As you begin to prepare to prepare
your 2022 federal income tax return here are ten “urban tax myths” that just
ain’t true.
1. You only have to claim the income for which you receive a Form 1099.
False! All income from self-employment, and all interest and dividends received, is taxable — regardless of the amount or whether or not you receive a Form 1099.
2. Receiving a Form 1099 increases your audit risk.
False! The mere receipt of a Form 1099 does not in any way affect your audit profile. Each tax return is assigned a score, called the Discriminant Inventory Function, or DIF, based on the information reported on the return. The higher your score, the more likely you are to get audited.
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.
3. Filing late means you're less likely to be audited.
False! Just because you file late in the season, near the April 15th deadline, does not mean you have decreased your audit risk. And requesting an extension, and filing your return close to Oct. 15, doesn't decrease your audit risk either. You get audited based on what is on your return, not when you filed it.
4. If the IRS didn't audit your returns, the deduction you’ve been taking all these years must be legal.
False! It just means you weren’t caught ... yet.
5. Because you had to work at home, you can claim a deduction for a home office.
False! There are specific requirements to be able to claim a home office deduction. And, as Employee business expenses are no longer allowed as a miscellaneous itemized deduction on Schedule A, a W-2 employee cannot deduct a home office even if the office applies.
6. You can deduct clothes and food you give to homeless people on the street.
False! Gifts made directly to individuals, regardless of how charitable the intent, are not deductible as a charitable contribution on Schedule A. You must donate the clothes or food to a qualified church or charity that will distribute the items to homeless or poor individuals.
7. Extending a return also extends the time to pay any tax due.
False! An extension only extends the time to “timely” file a tax return – and avoids a penalty for late filing. Any outstanding tax due on an income tax return is due on the initial statutory filing deadline – usually April 15th. Filing an extension does not avoid a penalty for late payment of tax. It is important to file an extension because the penalty for late filing is 5% of the tax due per month and the penalty for late payment is .5% (1/2 of 1%) of the tax due per month.
8. "It can’t be wrong? I used Turbo Tax!"
False! The Tax Court has on several occasions rejected the "Turbo Tax Defense" when a taxpayer attempted to blame tax preparation software for errors made on a tax return. If you rely on a “box” to prepare your tax returns remember – garbage in, garbage out.
No tax preparation software package, or online filing service, is a substitute for knowledge of the Tax Code, and no tax preparation software package, or online filing service, is a substitute for a competent, experienced tax professional!
9. You can settle your outstanding IRS tax debt for "pennies on the dollar”.
False! Don’t believe the ads for companies that make such a claim. It sounds too good to be true, and it is! These ads are referring to an IRS program known as “Offer In Compromise,” but no matter what they say, the IRS isn’t going to let you pay $100 to settle a $50,000 tax debt. If you use one of these companies you will pay a sizable fee — after all, how do you think they afford to advertise on TV? Avoid these companies like the plague. Several of the companies promising to settle IRS debt for “pennies on the dollar” have gotten into legal trouble for taking advantage of their customers and have been shut down.
10. CPAs are 1040 tax experts.
False! The initials “CPA” have absolutely nothing whatsoever to do with one’s knowledge of, experience with, or ability to prepare 1040s. All they mean is that the person can certify financial statements. A CPA passed a very difficult test on accounting issues, perhaps dozens of years ago, with minimal, if any, questions on 1040 taxation. CPAs must maintain minimal annual continuing professional education (CPE) credits — but there is nothing that says any of their CPE must be in 1040 taxation. In my 50 years of preparing 1040s I have found more mistakes made by CPAs than by taxpayers who self-prepare.
There are many CPAs who are also 1040 tax experts. But this is because of the education, experience, ability, temperament, and other factors that are specific to that individual preparer, and has absolutely nothing to do with their “initials.” The only “initials” that have any bearing on a person’s competence and currency with federal income tax law are “EA” for Enrolled Agent, “ATP” for Accredited Tax Preparer, and “ATA” for Accredited Tax Advisor.
Got it?
TTFN
1. You only have to claim the income for which you receive a Form 1099.
False! All income from self-employment, and all interest and dividends received, is taxable — regardless of the amount or whether or not you receive a Form 1099.
2. Receiving a Form 1099 increases your audit risk.
False! The mere receipt of a Form 1099 does not in any way affect your audit profile. Each tax return is assigned a score, called the Discriminant Inventory Function, or DIF, based on the information reported on the return. The higher your score, the more likely you are to get audited.
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.
3. Filing late means you're less likely to be audited.
False! Just because you file late in the season, near the April 15th deadline, does not mean you have decreased your audit risk. And requesting an extension, and filing your return close to Oct. 15, doesn't decrease your audit risk either. You get audited based on what is on your return, not when you filed it.
4. If the IRS didn't audit your returns, the deduction you’ve been taking all these years must be legal.
False! It just means you weren’t caught ... yet.
5. Because you had to work at home, you can claim a deduction for a home office.
False! There are specific requirements to be able to claim a home office deduction. And, as Employee business expenses are no longer allowed as a miscellaneous itemized deduction on Schedule A, a W-2 employee cannot deduct a home office even if the office applies.
6. You can deduct clothes and food you give to homeless people on the street.
False! Gifts made directly to individuals, regardless of how charitable the intent, are not deductible as a charitable contribution on Schedule A. You must donate the clothes or food to a qualified church or charity that will distribute the items to homeless or poor individuals.
7. Extending a return also extends the time to pay any tax due.
False! An extension only extends the time to “timely” file a tax return – and avoids a penalty for late filing. Any outstanding tax due on an income tax return is due on the initial statutory filing deadline – usually April 15th. Filing an extension does not avoid a penalty for late payment of tax. It is important to file an extension because the penalty for late filing is 5% of the tax due per month and the penalty for late payment is .5% (1/2 of 1%) of the tax due per month.
8. "It can’t be wrong? I used Turbo Tax!"
False! The Tax Court has on several occasions rejected the "Turbo Tax Defense" when a taxpayer attempted to blame tax preparation software for errors made on a tax return. If you rely on a “box” to prepare your tax returns remember – garbage in, garbage out.
No tax preparation software package, or online filing service, is a substitute for knowledge of the Tax Code, and no tax preparation software package, or online filing service, is a substitute for a competent, experienced tax professional!
9. You can settle your outstanding IRS tax debt for "pennies on the dollar”.
False! Don’t believe the ads for companies that make such a claim. It sounds too good to be true, and it is! These ads are referring to an IRS program known as “Offer In Compromise,” but no matter what they say, the IRS isn’t going to let you pay $100 to settle a $50,000 tax debt. If you use one of these companies you will pay a sizable fee — after all, how do you think they afford to advertise on TV? Avoid these companies like the plague. Several of the companies promising to settle IRS debt for “pennies on the dollar” have gotten into legal trouble for taking advantage of their customers and have been shut down.
10. CPAs are 1040 tax experts.
False! The initials “CPA” have absolutely nothing whatsoever to do with one’s knowledge of, experience with, or ability to prepare 1040s. All they mean is that the person can certify financial statements. A CPA passed a very difficult test on accounting issues, perhaps dozens of years ago, with minimal, if any, questions on 1040 taxation. CPAs must maintain minimal annual continuing professional education (CPE) credits — but there is nothing that says any of their CPE must be in 1040 taxation. In my 50 years of preparing 1040s I have found more mistakes made by CPAs than by taxpayers who self-prepare.
There are many CPAs who are also 1040 tax experts. But this is because of the education, experience, ability, temperament, and other factors that are specific to that individual preparer, and has absolutely nothing to do with their “initials.” The only “initials” that have any bearing on a person’s competence and currency with federal income tax law are “EA” for Enrolled Agent, “ATP” for Accredited Tax Preparer, and “ATA” for Accredited Tax Advisor.
Got it?
TTFN
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