Tax season can be confusing for those who aren’t well versed in tax laws. With conflicting advice from friends, social media and even family members, it is easy to fall victim to tax myths that could cost you money or lead to penalties.
According to a 2023 National Taxpayer Advocate report, 68% of taxpayers stated that they were unsure about the details of tax laws and 40% of small business owners make costly tax mistakes due to misinformation.
Misunderstanding your tax responsibilities can lead to missed deductions, overpaid taxes or even trouble with the IRS. In this post, you can see some common tax myths and provide the accurate information you need to manage your taxes effectively and avoid common mistakes.
Myth 1
Many people believe that if they are self-employed or running a small business, they don’t need to file taxes unless they reach a certain income threshold.
The Reality: If you want to make money, the IRS requires all self-employed individuals to file taxes. Even if you don’t owe any taxes, tax filing is necessary to avoid penalties. Self-employed individuals must report all income if it comes from freelance work. Not filing tax can trigger penalties and interest from the IRS and failure to file for multiple years can lead to serious consequences.
If you are self-employed, it is important to file taxes every year. Even if you didn’t make much income, tax filing ensures you remain in compliance and avoid future issues with the IRS.
Myth 2
Many people think that claiming as many deductions as possible will automatically reduce their tax bills, regardless of whether those deductions are valid or not. This leads to claim deductions for things they are not permitted to do.
The Reality: While deductions can lower your taxable income, they must be valid by IRS rules. Falsely claiming deductions can result in a red flag for the IRS which can lead to an audit and possible penalties. Some deductions only apply if you meet certain criteria such as business-related mileage or specific home office expenses.
Myth 3
It is common for individuals to believe that if they earn money through side jobs that aren’t officially reported, they don’t need to report it to the IRS.
The Reality: The IRS requires you to report all sources of income including freelance work or payments that weren’t processed through a formal paycheck. If you received cash, you are obligated to report this income when filing your taxes. The IRS has sophisticated methods for identifying unreported income including cross-referencing bank accounts and third-party payment processors. Failure to report all income could result in penalties, interest and an audit.
Myth 4
Many taxpayers believe that tax software can automatically find every deduction and tax break.
The Reality: While tax software is a great tool for simplifying tax filing, it is unsafe. These tools can miss deductions or credits that require specific input or manual adjustments, and they can’t provide personalized advice for unique tax situations. If your tax situation is complex such as owning a business, having multiple sources of income or claiming specific credits it is a good idea to consult a tax professional to ensure you are taking full advantage of the tax laws.
Myth 5
Some people think they won’t be penalized for filing late or failing to file their returns on time if they owe no taxes.
The Reality: Failing to file your tax return on time can result in penalties and interest charges even if you don’t owe any money. The IRS charges penalties for both late filings and late payments. If you miss the tax filing, the IRS can execute a penalty of 5% per month up to 25%. Even if you owe no taxes, it is important to file on time to avoid these penalties.
To Wrap It Up
Accurate knowledge is important to understand your tax filing responsibilities as a self-employed individual and know the reality of tax deductions and refunds. The IRS has clear rules for tax filing and staying informed can help you maximize your deductions, avoid penalties and improve your financial situation in the long term. You can seek professional advice if you are unsure about your taxes.