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Tuesday, April 13, 2010

Taxes: You're Probably Wrong (Like Wesley Snipes Was Wrong!)

The Tax code is fairly complicated - even for lawyers, accountants, and other tax "experts". As the tax deadline approaches, The Civil Lawyer Online continues this series of posts designed to provide helpful information.*

Common Beliefs About Taxes:  Probably True, or Probably False?



1.       Filing an extension gives you more time to pay - True or False?


False! If you owe, you owe what you owe on April 15. Failure to pay results in interest charged and sometimes financial penalties. If you have to file an extension, but think you will owe the IRS this year, you are supposed to pay an estimated amount by April 15, even if you don't file by that date.

2.       Filing an extension makes you more likely to be audited - True or False?


Probably false. Extensions are automatically granted by the filing of form 4868 by April 15.  Extensions are commonplace. Sloppy/inconsistent tax returns are more likely to result in audits, so an extension may actually decrease the chances of being audited if it allows you to file a more proper and organized tax return.

3.       E-filing your tax return (filing it electronically) increases your chances of being audited - True or False?


False, according to the IRS, which encourages you to E-file.  It appears that the overwhelming majority of "early filers" filed electronically. Mr. McGrath has filed electronically for years now, including with The Civil Lawyer Online for tax year 2009.

4.       Paying taxes is voluntary - True or False?


Well, true and false!  Paying taxes is voluntary in the sense that nobody can truly force you to do so.  In fact, the instruction book published by the IRS for Form 1040 used to say that the tax system is voluntary! Of course, the people who interpreted that to mean they do not have to pay taxes often end up in prison. According to the IRS, what that language was intended to mean is that citizens have the freedom to prepare their own tax returns and have some say in their own tax affairs, as opposed to the government sending a bill with a mandatory amount. The bottom line?  Pay your taxes, unless you want to risk being prosecuted.

5.     Wages aren't taxable income (the "Wesley Snipes Tax Approach") - True or False?


False! Section 861 of the tax code contains a comment which some have interpreted to mean that income of U.S. citizens earned from U.S. sources is not taxable. This is more recently known as the "Wesley Snipes Tax Approach". (Mr. Snipes decided not to pay taxes for 6 years, during which he earned almost $40 million; he was convicted in federal court in 2008 and sentenced to 3 years incarceration for failing to file those tax returns.  He is smiling in the photo above leaving court because he was acquitted on more serious tax fraud charges, and because he had not yet been sentenced to the 3 years incarceration.)

6.       A big tax refund is a good thing - True or False?


This has to be true, right?  Right?  Well, not really; it's generally false. If you are getting a large refund, this basically means that, during the year, you gave the government more money than you needed to.  So, instead of that money being yours to use (even if just to gain interest on it), you loaned it to the government for them to use and then pay you back by way of your tax refund. To help avoid this, you can go to www.irs.gov and search the phrase "withholding allowances".  This will allow you to find assistance in adjusting your W-4 allowances, which can be done at any time during the year.

7.       If you're self-employed, you can deduct all of your expenses - True or False?


False! Many expenses are deductible, but not all of them. The very, very general rule is that expenses which are purely business related and not otherwise reimbursed are deductible. For example, while you may be able to deduct expenses related to using your personal vehicle for business trips if you aren't otherwise reimbursed for those costs, you can't deduct the portion of auto expenses which is incurred due to use of your car for personal reasons.

8.       Social security benefits are not taxable - True or False?


False!  Social security taxes might be taxable, if you bring in enough over all income. If social security is your only income, or the majority of your income, you likely don't have to pay taxes on your social security benefits. However, if you earn significant income above and beyond your social security, your benefits could be heavily taxed.  To learn more, go to www.ssa.gov/planners/taxes.htm.

9.       You can claim your  A) grown child; B) elderly parent; or C) dog as a dependent - True or False?


A) usually false; B) usually false; C) always false. Once your child is 18 years old, it's harder to claim him or her as dependent. Once your child is older than 19, it's even harder. You may be able to claim your "adult" child as a dependent if (s)he is a student and truly financially dependent on you.  But be careful and see IRS Publication 501.

With regard to an elderly parent who depends on you, such a person may be a dependent for tax purposes if (s)he meets certain criteria. Part of that criteria is that you provide more than half of that parent's yearly support and that parent has very little income of their own.  Again, be careful and see IRS Publication 501.

With regard to claiming your dog as a dependent, only golden retrievers qualify.  (Guess what kind of dog Mr. and Mrs. McGrath own?)  Just kidding - no dogs can be claimed as dependents, not Lassie, not Old Yeller, not Spuds McKenzie, and certainly not those little dogs women carry around in their purses or push around in baby strollers.

10.     Those E-mails you get during tax season about your tax return are from the IRS - True or False?


False! Be careful in opening such emails, and be very careful about responding to one!  Some such emails are scams, some are intended to transfer a virus to your computer, and some are solicitations.



This year, Mr. McGrath investigated paying his taxes online, and registered to do so. At the end of the registration process, he was told that he'd receive information - including a PIN (personal identification number) - not immediately via the internet, but rather by way of US mail within 10 days, which would allow him to pay his taxes online. So, while the IRS allows electronic filing of tax returns and electronic transmittal of tax monies to and from taxpayers, it does not yet engage in emails related to your tax return, for security reasons.



*THIS BLOG POST IS NOT LEGAL ADVICE, AND SHOULD NOT BE USED AS A REPLACEMENT FOR SEEKING ADVICE FROM A TAX EXPERT WITH REGARD TO YOUR OWN TAX SITUATION. IF YOU HAVE QUESTIONS REGARDING YOUR TAXES, PLEASE CONSULT WITH A TAX EXPERT.