First Person: 4 Water Cooler Myths About Taxes

It's that time of year, when everyone has questions about their taxes, and every one of your friends and acquaintances has answers. Quite often, these answers are completely wrong. I frequently hear stories from my clients that start with "my friend did this and it worked." Just because the friend has not yet been audited, it doesn't mean she won't be. Here are the top four tax myths that get passed around the water cooler.

If I'm getting a refund, I don't have to worry about the filing date.

This is a dangerous half-truth. Late filing and late paying penalties are calculated based on the amount of tax you owe on your return. Therefore, if you are truly getting a refund, you will likely not be assessed these penalties. There are a couple of caveats here. The first is that, if you have estimated incorrectly and you do have a balance owing, you will be subject to late filing and late paying penalties, which can be substantial. The second is that it is illegal to not file your tax returns if you are required to file them. Everyone who has income tax deducted at source (such as from your pay check) must file a tax return. Most importantly, if you're getting a refund, why would you want the government to keep it any longer than they have to?

Federal income taxes are not legal.

This is the most enduring tax myth ever and one that usually ends with its practitioners in jail after having their assets seized. There are pockets of people who believe that the 16th amendment to the Constitution was not passed in a legal manner and, therefore, the federal government has no legal grounds to impose taxes and cannot do anything about it if you choose to ignore them. You can end up in jail if you decide that you are not going to file or pay for several years. Just ask Wesley Snipes. He gets out of federal prison in 2013. (see Are Federal Income Taxes Legal?

Income earned from sites like eBay are not taxable.

The current shaky economy has generated a rise in small home-based businesses, including those selling new and used items on online sites like eBay. There are a substantial number of online sellers who do not claim their income from these enterprises because they do not receive any kind of tax slip that would alert the IRS. That may all change in 2011 as new government laws require payment processors, such as PayPal, to report total cash inflows of over $20,000. The purpose is to ensure that these sellers are in compliance with tax law. The rule is that if you are purchasing goods to resell or are selling your services, the income must be reported as business income. If you are cleaning out your attic and are selling old clothes, books, or other odds and ends, that income is not taxable.

Claiming certain deductions will trigger an audit

This one always astounds me because I even occasionally hear it from other accountants. There are certainly areas where the IRS will focus occasionally to ensure that taxpayers are in compliance, however, you should never decline to take a deduction or claim a credit if it is valid simply because you are worried about getting audited. As long as you have the appropriate documentation and that you know you are eligible, it doesn't matter if you audited. You're on solid ground. It is your right as a taxpayer to avail yourself of all of the deductions and credits that you are entitled to.

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Unemployed? Four Tax Tips to Help You Out
Getting Out of Debt in 2011
Hiring a Tax Debt Relief Law Firm