Myth No. 1: Federal income tax liabilities cannot be discharged in bankruptcy
Wrong. This may be the most pervasive tax myth of all. Federal (and indeed state) income taxes are dischargeable in bankruptcy as long as (1) the original due date of the return plus any extensions is at least three before the bankruptcy is filed; (2) the return was actually filed by the taxpayer (not a substitute for return filed by the IRS); and (3) if the return was filed late, it has to have been on file for at least two years before the bankruptcy petition is filed. There are some other rules relating to discharging taxes, but if the return qualifies under the three rules stated above, the tax can most likely be discharged in bankruptcy.
Myth No. 2: Only high income taxpayers or returns with business income are audited
Wrong. The IRS’s own statistics show that since 1992, although the total number of tax returns audited has remained about the same, the percentage of lower income taxpayers (returns showing annual income of less than $25,000.00) being audited has risen steadily over the last 20 years.
Myth No. 3: IRS Auditors have the power to assess tax, penalty and interest, take away your assets and even put you in jail
Wrong. IRS auditors review your returns to determine if the items shown on the return are correct and there is evidence to substantiate the income and deductions on the return. The IRS Auditor cannot assess tax, collect money, seize property or bring a criminal action. The IRS auditor may only suggest additions to the tax or adjustments in the deductions. The taxpayer is not obligated in any way to agree with the conclusions in the Auditor’s Report. If you don’t agree with the Auditor’s Report, don’t sign it. Appeal it!
Myth No. 4: Returns are selected for audit because of mistakes on the return.
Wrong. Nearly all returns selected for audit are initially selected for review by a computer program called the Discriminate Income Function or DIF Program. The DIF Program compares the deductions shown on the return to the average amount of the same deduction for all taxpayers with similar occupations, incomes and family structure. Each item on your return is assigned a DIF score based on how far the item on your return deviates from the average of the same item claimed on returns for taxpayers with the same occupation, income and family size. For example, the average charitable deduction for a carpenter with two dependents earning $40,000.00 a year may be $1,500.00. If the DIF program sees a $40,000.00 a year carpenter with two dependents taking a $15,000.00 charitable deduction, the return is more likely to be selected for audit.
Myth No. 5: If I handle my IRS problem myself, the IRS will give me a fairer shake than if I hire an attorney or other tax professional to represent me.
Wrong. If you don’t know your rights, you can’t assert them and it is not the IRS’s responsibility to protect your rights. Don’t fool yourself. The IRS is staffed with trained professionals whose mission is to assess and collect the maximum possible amount of tax. If you don’t know your rights, especially your right to appeal the IRS assessments and collection actions, you could lose many thousands of dollars. Think about it. You could probably pull an infected tooth yourself, but do you want to do that or do you want to go to the dentist?
Myth No. 6: I no longer have to keep receipts to substantiate my deductions, because the Taxpayer Bill of Rights puts the burden of proof on the IRS.
Wrong. The Taxpayer Bill of Rights shifts the burden of proof to the IRS in court cases only (less than 2% of IRS disputes end up in court) and only under very limited circumstances. This myth was created, or certainly perpetuated fifteen years ago, by the news media which trumpeted this minor change in large headlines but failed to provide the boring details about how and under what circumstances the burden of proof is actually shifted.
Myth No. 7: The IRS can’t seize my home for delinquent taxes
Wrong. The IRS can indeed seize your personal residence to satisfy delinquent tax liabilities. State law may exempt your home from state law creditors such as banks, credit card companies and retailers, but IRS follows federal law which does not exempt your personal residences from seizure.
Myth No. 8: If I don’t file a return, the IRS can’t assess taxes against me
Wrong. Nearly every person in the United States has his or her income reported on a W-2 (employees) or a 1099 (self-employed, gambling, interest, pensions, etc.). Copies of those income reports are sent to the IRS, and the IRS then looks for a return from the taxpayer which includes that W-2 or 1099 income. If the taxpayer does not file a return and report the income, the IRS has the authority to file a return (called a substitute for return or “SFR”) for the taxpayer, assess the tax shown on the SFR, and begin collecting the tax. The SFR tax assessment is usually far higher (sometimes as much as two or three times higher) than the amount that would have been shown on a return filed by the taxpayer.
Myth No. 9: If I can’t pay the amount of tax on my return, I shouldn’t file the return.
Wrong. If you owe taxes you cannot pay, you should file your return on time anyway. The IRS assesses separate penalties for failure to pay and for failure to file. But the penalty for failure to file increases much faster, and willful failure to file is a federal felony. The bottom line is this: The IRS considers failure to file a much more serious offense than failure to pay and you will be penalized accordingly.
Myth No. 10: Income Tax is voluntary. I’m not required to file a return or pay income tax
Right. However, you should be aware that there are hundreds of men and women currently in federal penitentiaries who voluntarily failed to file returns and pay taxes. I guess you could say that you can’t be forcedto file your returns and pay your taxes, but if you voluntarily fail to file your tax returns, you may also be volunteering for an orange jump suit and room and board at Uncle Sam’s expense.