People believe in some pretty incredible myths about taxes

People believe in some pretty incredible myths about taxes
By Eileen Ambrose
Copyright © 2010, Chicago Tribune
March 7, 2010
http://www.chicagotribune.com/business/yourmoney/sc-ym-0307-tax-myths-20100305-2,0,7492867.story


The U.S. tax code is massive and complicated, the perfect fodder for myth-making.

Perhaps the most well-worn fallacy, shot down by many courts despite the best efforts of tightfisted taxpayers, is that federal taxes are illegal.

It's an argument often used by people who have turned to Tax Masters, a company that helps filers in trouble with the IRS, said its president, Patrick Cox. Some clients have claimed they don't owe U.S. taxes because they are "citizens of the world." If that were the case, maybe they should be paying taxes to the United Nations, Cox said with a laugh.

Many myths involve audits. That's understandable, given that the IRS doesn't dish details on what triggers an audit. Some tax legends maintain that the IRS will give your return an extra hard look if you call to ask a question.

"Not true," said IRS spokesman Jim Dupree. "If someone asks a general tax question, we aren't going to ask who they are."

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

Income taxes are unconstitutional: Pick an amendment, from the right to free speech to protections against self-incrimination and involuntary servitude, and tax protesters have used it to justify not paying taxes. In particular, the 97-year-old 16th Amendment, which authorized Congress to enact our current tax system, has long been under attack.

"There are some people in jail who argued that the 16th Amendment was never ratified," said Eddy Quijano, an instructor at California Polytechnic State University and a former IRS lawyer.

Actor Wesley Snipes tried that and now remains free while appealing a three-year prison sentence.

Similarly, some argue that we have a "voluntary" system, making taxes optional. But voluntary "means the government is trusting you to self-report how much tax you owe," said George Willis, an associate clinical professor at Chapman University School of Law.

Bartering is tax-free: Bartering has blossomed in the recession, particularly online. And the value of the swaps is taxable income for both sides, Quijano said.

Internet revenue isn't taxable: Online entrepreneurs who believe this are in for a rude shock next year, said Barbara Weltman, author of "J.K. Lasser's 1001 Deductions & Tax Breaks." That's when credit card companies and groups such as PayPal must start reporting merchant sales to the IRS, she said.

Ill-gotten gains aren't taxable: Even if your line of work is theft, embezzlement, prostitution, drug dealing or some other illegal enterprise, that income is taxable.

Take bribing a senator. "The senator should report the bribe," Willis said, quickly adding, "The bribe is not deductible to the payer."

Cash isn't taxed: Tips, gambling winnings, 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," said Zack Goff, a senior tax analyst with The Tax Institute at H&R Block.

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 said.

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

There are exceptions, but dependents usually are children or other relatives who get more than half their financial support from you and live with you for more than half the year.

Home-office deduction triggers audit: This was true when anyone with a desk in the basement claimed it as a home office. Teachers were big offenders, saying they graded papers at home, though their principal place of business was the school, Weltman said. 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, she said.

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.

What prompts an audit "is a guarded secret," said Dennis Raible, an accounting professor at St. Joseph's University and a former IRS agent. But flags are raised when income listed on a return doesn't match what the employer reported, or your claims seem way out of line compared with others in your locale, he says.

If you get a refund, you won't be audited: A refund doesn't mean you're in the clear, Quijano said. The IRS generally can audit returns filed within three years, but there's no limit if fraud is involved.

Kids and retirees don't have to file: It's not your age that determines whether you have to file but your income. For instance, singles younger than 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.

The rich don't pay taxes: "People don't understand how progressive the income tax is," said Len Burman, a public policy professor at Syracuse University. "Middle-income people think they are paying more than they are."

Sure, the rich can afford accountants and lawyers to help shelter income from taxes, he said. But figures from the Tax Policy Center show the top fifth of earners pay 67 percent of the federal income taxes. The bottom fifth get more back than they pay in because of refundable credits and other tax breaks.

Most will pay the federal estate tax: This tax disappeared this year, but it will be back in 2011. Still, last year 99.8 percent of deaths didn't set it off, according to the Tax Policy Center.

Estate tax opponents often don't realize the millions, $3.5 million per person last year, that can be sheltered from this tax, Burman said.

eambrose2@tribune.com