144.3 million people file tax returns in the United States every year. A great percentage of them file faulty tax returns, getting them penalties from the IRS. The reason behind it is the lack of awareness and belief in several tax myths present among common folks living in the United States.
It’s best to know the reality and take the right steps to safeguard yourself from legal troubles from the IRS that can cost a great deal of hard-earned money. Indeed, those who don’t pay attention to tax codes pay the price of ignorance. Don’t be one of them and believe what everybody believes regarding taxes in the United States. Here, you’ll get the four biggest tax myths debunked and get full awareness about them. So, you can decide the best while filing your returns in the next year.
Myth# 1: Federal Income Taxes Are Not Legal or Valid. You Pay Them Voluntarily!
Federal tax protestors hide behind the fifth amendment and say that we have a right against self-incrimination. Also, they say that the United States Government has never enacted the 16th amendment completely. Moreover, the third argument is that the federal income tax applies only to sovereign territories, such as Washington and Puerto Rico. That’s why they say that we are right when we decline to pay federal taxes, and we only have to pay state taxes. Yes, such arguments look very valid in casual talks and debates. But in front of the IRS, you cannot prove your point or make them rule in your favor. So, people standing on such arguments always get tax penalties and fines.
Also, many people do not know the current tax codes and tax reforms. They often think or question what is tax reform? When does it happen? They have to face the harsh procedures from the IRS due to their ignorance.
Myth#2: You Can Write-Off Taxes Claiming Home Office Deductions
Most people make a blunder in tax returns and use home office deduction to reduce their annual income tax. But they don’t know the exact guidelines to use home office deductions. Let’s clarify everything: you cannot be employed elsewhere and use the cost of your home computer and desk to avail of home office deductions.
The IRS states that you have to be self-employed to claim home office deductions. Also, you have to reserve a place in your home to meet your clients for business. If you don’t meet such criteria, you cannot file home office deductions in your returns. Often you get an audit from the IRS if you use home office deductions to reduce taxes.
Myth#3: You Can Easily Include Your Gambling Losses in Tax Reductions
Most people think they can write off gambling losses as business losses in the tax returns. By doing so, they can trick the IRS. Don’t try to pull off such a blunder and get an audit. People claim minimalistic winning in gambling every year and show huge losses in their returns. But the IRS clearly states that they’ll only consider your losses tax-deductible if your losses are less than the number of your winnings.
Remember, if you put your gambling income in your tax returns, you’ll get extreme attention for an audit. It’s because gambling income is always a red flag for the IRS. So, don’t try to outsmart the IRS by claiming huge losses or winnings through gambling. You’ll regret it when you have to show every trail of your income on demand from the IRS during an audit. One more thing, you cannot mention your gambling losses from illegal gambling places in your tax returns. If you do that, you’ll be opening a legal course of action against yourself.
Myth#4: You Have to Pay No Tax on Received Restaurant Tips
Workers receive tips in restaurants, taxis, hotels, and many more places, and they think that these tips are not subject to any taxes. However, this is not the situation for the IRS, which has published tip reporting procedures for all employees. Every worker has to report their earnings in terms of tips to their employer on the 10th of every month. Also, every tip of more than $20 in a month is a taxable income.
High-end restaurants and service centers have now installed tip reporting systems for their workers throughout the United States. Yet, medium and small-level businesses have not done anything regarding tip reporting guidelines from the IRS. That’s why most service workers and employers are not aware that the IRS can charge them due to such neglect of guidelines. Suppose you are a restaurant owner or service operator. In that case, you should voluntarily enroll your business in the Tip Reporting Alternative Commitment Program TRACP and give awareness to your employees about it. It’ll save you from random audits, penalties, and legal fees.
Federal income taxes are legal, valid, and do not violate your constitutional rights. You cannot use home office deductions if you are not self-employed. According to the IRS, gambling losses have to be less than the number of your winning to be tax-deductible. Also, workers have to pay taxes on their earnings from tips. So, know the reality and be truthful while filing for a tax return. Otherwise, you’ll get an audit that can lead to penalties and fines. Have a great day.