If you follow me or have read any of my blogs in the past couple of months then you know I have been writing quite a bit about taxes. I want to share five myths I consistently hear about tax returns.
Myth #1 – I Can Do It Myself
This is less of a myth and more of a question of one’s ability. Everyone is entitled to prepare their own tax return, that’s no secret. But there is much to consider when doing it yourself, primarily, the complexity of your return. That is where the “myth” comes in. There will come a time when you will have a complicated return and really shouldn't do it yourself.
I have seen self-prepared returns from the impoverished to multi-millionaires and I can tell you everyone makes mistakes. It's very rare that I do not find mistakes on self-prepared tax returns. Vendors like TurboTax and H&R Block Online do a great job with their products, but even I have had to cobble my way to the right answer when using their software. There are parts of the tax code that are highly subjective to interpretation, and unless you are well versed in everything tax, then you stand a fair chance of being wrong in your interpretation. This could mean you are leaving money on the table or might have to pay back some of your refund down the road. Know your limits and when it makes sense to bring in a CPA to assist you.
Myth #2 – I Always Get a Refund
Nobody is ever guaranteed a tax refund. Your tax return is an annual reconciliation between what you should have paid and what you actually paid throughout the previous year. If you paid too much then you get a refund, but if you didn’t pay enough, well, then you owe. Some taxpayers treat refunds like found money, but the reality is that it is money overpaid throughout the year. Yes there are credits available to certain taxpayers who meet specific criteria, but they are not available to everyone and a taxpayer’s situation can (and usually does) change each year. If you prepare your own taxes you may not even be aware at how much you are overpaying into the system each month. Again, this is why it’s important to consider working with someone that can explain the results to you each year.
Myth #3 – Tax Preparers are Responsible for the Return
Not true! If you are working with a reputable preparer then you should be receiving an engagement letter or agreement each year. Somewhere in that letter or agreement it should clearly state that the preparer is not responsible for the return and that they only used the information provided by the taxpayer to prepare the return. This is also clearly stated on your return.
What does this mean? Well, if you provide facts and circumstances that are inaccurate, you are on the hook for additional taxes as well as penalties and interest if you are ever audited. But if your return preparer misinterprets the law using accurate information you provided, then the liability might be shared. One thing I can assure you is that the IRS is indiscriminate with their notices and audit selection and it is usually unrelated to who prepared the return. Speaking of the IRS…
Myth #4 – I Received a Notice from the IRS, it’s my Preparer’s Fault
In most cases, you didn’t receive a notice because you changed who was preparing your tax return. More likely, you may have received a notice requesting additional information to validate a tax return line item. Typically it has something to do with earning significantly more or less money, or not paying enough taxes.
There is little correlation between who receives notices based on their tax return preparer. That being said, the IRS looks favorably upon CPAs and tax attorneys because they usually possess an advanced understanding of the tax code versus their peers. An IRS agent reviewing a return may choose to forego any further action if they see that a return has been prepared an individual with one of those designations.
Myth #5 – Tax Elimination Plans
This myth is by far my favorite because hands down it is a complete lie. I have heard industry experts claim they can eliminate your tax liability and I know how they do it. Rather than have you pay the government what is owed, they have you invest the money into a tax-deferred investment account such as an IRA (or SEP if you’re self-employed) so that you don’t have to pay taxes on that money today. Well, it’s true that you may not owe today, but your tax bill hasn’t actually been eliminated. Any tax due on the money you invested is just deferred until 70 1/2 when Required Minimum Distributions “RMDs” kick in. You're also still out of pocket that cash so you still have to come up with the money, you're just sending it elsewhere for the time being. The term tax elimination is misleading and if you ever encounter someone who tells you they can do it then you should be skeptical.
Share Your Thoughts!
I’m really interested to hear what other taxpayers (and preparers) think or have heard about taxes. As part of my service I try to educate my clients to understand how the system works so they are better informed for the future. Leave your comments in the section below.