Believing Tax Myths Can Be a Costly Mistake

Black taxesFiling your taxes can be confusing. Even though it’s an annual ritual, there’s so much bad information out there that you can easily be led astray. Add a few myths to your adjusted gross income, and you can find yourself facing an unexpected bill ? or worse, shortchange your own refund.

One common misperception is that filing for an extension will give you more time to pay any taxes you owe. That’s simply not true.

Although everyone is entitled to six more months to file a return, the extension doesn’t apply to the amount owed. If you don’t send a check with estimated taxes by April 18, expect to add interest and penalties when you get around to paying the Internal Revenue Service.

That’s not the end of the popular myths about taxes. Here are four more:

MYTH (hash)1: Claiming a home office deduction is a surefire trigger for an audit.

If you meet the requirements for a home office ? some of which are, you have a space used exclusively for work and it’s your main place of business ? then go ahead and claim the expenses.

The same goes for any other deduction or credit you qualify to take.

“There aren’t any deductions that are problematic,” said Greg Rosica, tax partner at Ernst & Young. Problems only arise when taxpayers try to claim deductions they aren’t entitled to take.

The surest way to trigger an audit is to overlook income that an employer, bank or investment advisor reports to the IRS, or to make a mistake transcribing numbers, said Barbara Weltman, a tax attorney and spokeswoman for tax guide publisher J.K. Lasser.

Some tax experts also believe that IRS computers are programmed to pick out returns with unusually large claims for charitable deductions, unreimbursed business expenses or other items. But if you can document your claim, an audit shouldn’t be a concern.

“The worst that will happen is the IRS will ask you about it and you’ll show that you’re entitled to it,” she said.

MYTH (hash)2: You have to appear before the IRS if you’re audited.

If the IRS questions an item on your return, chances are you won’t have to show up at the local office with your entire shoebox of records.

The most common type of audit is known as a correspondence audit. As its name implies, it’s done in writing.

Last year, there were just under 1.6 million audits, about 1.1 percent of the total number of returns filed. Of those, 78 percent were correspondence audits, while 22 percent were “field,” or in-person examinations.

If your income is less than $200,000, you’re even less likely to have to appear in person ? 20 percent of the audits for returns for that income level were field audits.

Just because an audit is done on paper, however, doesn’t mean resolving whatever issue the IRS is questioning is easy. Alan J. Straus, a certified public accountant in New York, said he’s had problems with lost paperwork. “You keep sending the stuff in, and it winds up in a black hole,” he said. “It gets incredibly frustrating.” So don’t send original paperwork when trying to document a claim.

MYTH (hash)3: If you don’t receive a 1099 form for an account, you don’t have to pay taxes on any income it earned.

There could be a number of reasons why you didn’t receive a 1099 for a bank or investment account, but that doesn’t get you out of reporting the income, said Melissa Labant, of the American Institute of CPAs. For instance, if you moved, a 1099 might have been sent to a wrong address. If you receive your statements online, you may have overlooked the form in your inbox.

Also, banks are not required to send a 1099 for any account that earned a small amount of interest, say $9 earned on an interest-bearing checking account.

The amount of interest you earned is usually included on the last statement of the year, so that’s one place to check to see if you’re owed a form.

If you can’t locate it, contact your bank or broker. They are required to report any interest you earned, so failing to include the income on your return could be a red flag for the IRS.

MYTH (hash)4: If you make a hardship withdrawal from a retirement plan early, you don’t have to pay taxes on it.

Pulling cash out of your IRA or 401(k) plan may seem like a necessity in times of financial distress, but it’s not without consequences. Not only is that money taxable, it’s also likely you’ll have to pay a penalty on top of the tax.

If you took money out of a retirement account before age 59 1/2, you’ll have to pay an additional penalty of 10 percent. There are a handful of limited exceptions, such as if you are totally and permanently disabled, but most taxpayers will have to pay extra for using the money early.

Source: The Associated Press.