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Here, fellow freelancers, are ten “urban tax myths” that just ain’t true.
**1. You only have to claim the income for which you receive a Form 1099. **
False! All income from self-employment is taxable — whether or not you receive a Form 1099.
2. Receiving a Form 1099 increases your audit risk.
False! The mere receipt of a Form 1099 does not in any way affect your audit profile. Each tax return is assigned a score, called the Discriminant Inventory Function, or DIF, based on the information reported on the return. The higher your score, the more likely you are to get audited.
However, if you don’t report the income from a Form 1099 on your 1040 you will eventually receive a bill from Uncle Sam for additional tax and accrued penalties and interest.
3. Filing late means you're less likely to be audited.
False! Just because you file late in the season, near the April 15th deadline, does not mean you have decreased your audit risk. Also requesting an extension, and filing your return close to Oct. 15, doesn't decrease your audit risk either. You get audited based on what is on your return, not when you filed it.
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**4. If the IRS didn't audit your returns, the deduction you’ve been taking all these years must be legal. **
False! It just means you weren’t caught ... yet.
5. Claiming a home office deduction automatically triggers an audit.
False! Before the rules were clarified in the '90s, the home office deduction was thought to be an audit “red flag.” But not anymore. In my 44 tax seasons preparing 1040s, none of my clients have ever been questioned or audited by the IRS for claiming a home office deduction. If you qualify for a home office deduction you should by all means claim it on your tax return.
6. Working taxpayers older than 65 don't have to pay Social Security tax.
False! Net income from self-employment in excess of $400 is subject to self-employment tax (the self-employment equivalent of Social Security and Medicare taxes) whether you’re 3 years old or 101 years old, and regardless of whether or not you are already collecting Social Security.
7. You can deduct the cost of your car and all its operating expenses, or mileage, as a business expense if you put advertising on the car.
IRS Publication 463 states the facts - “Putting display material that advertises your business on your car does not change the use of your car from personal use to business use. If you use this car for commuting or other personal uses, you still cannot deduct your expenses for those uses.”
8. "It can’t be wrong? I used Turbo Tax!"
False! The Tax Court has on several occasions rejected the "Turbo Tax Defense" when a taxpayer attempted to blame tax preparation software for errors made on a tax return. If you rely on a “box” to prepare your tax returns remember – garbage in, garbage out.
No tax preparation software package, or online filing service, is a substitute for knowledge of the Tax Code, and no tax preparation software package, or online filing service, is a substitute for a competent, experienced tax professional!
9. You can settle your outstanding IRS tax debt for "pennies on the dollar”.
False! Don’t believe the ads for companies that make such a claim. It sounds too good to be true, and it is! These ads are referring to an IRS program known as “Offer In Compromise,” but no matter what they say, the IRS isn’t going to let you pay $100 to settle a $50,000 tax debt. If you use one of these companies you will pay a sizable fee — after all, how do you think they afford to advertise on TV? Avoid these companies like the plague. Several of the companies promising to settle IRS debt for “pennies on the dollar” have gotten into legal trouble for taking advantage of their customers and have been shut down.
10. CPAs are 1040 tax experts.
False! The initials “CPA” have nothing whatsoever to do with one’s knowledge of, experience with, or ability to prepare 1040s. All they mean is that the person can certify financial statements. A CPA passed a very difficult test on accounting issues, perhaps dozens of years ago, with minimal, if any, questions on 1040 taxation. CPAs must maintain minimal annual continuing professional education (CPE) credits — but there is nothing that says any of their CPE must be in 1040 taxation.
There are many CPAs who are also 1040 tax experts. But this is because of the education, experience, ability, temperament, and other factors that are specific to that individual preparer, and has to do with nothing to do with their “initials.” The only “initials” that have any bearing on a person’s competence and currency with federal income tax law are “EA” for Enrolled Agent, “ATP” for Accredited Tax Preparer, and “ATA” for Accredited Tax Advisor.
Northeast PA resident Robert D Flach has been preparing 1040s since 1972, and has been writing the popular tax blog THE WANDERING TAX PRO since the summer of 2001. He has also created and writes the websites THE TAX PROFESSIONAL and FIND A TAX PROFESSIONAL. He is available to write articles and columns on federal tax planning and preparation for print and online newsletters and magazines and websites and portals.