When it comes to filing your tax returns, don’t make the mistake of believing the following myths. Some may lead you to lose refunds you’re owed while others may get you unwanted attention from the Internal Revenue Service (IRS).
MYTH #1: IF I RECEIVED MY TAX REFUND IT MEANS I WILL NOT BE AUDITED BY THE IRS
Not true. Whether or not you received a Federal tax refund, the IRS can audit your returns going back three years. In some cases, they can go back six years if they’ve identified a error.
What are the chances you’ll get audited? According to IRS data for the 2017 tax year:
- 1% of those earning less than $200,000 were audited
- 4% of those earning over $200,000 were audited
- 12.5% of those earning $1,000,000 were audited
To avoid the red flags that may trigger an IRS audit, it’s important to report all of your income, bank account interest (especially foreign bank accounts), and don’t claim excessive business deductions that may actually be personal expenses.
MYTH #2: DEDUCTIONS FOR A HOME OFFICE WILL AUTOMATICALLY TRIGGER AN IRS AUDIT
Not true. If you’re among the millions of Americans working from home, don’t let this myth lead you to leave refund money on the table.
There are two basic IRS requirements for claiming a home office deduction.“Regular and exclusive use” which means regularly using part of your home exclusively for conducting business. Plus “Principal place of your business” which means most of your business is conducted from your home office. You can also deduct expenses for a free-standing studio, garage, or barn, if you use it exclusively and regularly for your business.
MYTH #3: STUDENTS DON’T HAVE TO PAY TAXES
This is true when two criteria are met: if the student is claimed as a dependent by someone else and if they earned below an amount established for the tax year. For 2017 that threshold is below $7,900. Then again, if the student’s employer withheld taxes from their paychecks, it may be a good idea to file a return because they’re probably owed a refund.
MYTH #4: MONEY I EARN SELLING ITEMS ONLINE AT AUCTION WEBSITES IS NOT TAXABLE INCOME
Totally false. The IRS has specific requirements for income made on auction websites like eBay®. If you’re selling items you’ve purchased to generate profits and recurring sales, you must report this income on your tax return. However, you may also qualify to deduct home office and other business expenses like your cost for repairing items you’ve sold, travel expenses for miles driven to pick up items, advertising costs, and other small business deductions.
If you’re selling items like art, antiques, and collectibles, that have appreciated in value –meaning your sales price is more than your original cost – this may be considered business income or capital gains.
Online sellers who generate $20,000 or more in gross sales, with 200 or more transactions, usually receive a 1099-K from from eBay® for reporting this income to the IRS.
If you’re simply using auction sites like an online garage sale – selling your used household items for less than what they originally cost you – you don’t have to report this income.
MYTH #5: COLLECTION AGENCIES CAN GARNISH MY TAX REFUND FOR PAST-DUE CREDIT CARD DEBT
When it comes to credit card debt, this is not true. There are only certain types of debt that will cause the IRS to withhold your tax return and send it to a creditor: past-due federal taxes, state income taxes, child support, and money owed to other federal agencies like federal student loans.
However, depending on the laws in the state where you live, once your refund is deposited in your personal bank account, collection agencies may be able to levy those funds.
MYTH #6: THE CPA IS LIABLE FOR ANY MISTAKES ON MY TAX RETURN
Not true. Whether or not you use a professional to prepare your tax returns, you are responsible for any mistakes because you sign your tax return.
MYTH #7: THE IRS WILL EMAIL ME IF THEY NEED TO SEND ME NOTICES
Absolutely false! In fact, this myth is the reason why so many people become victims of email scams and phishing schemes that steal their personal information.
The IRS will not initiate any type of email communications. If you get an email claiming to be from the IRS:
- Don’t reply to the message
- Don’t give out your personal or financial information
- Don’t open any attachments or click on any links – they may infect your computer with malware
- Forward the email to email@example.com then delete it
It’s also common to get scam phone calls from criminals claiming to be from the IRS. These include recorded “urgent” call back requests known as robo-calls that show “IRS” on your caller ID. Don’t fall for it.