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Common IRS Myths

March 28, 2016  |   Tax Advice,Tax Tips   |   Tags: , , , , ,  

Myths about taxes abound, but they can become dangerous if followed. A taxpayer believing false information about the IRS, taxes, audits or back taxes may make the wrong decisions. Here are seven of the most common IRS myths that taxpayers need to be beware of.

Myth 1: Taxes are Voluntary

IRS mythsBelieving that paying taxes is voluntary is a myth that often leads taxpayers to face the IRS in court. It is considered a frivolous argument by the IRS, and may trigger a variety of civil and criminal penalties. If a taxpayer is required to file a tax return and pay taxes, he/she must do so or face IRS penalties.

Myth 2: Only the Rich and Businesses are Audited

That the IRS audits only high-income earners and businesses is another common myth. In reality, the IRS randomly selects tax returns to be audited. The IRS also selects returns for audit that do not contain accurate information, though many of the returns are selected solely based on a statistical formula.

Myth 3: The IRS Cannot Take Away Assets

The IRS is given certain powers, including the legal seizure of a taxpayer’s property, to satisfy a tax debt. The tax agency can garnish wages; sell a taxpayer’s home, vehicle, etc.; or take money from a taxpayer’s bank account. The Internal Revenue Code authorizes the IRS to place levies to collect delinquent tax.

Myth 4: An Extension to File Means More Time to Pay

Obtaining an extension to file does not mean receiving additional time to pay taxes. When a taxpayer receives an extension, he/she gets six more months to file his/her tax return. But the taxpayer must pay the full tax bill before the filing deadline. Even if an extension is obtained, the IRS will charge penalty for failure-to-pay.

Myth 5: Students and Children Do Not Need to File a Return

Students and minors are not exempted from filing a tax return. Any individual that earns an income may be required to file a tax return. Usually, a person’s filing status and income determines whether he/she needs to file a return. To help taxpayers determine if they are required to file a return, the IRS provides an interactive questionnaire ‘Do I Need to File a Tax Return?’ at irs.gov.

Myth 6: Not Filing a Return Hides Unpaid Taxes from the IRS

The IRS does not solely depend upon the tax return of a taxpayer to determine their tax liability. They also receive information from third parties such as employers, banks, etc. When a tax return is not filed, the IRS uses this information to determine the tax liability and file a Substitute for Return (SFR) on behalf of the taxpayer. After filing an SFR, the IRS can begin collection efforts.

Myth 7: Back Taxes Cannot be Discharged in Bankruptcy

Federal income taxes are dischargeable in Chapter 7 bankruptcy if certain conditions are fulfilled. These are:

  1. 1. The taxes are income taxes and not other taxes, such as payroll taxes, penalties, etc.
  2. 2. The original due date of the return and extensions is at least three years-old (following the date of the bankruptcy).
  3. 3. The taxpayer filed the return and it was not an SFR filed by the IRS.
  4. 4. The return for the debt that is to be discharged must be filed at least two years before the bankruptcy petition is filed.
  5. 5. There is no willful tax evasion or fraud.
  6. 6. The debt must have been assessed by the IRS at least 240 days before bankruptcy was filed.