When it comes to filing your taxes, there’s plenty of misinformation out there. After all, filing your taxes is often a highly complex process, especially if you’re self-employed or don’t understand how deductions work.
Bad tax advice can easily put you in a bad position or cause you to owe more money than you should. Understanding common tax myths can help prevent you from making a mistake during filing season. Here’s what you need to know:
Filing Taxes Is an Option
The idea that filing taxes isn’t mandatory is one of the biggest myths surrounding the IRS.
Filing taxes is obligatory but many people are confused by this because the Form 1040 instruction book states that the tax system is voluntary, but this passage can be misleading.
What this means is that each American resident is responsible for determining how much they owe, and that compliance is the only aspect that’s mandatory. In fact, it is required by law for every American receiving an income to file for taxes.
The IRS Can’t Take Your Money
If you owe the government money, they can take the money directly from your bank account by issuing a bank levy.
The IRS can garnish wages, take money from your bank account, and even retrieve property. However, there are situations where you can get money back.
For example, with an IRS bank levy release, you can retrieve funds taken if you’re able to demonstrate economic hardship.
Payments Can Be Postponed With Extensions
Any individual is welcome to file for a tax extension and there’s no stigma attached to doing so. However, many people assume that once you’re approved for an extension, you’ll also be able to postpone your payments.
But the truth is, you’re required to pay your taxes on the same date even if you’ve been given more time to file. The penalty for not paying your taxes on time is 1% per month that your taxes aren’t paid.
You Don’t Have to Pay Taxes If You Make Money Online
We are living in the age of the entrepreneur, the gig economy, and e-commerce. Anyone with a little startup capital and dedication can quickly start their own online business. Let’s take dropshipping for instance.
Dropshipping has become a very popular online business model because anyone can get started with very little money; simply set up a website, import products from third party sellers, and when a customer makes a purchase, the manufacturer sends the product directly to the customer.
This means the ecommerce store owner never has to touch the product and can earn plenty of money in the process. However, once you earn more than $400 online, you must declare that income on your business taxes.
Low Income Individuals Won’t Get Audited
Contrary to popular belief, tax auditing isn’t just reserved for the rich. Although people with higher incomes tend to get audited twice as much as those with lower incomes, even low income individuals can have their income audited.
The IRS audits individuals who have demonstrated red flags in their filings. Therefore, people who do taxes themselves or make math mistakes are likely to be audited.
Failing to report income, claiming too many charitable donations, deducting a large amount of business expenses, and claiming a home office deduction are just a few reasons your taxes might be flagged.
One of the best ways to protect yourself is by keeping detailed records of receipts, particularly when it comes to deductions that you claim.