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The Top Tax Myths (and What Happens When You Believe Them)

Updated for Tax Year 2017


OVERVIEW

Don't get caught believing in any of these myths when it comes to your taxes.


It’s getting to be that time of the year again. The time when Tax Day is fast approaching and you start hearing conflicting things from friends and family about what is—and what isn’t—okay when filing your taxes. There’s a lot of misinformation out there about various deductions, loopholes, and write-offs that can get you into hot water if you blindly follow someone else’s bad advice. So, in an effort to save you from pulling a Wesley Snipes and ending up on the IRS’ radar, we’re sharing some of the most common tax myths—and what you can do to protect yourself.

Myth number one: Filing taxes is voluntary

myth 1Although this might easily be the most blatant falsehood on the list, there is a surprisingly large number of people who contend that because the Form 1040 instruction book describes the tax system as “voluntary,” that means they have no legal obligation to actually file. This is not the case. The term voluntary refers to the fact that each individual is responsible for determining the correct amount of tax they owe, and has absolutely no relation to whether or not filing taxes is actually an option. It’s not. Unless you have a legitimate dispute, trying to get cute with the IRS and contesting the payment or filing of taxes is always a bad idea.

Myth number two: You can claim pets as dependents

myth 2No matter how much you love your pets, you can’t claim them as dependents. This hasn’t stopped hundreds of people each year from attempting to count Rex, Rover, and Skitters the cat as actual dependents. While there’s no denying that pets do meet the requirement of getting more than half their financial support from their owners, there’s still one small technicality…they’re not humans! Falsely claiming a dependent is considered fraud and should be avoided at all costs.

Myth number three: The IRS is legally obligated to file a return for you

myth 3The IRS does have the right to verify your return, but sitting on your couch waiting for them to file a return for you is likely to leave you sorely disappointed. LIke the initial myth that taxes are voluntary, this myth stems from language alluding to the fact that the IRS can compile a return on your behalf if they suspect fraud. Unfortunately, this in no way means you are off the hook from having to file your own tax return.

Myth number four: Illegal activity is not taxable

myth 4As counterintuitive as it seems, breaking one law doesn’t have any impact on your ability to break others. Income acquired through illicit activity is still taxable income. From a tax compliance perspective, the IRS doesn’t care if you’re selling drugs, robbing banks, or defrauding investors of millions. As long as you’re making money, the government is still entitled to their piece of the pie. Remember, no matter how well you cover you tracks when it comes to illegal activities, cheating on your taxes can come back to bite you—just ask Al Capone.

Myth number five: Home office deductions = instant audit

myth 5There was a time when this myth was actually pretty close to truth. However, with home offices becoming increasingly prevalent, this one-time fact has become predominantly fiction. Although claiming a home office does increase scrutiny, they’ve become common enough that there’s no need to be afraid of claiming a legit deduction. The one thing to be wary of is making sure your claim actually falls within the IRS definition of a home office.

Myth number six: Students don't have to pay taxes

myth 6This myth is actually partially true. A student is not required to pay taxes if they earned less than $9,000 during that tax year. However, it’s typically in the student's best interest to file taxes anyway, because if they had an employer who withheld money for tax purposes, they are probably due a refund.

Myth number seven: Money made over the Internet is tax free

myth 7This myth is just plain false. It’s not hard to see how a rumor like this might have gotten started, since most people doing business online aren’t filling out a W-9 and having their income reported to the IRS. However, in the eyes of the IRS, money made online is no different than income earned offline. Regardless of the medium, if you sell a product or service and end up making more than $400, you’re required to declare that income on your tax returns.

Myth number eight: I don't make enough money to get audited

myth 8Income actually has less to do with being audited than you might think. There are considerably more factors involved and plenty of other things that can send up red flags. Although individuals with income exceeding $100k tend to get audited almost twice as often, there is still a one-percent chance of getting audited if you fall beneath that threshold. The best thing you can do is make sure you maintain detailed records of anything that could be considered a questionable deduction. Saving any relevant receipts for a three year period can help eliminate any headaches should you find yourself facing an audit.

Myth number nine: My accountant is liable for any mistakes

myth 9Whether or not you hire an accountant, you are still ultimately responsible for any mistakes. Because of this, it’s always best to not simply assume your accountant has everything taken care of, but instead to take a few minutes and double check your return before it is filed. In many cases your accountant will help you through the process if you’re unfortunate enough to be audited, but the bottom line is that you’re the one the IRS is going to be coming after.

Myth number ten: I don't have time to do my own taxes

myth 10Seriously? Having already covered the fact that taxes aren’t voluntary (it was the first myth, for crying out loud), there shouldn’t be any question about whether or not you’re going to file. With the numerous options, including online, available to make filing your taxes easier than ever, “I don’t have time” shouldn’t enter into the equation. No one enjoys filling out their taxes. Okay, no one normal. But that still doesn’t mean you can’t figure out a way to get them done.

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.


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