Tax Rumors

Tax-related rumors often circulate, and while some may have a basis in truth, others can be misleading or incorrect. Here are some common tax rumors and the facts that clarify them:

1. “You Can Avoid Taxes by Not Reporting Income”

• Fact: All income must be reported to the IRS, regardless of whether it’s earned through a formal job or other means. Failure to report income can lead to penalties, interest, and even legal action.

2. “Tax Refunds Are Taxable Income”

• Fact: Tax refunds are generally not taxable income. If you receive a refund of state or local taxes, it is typically not taxable if you did not deduct those taxes in a previous year.

3. “If You Don’t Have a Social Security Number, You Don’t Have to Pay Taxes”

• Fact: Even if you don’t have a Social Security Number, you are still required to pay taxes if you earn income. You can apply for an Individual Taxpayer Identification Number (ITIN) from the IRS to fulfill your tax obligations.

4. “You Can Deduct Any Expense If It’s Related to Your Job”

• Fact: Not all job-related expenses are deductible. For employees, many expenses are not deductible under recent tax law changes. Self-employed individuals can deduct legitimate business expenses, but personal expenses are not deductible.

5. “You Can Claim Your Pets as Dependents”

• Fact: Pets cannot be claimed as dependents. Dependents must be human and meet specific criteria related to relationship, age, residency, and support.

6. “If You Don’t File Your Taxes, You Can’t Be Audited”

• Fact: The IRS can still take action if you don’t file your taxes. They may assess taxes based on information they have, and failure to file can lead to penalties and legal consequences.

7. “The IRS Will Never Audit You If You Don’t Make a Lot of Money”

• Fact: While audits are more common among higher-income individuals, anyone can be audited. The IRS uses a variety of methods to select returns for audit, and income level is just one factor.

8. “You Can Legally Refuse to Pay Taxes by Claiming Religious Exemptions”

• Fact: There are no general religious exemptions from paying federal taxes. While certain specific religious groups may have special provisions, claiming religious exemption to avoid taxes is not valid.

9. “You Can Pay Your Taxes with Credit Cards and Earn Rewards”

• Fact: You can pay taxes with a credit card, but it often involves fees that might outweigh any rewards earned. The IRS charges a processing fee for credit card payments, so it’s important to weigh the cost against the benefits.

10. “Tax Refunds Are Guaranteed if You’re in the Lower Tax Bracket”

• Fact: A tax refund depends on the amount of taxes paid and eligible deductions or credits. Lower-income individuals may still owe taxes or receive a smaller refund depending on their tax situation.

11. “The IRS Will Never Take Action Against You for Small Mistakes”

• Fact: Even small mistakes can lead to penalties or interest. It’s important to file accurately and correct any errors promptly.

12. “All Tax Avoidance Strategies Are Legal”

• Fact: There is a difference between tax avoidance (legal strategies to reduce tax liability) and tax evasion (illegal activities to avoid paying taxes). Using illegal schemes can lead to serious legal consequences.

13. “You Don’t Have to File if You’re Self-Employed”

• Fact: Self-employed individuals are required to file tax returns and pay self-employment taxes. The requirement to file does not depend on employment status.

Understanding the facts behind these rumors can help you navigate your tax responsibilities more effectively and avoid potential pitfalls. If you’re ever unsure about tax-related matters, it’s always a good idea to consult a tax professional.