Business

Tax facts and myths

To help separate fact from fiction, here are some common myths about income taxes:

Your return will get an extra hard look if you ask the IRS a question: "Not true," says IRS spokesman Jim Dupree. "If someone asks a general tax question, we aren't going to ask who they are."

Income taxes are unconstitutional: Pick an amendment and tax protesters have used it to justify not paying taxes, especially the 6th Amendment, which authorized Congress to enact our current tax system. Similarly, some argue that because we have a "voluntary" system, taxes are optional. But voluntary only "means the government is trusting you to self-report how much tax you owe," instead of the government telling you what you owe, says George Willis of the Chapman University School of Law.

Bartering is tax-free: Bartering has blossomed in the recession, particularly online. But while no money changes hands, the value of the swaps is taxable income for both sides.

Internet revenue isn't taxable: Online entrepreneurs who believe this are in for a rude shock next year. That's when credit card companies and groups like PayPal must start reporting merchant sales to the IRS.

Cash isn't taxed: Tips, gambling winnings, extra bucks you earn under the table and money you find on street must be reported to the IRS and is subject to tax. "The law requires reporting all your income, even if it's not on a Form 1099 or W-2," says Zack Goff of H&R Block Tax Institute. The IRS has the tools to uncover unreported cash. "They can get access to bank account information and other third-party sources to, in a roundabout way, verify income," Goff says.

My dog is my dependent: "People think they can claim anyone living with them as dependents," Willis says. "The joke was, before the IRS required Social Security numbers (for dependents), people claimed their dogs and cats."

Home-office deduction triggers audit: This used to be true when anyone with a desk in the basement corner claimed it as a home office. The rules were clarified in the 1990s, so people are less likely to mistakenly claim the deduction, and it's not the red flag to the IRS that it once was.

Extensions lead to audits: Filers suspect that if they request more time to file a return, the IRS will get suspicious and might pull them in for an audit. But extensions are routine and don't raise an eyebrow. Flags are raised, however, when income listed on a return doesn't match what the employer reported or your claims seem way out of line compared to others in your locale, experts say.

Kids and retirees don't have to file returns: It's not your age that determines whether you have to file but your income. Singles under age 65 with $9,350 in gross income last year must file a return, as well as those 65 and older with income of $10,750 or more. The self employed with income of $400 or more also must file.

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