The annual arrival of the 1040 Booklet in the mail always marks the beginning of yet another tax season. And yet, in spite of this constant ritual, there persist a number of myths about ways to avoid taxes. While interesting, they could result in significant liability if followed. As you'll see below, FindLaw has set out to debunk some of the more common myths regarding the filing of tax returns.
Myth #1: Federal Income Taxes are Illegal, Invalid and/or Voluntary
"Filing a tax return violates my Fifth Amendment right against self-incrimination!"
Wrong. There are many different theories under which tax protesters claim that the payment of taxes and the filing of tax returns are voluntary and/or illegal. Some arguments are constitutionally based, while others hinge upon semantics and word play. For example, one flawed argument states that the 16th Amendment, which authorizes collection of income taxes, was not properly enacted. Another debunked contention claims that only residents of "sovereign" jurisdictions, such as Washington D.C. and Puerto Rico, are required to pay income taxes.
The truth is that U.S. courts have universally found these tax avoidance arguments to be frivolous. Furthermore, the people who make these arguments usually end up liable for taxes and are sometimes hit with additional tax penalties.
Myth #2: The Home Office Write-Off Myth
"I have a computer and a desk in my home, therefore I can take a home office deduction."
Not necessarily. One commonly misunderstood tax write-off is the home office deduction. Many believe that they can simply deduct the cost of their home computers by claiming a home office. However, just because you have a desk and a computer in your home does not mean you qualify for the home office deduction. In fact, the IRS has very specific guidelines for the home office exemption.
To qualify for this deduction, you need to be self-employed. According to the IRS, you're able to claim this deduction for the business use of a part of your home only if you use that area regularly and exclusively:
According to some tax professionals, this deduction is so frequently misused that the IRS views taking the home office deduction as one factor that may contribute to receiving an audit.
Myth #3: It's Easy To Write Off Your Gambling Losses
"I just lost a bundle in Vegas, but it's OK - I'm writing off the loss!"
Don't count on it. When it comes to writing off gambling losses on your income tax return, the IRS is very strict. Every year the IRS receives tax returns from people who claim their gambling income is minimal while their gambling losses are huge.
The IRS has a simple rule for gambling losses: Taxpayers can only claim deduction on losses equal to or less than their winnings. For example, in 2007 you win $500 gambling, but you lose $1,000 in gambling in the same year. Under the rule, you can only claim up to $500 (the amount of your winnings) in losses on your 2007 tax return.
One highlight is that the IRS is not particular about how you lost your money, as long as it was by gambling. So, it doesn't matter if you lost at the track, the craps table, or the roulette wheel. If you won $500 in the lottery, you can claim any $500 that you lost in fantasy football or at the casino. Just beware that gambling income and losses are red flags for the IRS and could trigger an audit.
Myth #4: Restaurant Tips Don't Count As Taxable Income
"There's no record of my tips, so I don't have to report them as income."
Here's a real tip. Workers who receive tips often believe that their tips are not taxable income. The IRS, however, does view tips as taxable income.
Most tips are given in cash directly to an employee, and there are often no formal records of the tip amount. Recognizing the lack of precise records, the IRS has created tip reporting responsibilities for workers who receive them. These tip reporting obligations apply to workers in restaurants, hotels, taxicabs, and other personal services.
If in any month you earn more than $20 in tips, federal tax laws require you to report that amount to your employer by the 10th of the following month. This includes tips you receive directly from the customer, as well as amounts you receive from "tip-outs" or tip pooling arrangements.
Restaurant workers and employers, in particular, have heightened tip reporting obligations to the government. Tipping is so commonplace in eating establishments that the IRS has established the voluntary Tip Reporting Alternative Commitment (TRAC) program, under which restaurants agree to create tip reporting systems and educate employees about their reporting responsibilities.
Get More Legal Help with Your Taxes: Consult with a Lawyer
It would be nice if there were a 5th Amendment exception allowing you to avoid paying taxes. However those myths won't keep the IRS form knocking on your door or garnishing your wages. If you're concerned about your tax situation, your best protection is having an experienced tax attorney by your side.