3 common and potentially harmful tax misconceptions
Many taxpayers may misunderstand their liability for tax return errors, their obligation to file returns and the effects of requesting deadline extensions.
Although calculating tax liability and correctly filing tax returns can be complex tasks, many California residents feel confident that they at least understand the basic elements of state and federal tax laws. Unfortunately, despite this belief, it is not uncommon for taxpayers in Los Angeles to suffer from misconceptions about their responsibilities. The following myths are especially widespread and potentially harmful.
1. Personal liability
People who hire tax preparers may believe that the preparer is ultimately responsible for any oversights, errors or fraudulent information that appears in a tax return. Per the IRS, however, taxpayers remain liable for returns that are filed in their names, even in the extreme case that a tax preparer engages in fraud without the taxpayer’s knowledge. To reduce the risk of this outcome, the IRS recommends that taxpayers take the following steps when choosing a preparer:
- Use referrals to find someone trustworthy, or take time to research a preparer’s reputation.
- Be wary of professionals who promise a higher tax refund than other tax preparers can.
- Avoid arrangements in which a tax preparer’s fee is a percentage of the refund.
Additionally, it is critical to obtain a copy of all returns and review them carefully prior to signing. Taxpayers should never sign a blank form and assume that the information provided in the final return will be correct.
2. Effects of extensions
Many people believe that requesting an extension gives them more time to file and pay their taxes. However, an extension only extends the filing deadline; it does not affect the payment deadline or spare taxpayers from IRS penalties and interest for late payments. Even if an extension is granted, the IRS will still assess a monthly fee of .5 percent of a person’s unpaid taxes.
3. Necessity of filing
Many people have heard that the IRS can file returns for taxpayers, and as a result, they may believe that personally filing a return is not strictly necessary. The IRS does reserve the right to file a substitute in return on an individual’s behalf, as U.S. News explains. However, this return calculates a person’s liability without accounting for adjustments that favor the taxpayer, such as deductions. Additionally, failure to file tax returns and pay taxes on time can result in a penalty of 5 percent of the unpaid amount being assessed every month.
Another common misconception is that students or dependents do not have to file income tax returns. U.S. News explains that the necessity of filing a return depends on the individual’s income, rather than his or her status. For example, full-time students who earn over $10,150 in a year are required to file returns.
Addressing tax errors
The above misunderstandings may cause many people to file late tax returns, miss payment deadlines or submit inaccurate returns. Unfortunately, innocent oversights or errors do not excuse a person from potentially harsh sanctions. Considering this, people who face these serious consequences should protect their interests by consulting with an attorney about mitigating or minimizing any IRS penalties.