Few subjects have remained as reliably controversial throughout history as tax law. Even the much-maligned IRS has a tongue-in-cheek collection of quotes on taxes from historical figures on its website. Clearly, those who study tax law and work with clients on a daily basis understand the public’s frustration with taxation. After all, a recent study from the Council for Economic Education found that require some amount of personal finance coursework at the secondary level.
This may also help explain why so many myths and misunderstandings about personal taxes continue to persist. Anyone working with clients on tax issues should be prepared to field some of the most common tax misconceptions, and do so in a professional, helpful manner. After all, as many tax professionals will readily admit, no one was born knowing these things. Graduates from Northeastern University’s D’Amore-McKim School of Business Master of Science in Taxation online program will learn how to put these high-level concepts into use in their own tax practice.
Myth 1: Filing taxes is optional
It’s not clear just how common this belief is, but as pointed out by software provider Intuit, the IRS does, after all, state on the Form 1040 that participating in the tax system is “voluntary”. According to TaxHistory.org, arguments and lawsuits debating the constitutionality of direct taxation have been common for almost as long as the Constitution itself has existed.
While any American citizen is free to state their case against taxation in the court system, they are more likely to face fines or jail time if they do not file their taxes. As Intuit explained, when the IRS calls the process voluntary, it only means that individuals are responsible for calculating their own tax liability.
Tax professionals who encounter this kind of argument should state plainly that it is almost always much cheaper and easier to simply determine an individual’s lowest possible tax liability and pay it on time.
Myth 2: Tax refunds are like free money
As much as Americans hate paying and reporting their taxes, they love receiving their refunds. The IRS reported the average federal tax refund issued in 2016 amounted to just over $3,000. But a survey from the National Retail Federation (NRF) suggested that around half of U.S. taxpayers spend those refunds on things like vacations or TVs. Tax professionals should generally avoid telling their clients how to spend their money (beyond paying their taxes, of course). However, surveys like those from the NRF suggest taxpayers tend to misunderstand that a tax refund shouldn’t be treated the same way as a bonus from work. Tax refunds are issued to those who paid too much in payroll withholding throughout the previous year, effectively granting an interest-free loan to the government.
It’s always preferable to get the biggest return possible, but tax preparers should take the time to inform their clients on how they arrived at that figure. This might help them better understand how they could reduce withholding and increase their net income, which would be helpful to those short on cash. And if the tax advisor has a more personal relationship with the client, he or she might also consider helping the client decide how best to spend a refund. According to Bankrate, most financial professionals recommend using refunds to pay down debt or pad a savings account rather than rushing off to spend it.
Myth 3: I definitely will/will not get audited
There may not be a word more despised in the business community than “audit,” particularly when it’s coming from a government agency. Individual taxpayers are also subject to this intense financial scrutiny, although there are some misconceptions regarding the practice. In a nutshell, taxpayers and their advisors should file all tax returns honestly, no matter what.
On one hand, an audit from the IRS remains exceedingly rare. The agency initiates most audits as a result of automated computer screening, checking returns against expected values. Returns with abnormal results might be flagged for further review and lead to the initiation of an audit, while an even smaller number may be randomly selected for audit. The IRS does not release much detailed information about this process, but experts who spoke to Forbes said that a taxpayer’s overall chances of being audited for any reason were less than 1 in 100 in 2016. Furthermore, given repeated budget cuts to agency programs over the years, audits have become less common than in the past. At the same time, no one should attempt to bend the law just to save on taxes or prevent an audit. While it’s not always clear precisely what will trigger an audit, Northeastern University Professor Timothy Gagnon made note of some common red flags in an article for MSN:
● Health insurance coverage: Beginning in 2014 under the Affordable Care Act, taxpayers were required to prove they were enrolled in an eligible health insurance plan or face a tax penalty. Since this is relatively easy to look into, tax professionals told U.S. News & World Report that this is among the biggest predictors of an audit.
● High income: For obvious reasons, the IRS tends to focus the bulk of its auditing efforts on the highest earners. Therefore, those who report very large incomes can reasonably expect their odds of facing an audit to rise.
● Complex returns: Similar to the above point, anyone claiming a large number of deductions and credits will likely face tougher scrutiny. The logic behind this assumption is somewhat two-sided. The IRS assumes if someone was going to cheat on their tax returns, it would most likely be attempted by fudging the numbers on income, expenses, donations, or filing status. But even absent any ill intent on the part of the taxpayer, the fact remains that more complicated returns invite more chances for mistakes.
Myth 4: My refund is delayed, lost, or otherwise missing
Patience may be a virtue, but it’s not bestowed upon everyone. Perhaps no one is more aware of this than the IRS, which routinely issues statements urging taxpayers to not overload phone lines just to get answers to basic questions like why their refund has not arrived yet. Unfortunately, this advice goes unheeded every year.
According to Forbes tax writer Kelly Phillips-Erb, many tax filers mistakenly assume their returns are delayed or rejected. They might then call the IRS to get answers, only to inevitably encounter long wait times and become even more frustrated.
Fortunately, the IRS makes it relatively easy to check the status of a refund. Using the simple “Where’s My Refund?” tool, most of these records can be tracked down within seconds, along with an estimated date they will arrive. Most refunds are approved and issued within 21 days of filing. Any length of time greater than this is most likely due to a mistake in the process of filing, or because of extra scrutiny due to one of the reasons outlined in Myth 3. Phillips-Erb also noted that filers claiming the Earned Income Tax Credit or Additional Child Tax Credit might experience longer waits for their refunds, since a new law mandates that these refunds not be released until February 15.
Myth 5: IRS agents can email/call/visit your home to demand payment
Scams involving people impersonating IRS agents online, over the phone, or in person are becoming more common. A press release from the U.S. Treasury inspector general’s office warned taxpayers to be vigilant and highly skeptical of anyone claiming to be a government employee and demanding payment for back taxes, fines, or anything similar.
“If someone unexpectedly calls claiming to be from the IRS or in a new twist, the Treasury Department, and uses the threat of legal action if you do not pay immediately, that is a sign that it is not the IRS calling, and your cue to hang up,” Inspector General J. Russell George said, according to the statement. “Do not engage with these callers. If they call you, hang up the telephone.”
Even if someone did actually owe taxes or penalties, the IRS does not operate this way. Yet scammers have absconded with an estimated $29 million in fraudulent payments since 2013, with most of the victims being elderly or non-native English speakers.
On the advice of the inspector general, anyone receiving such a call or email should disregard it and immediately alert the IRS through its official phone line (800-829-1040) or online contact. At that point, officials will be able to notify individuals if they do in fact owe taxes, or will assist in tracking down the scammer.