Myths about federal taxes
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 actually illegal.
It's an argument often used by people who have turned to Tax Masters, which helps filers in trouble with the IRS, says company 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 jokes.
Many myths involve audits. That's understandable, given that the IRS doesn't dish details on what triggers an audit, leaving us to speculate. some tax legends maintain that the IRS will give your return an extra hard look if you call the agency to ask 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."
To help separate fact from fiction, here are some common myths:
Actor Wesley Snipes, who argued he wasn't legally required to pay taxes, may soon join other so-called tax deniers in jail. he was convicted of failing to file tax returns in 2008, and remains free while appealing his three-year prison sentence.
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, an associate clinical professor at Chapman University School of Law.
Take bribing a senator. "The senator should report the bribe," Willis says. he quickly adds: "The bribe is not deductible to the payer."
"The law requires reporting all your income, even if it's not on a Form 1099 or W-2," says 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 says.
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.
Still, filers shy away from the deduction for fear of an audit, she says. "If you're entitled to take it, you should take it."
What prompts an audit "is a guarded secret," says Dennis Raible, an accounting professor at Saint Joseph's University and a former IRS agent. Although, 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 to others in your locale, he says.
Sure, the rich can afford to hire accountants and lawyers to help shelter income from taxes, he says. But figures from the Tax Policy Center show the top fifth of earners pay 67 percent of the federal income taxes. The bottom fifth of earners actually get more back from income taxes than they paid in because of refundable credits and other tax breaks.
Estate tax opponents often don't realize the millions — $3.5 million per person last year — that can be sheltered from this tax, Burman says. Others are against the tax because they dream of being rich someday. "But you have to be really rich to be subject to the estate tax," he says.
