How to Survive These 10 Common Tax Misunderstandings

Taxes are certain; you earn money, you pay taxes. You don’t pay taxes and you probably end up in serious trouble with the United States government, and that just does not sound like a load of fun. The simple truth is that taxes are tedious and awful. No one likes to give the money they worked so hard to earn to someone else, and that’s just the way that the world works. There are, however, so many understandings associated with income taxes. People don’t understand them all, and that means that they end up confused and unable to figure out how to avoid feeling worried or stressed, and they’re not entirely certain how they can avoid these misunderstandings. We know a little something about taxes over here, and we thought we might share some of the biggest tax misunderstandings and how to survive them.

Having Kids Means Money Back

One of the biggest misconceptions people have about taxes is that they will get money back each year. While it is true that your kids will provide you with more exemptions that will lower your income tax liability, they will not guarantee a refund. The eligibility to file the child tax credit and receive refunds caps out at a certain amount, and many families just earn too much to get anything back from their kids.

You Have to File by April 15

This is true, but not true. You can file an extension of time that allows you an additional 6 months to file your income taxes if you cannot get them completed by April 15. This is good for any taxpayer that needs more time, and it’s perfectly legal. The IRS allows this provided you file an extension of time on or before April 15.

You Have to File an Extension

If you are someone who gets a refund on your income taxes and you don’t have time to complete your return prior to April 15, you don’t actually have to file an extension. It’s recommended that you do, but the IRS does not actually penalize anyone who forgets to file an extension if they are getting money back. So the deal is that you should file an extension, but if you forget and just file your taxes a few days late, you will not be penalized for your mistake.

Extension Means 6 Extra Months to Pay

This is not the truth. If you have money that you owe to the IRS, you better estimate what you owe when you file your extension and send that check into the government with the extension. If you fail to do this, you will be hit with penalties and fees that could be quite excessive in terms of how much more you owe to the federal government.

Audits are Awful

No one wants to be audited by the IRS, but the chances of this happening are very slim. For one, it usually takes many years for the IRS to find mistakes on your income tax return. For example, it was two years ago when we received notification that we owed an additional $1000 in taxes because of a 1099 I accidentally input incorrectly on our return (I left a 0 off the end) and the return on which they were taxing me was from three years before that. Audits are not awful; they’re actually very simple. You provide information to the IRS to clarify (or they tell you that you made a mistake) and you just handle it.

Filing Through the Mail is Safe

Filing through the mail is not bad, per say. However, it’s not entirely safe. It’s actually not something I would have ever recommended to my past clients in my tax days, but it’s something that many people do. There is nothing more dangerous than sticking a return with your personal information in the mail. It’s not hard to see the IRS address on the outside, which means any criminal is going to get a great opportunity to open that envelope and take your name, address, and your social security number. And there you have it; identity theft. File online – it’s safer.

Refunds are Great

Refunds are a lot nicer than checks you have to write to the government, but they’re not great. They’re not great because you actually gave the government far too much money over the course of the year, and they held onto it free of charge for you. You should not allow this to happen again, and you can handle it by changing the information on you W4 so that less money is withheld throughout the year.

Cash Income isn’t Reportable

If you have cash income, say as a business owner or freelancer, don’t assume you don’t have to report it. Sure, the IRS is not going to have a record of it, but if you own a business and show that you only have so much income from credit or checks and the IRS takes a look at your returns and paperwork, they’re going to see that you did have cash income, and then you are going to be in big trouble.

You Don’t Have to Keep Records

You do have to keep records. You have to keep them at least 7 years, and then you can get rid of them. These are going to come in seriously handy if you are audited. If you can’t prove something, the IRS will assume that you are incorrect about it and they will penalize you. Do yourself a favor and keep copious notes and records recording every single thing you do throughout the year so that you are protected.

Business Owners can Claim Anything

It might seem like business owners can deduct anything, but they can’t. It is true that they can deduct a lot more than most people might consider appropriate, but not just anything. You still have to be honest and make sure you take good care of what it is you claim each year so that you avoid the risk of an audit.

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