As the recent report issued by the President’s Economic Recovery Advisory Board pointed out, “the tax code is complex.”
Because of this complexity, a number of “urban tax myths” sprung up over the years. Below are a dozen, followed by the truth.
Receiving a Form 1099 increases your audit risk. The mere receipt of a Form 1099 does not in any way affect your audit profile. However, if you don’t report the income from a Form 1099 on your 1040 you will eventually receive a bill from Uncle Sam for additional tax and accrued penalties and interest.
You only have to claim the income for which you receive a Form 1099. All income from self-employment, and most interest and dividends, is taxable — whether or not you receive a Form 1099.
Filing late means you're less likely to be audited. Just because you file late in the season near April 15, that does not mean you have decreased your audit risk. Also, filing an extension close to Oct. 15 doesn't decrease your audit risk either. You get audited based on your return, not when you filed it.
If the IRS didn't audit your returns, the deduction you’ve been taking all these years must be legal. Absolutely not. It just means you weren’t caught ... yet.
Claiming a home office deduction automatically triggers an audit. Before the rules were clarified in the '90s, the home office deduction was considered an audit “red flag.” Not anymore. In my 39 tax seasons of preparing 1040s, none of my clients have ever been questioned or audited by the IRS for claiming such a deduction.
Working taxpayers older than 65 don't have to pay Social Security tax. Salaries and wages are subject to FICA (Social Security and Medicare) Tax, whether you’re 3 or 101 years old, and regardless of whether or not you are collecting Social Security. I actually had an employee at one of my business clients tell me several years ago that since she was 70 I do not have to withhold Social Security tax from her paycheck anymore. This myth stems from the fact that at one time retirees 72 or older did not have to reduce or repay Social Security benefits due to excess earned income.