Taxpayers' Craziest Misconceptions
It's amazing what clients can walk in with: overflowing shoeboxes, demands for a refund in cash, insistence that their return is handled before all others. Taxpayers try to deduct everything from unborn children and kids' weddings to speeding fines, groceries and massages. Many also walk around with some pretty wacky ideas about filing and taxpaying.
"That they don't have to pay any income taxes," said Becky Neilson of Neilson Bookkeeping in Sheridan, Calif., "as the taxes are unconstitutional."
Enrolled Agent Martha Nest of Westview Tax Services, Bardstown, Ky., also recalled:
- "If I get a refund, I didn't pay taxes!"
- "'Cash' is not income."
- "I don't have to pay taxes if I have an S-Corp," and,
- "Commuting is using my vehicle for business."
Added San Antonio-based CPA Susana Lozano:
- Being a notary public is synonymous with being a tax professional;
- Having a CPA prepare your taxes ensures you a higher return; and,
- High-income individuals ($1 million of revenue or more) should not pay more than a 20% marginal tax rate.
"That if you're older than 70, you don't have to pay taxes," added New York-based preparer Maurice Trauring, "and 90% of my clients want to deduct their dog or cat."
Another misconception: That a preparer, if things go wrong with tax authorities, can't be the client's best friend.
The favorite taxpayer statement of Donna Sue Henderson of Bristol Tax and Accounting, Bristol, Tenn.: "'I can't pay their taxes 'cause then the government will have all my money.'"
"I find that funny," Henderson said, "because the alternative is to not pay and then have the IRS assess late-payment fees and penalties - and sometimes something worse." Her advice to clients creative and otherwise? "Just pay what you owe before it all snowballs out of control and the IRS starts levying."
'WON'T COME AFTER THEM'
Certain types of filing sometimes occasion wrong ideas. For example, Jeffrey Schneider, an EA at SFS Tax & Accounting Services in Port St. Lucie, Fla., finds the biggest misconceptions stem from a detail of business filing. "A client on the cash basis wants to write off a bad debt when a customer doesn't pay," he said. "It's foreign to them that since they didn't record into income, they cannot get the write-off. Another is a loan on a business asset: When I don't deduct principal, they have a hard time understanding cash expenditure and cash expense."
"Clients with inventory ask, 'How do I show a profit when I do not have any cash?' After a 10-minute explanation, they get it. They don't like it," Schneider added, "but they get it."
Government benefits are another patch of thick woods. Clients believe "that once you begin to draw Social Security, you no longer have to pay taxes or file a tax return," said Melissa Bowman, an EA with Bradford, Ohio-based Rainbow Accounting Services. "This is only the norm for those who have no other income besides the Social Security benefit. Another is that people tend to think that if they file an extension, they will be safe from an audit."
STRAIGHTENING THEM OUT
Speaking of government, clients sometimes feel "that if they don't file their returns that the IRS will never catch up to them," said Kathleen Fitzpatrick, owner of Padgett Business Services, Princeton, N.J. "I have prospects who have gone five or more years without filing and who really think nothing of it or who feel that the government won't come after them because it's likely a small amount of money."
"One of the funniest things new clients think is that if they didn't get a W-2 or 1099 by Jan. 31, they don't need to include the forms with their return," said Douglas Lindgren of Lindgren's Tax Service in Brooklyn Park, Minn. "We straighten them out accordingly."
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