Common Business Tax Myths Debunked

Last week the Roni Deutch Tax Center – Tax Help Blog posted a new article debunking a handful of common business tax myths. I have included a of the myths below, but be sure to check out the full text at RDTC.com.

1. My accountant is liable for any mistakes on my return

Although you may hire a professional to prepare your tax returns, you are still responsible for filing a correct return with the IRS. Even though an accountant or tax preparer may complete and file your return, they will not be held liable for any mistakes, you will be. To avoid any problems, you should at least have a basic understanding of business tax laws, and always review your return before you sign it.

2. Itemizing is only for the rich

Unfortunately, many taxpayers (both those that are self-employed and those who work for an employer) assume that only wealthy people should bother itemizing their deductions. The truth is that filing an itemized return can benefit all types of taxpayers, at many different income levels. Itemizing is especially helpful for self-employed taxpayers, as there are dozens of business-related deductions you can qualify for. If you are unsure about itemizing, then you can prepare one return itemized and one return using the standard deduction, and compare the results.

3. I know I saved because I prepared my own return

Although preparing your own return will save you from having to pay your accountant or tax professional, you might be putting yourself at risk. Tax laws are always changing, which can make it hard to keep up with new credits, deductions, and qualification rules. A tax professional spends their career studying tax law changes. Therefore, unless you are confident about your tax knowledge, you might want to consider seeking help from a professional.

4. Only big business needs to collect sales taxes

It is unfortunate that any business owners believe this myth. Studies show that a number of business owners have used this excuse in tax evasion cases. The exact amount of sales tax you will need to collect will depend on the state you live in, not on the size of the business you operate. If you unsure about your sales tax obligations, contact your local tax authority or a qualified tax professional.

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Popular Tax Myths About the Health Care Reform Legislation

This week President Obama intends to address Congress to encourage them to pass their health care reform bill. However, with recent polls showing that a majority of Americans either moderately or strongly oppose the current legislation, getting members of Congress to vote in favor of it is going to be difficult. As the debate continues, it seems like television commercials and e-mail blasts are going out left and right to either promote or discredit the bill. To help people confused by some of the claims being made in these advertisements I have put together the following list of the top tax myths about the health care reform bill.

The Bill is Fully Funded

President Obama has repeatedly claimed that the health care overhaul will be paid for, and that he would not sign a bill that is not "deficit-neutral." The plan to raise taxes on the top income earners is expected to generate $239 billion in additional federal revenue over the next ten years. However, the reform is expected to cost more than $600 billion. Obama stated that his team has identified cuts to pay for the rest of the bill, including cuts to Medicare and payments to insurers and practitioners. However, these cuts are quite unpopular and have a history of never coming to fruition. This has left many wondering if Obama will go back on his promise and sign a bill that will increase the national debt and ultimately lead to additional tax increases.

US Taxpayers will Pay for Heath Care for Illegal Immigrants

Although there has been speculation that over 5 million illegal immigrants will be covered by Obama's health care plan, it is almost entirely a fabrication. The bill drafted by the House of Representatives specifically says that no money will be spent giving illegal immigrants health care. H.R. 3200: Sec 246 claims "nothing in this subtitle shall allow Federal payments for affordability credits on behalf of individuals who are not lawfully present in the United States."

The Government Health Agency will have Unlimited Access to Taxpayer's Financial Information

The myth that the government's new health care agency will have access to every American's financial information has been making the rounds for a few weeks. The actually legislation does allow the government to get certain information about taxpayers attempting to qualify for health benefits. However, the bill limits the information that can be requested to "(i) taxpayer identity information with respect to such taxpayer, (ii) the filing status of such taxpayer, (iii) the modified adjusted gross income of such taxpayer (as defined in section 59B(e)(5)), (iv) the number of dependents of the taxpayer, (v) such other information as is prescribed by the Secretary of regulation as might indicate whether the taxpayer is eligible for such affordability credits (and the amount thereof)." Additionally, the bill also limits the use of the information to only establishing and verifying the appropriate credit, "and providing for the repayment of any such credit which was in excess of such appropriate amount."

Employers Not Offering the Public Option will Pay an Additional 8% Tax

This myth is actually somewhat based in fact, except is has been exaggerated slightly. The current health care bill does require employers to either offer private health benefits or help pay for the public option through additional taxes. Employers with annual payrolls over $400,000 will have to pay 8%, and those with payrolls between $250,000 and $400,000 will pay a lesser amount. However, employers with payrolls under $250,000 will not have to pay an additional tax or be forced to offer health benefits.

Taxpayers without Acceptable Health Care will Pay 10% or More in Taxes

As part of the health care package, there is a mandate requiring everyone to have insurance. Therefore, those without acceptable coverage will have to pay a penalty. There have been dozens of rumors swirling around that this penalty could exceed 10% or more, however the actual bill calls for a penalty of 2.5% of a taxpayer’s adjusted gross income, not exceeding the national average premium for individual coverage.

Estate Taxes will be Locked in Before a Taxpayers Death

This claim, along with others of a suicide council, are all misinterpretations of a provision to the House's bill asserting that Medicare will cover voluntary end-of-life counseling sessions between seniors and their doctors. These sessions can include topics such as hospice care, creating a living will, etc. However, there is no mention of forcing taxpayers to lock in their estate taxes while on their deathbeds.

Tax Dodge Myths- Are Multinationals Not Paying Their Fair Share?

From NewsWeek.com:

The U.S. tax code is "full of corporate loopholes that makes it perfectly legal for companies to avoid paying their fair share." —President Obama, May 4

Like it or not, ours is a world of multinational companies. Almost all of America's brand-name firms (Coca-Cola, IBM, Microsoft, Caterpillar) are multinationals, and the process works both ways. In 2006, the U.S. operations of foreign firms employed 5.3 million workers. Fiat's looming takeover of Chrysler reminds us again that much business is transnational.

For most people, the multinational company is a troubling concept. Loyalty matters. We like to think that "our companies" serve the broad national interest rather than just scouring the world for the cheapest labor, the laxest regulations and the lowest taxes. And the tax issue is especially vexing: How should multinationals be taxed on the profits they make outside their home countries?

Listen to President Obama, and the status quo seems a cesspool. Pervasive "loopholes" engineered by "well-connected lobbyists" allow U.S. multinationals to skirt American taxes and outsource jobs to low-tax countries. So the president proposes plugging loopholes. Some jobs will return to the United States, he said, and U.S. tax coffers will grow by $210 billion over the next decade.

Sounds great—and that's how the story played. "Obama Targets Overseas Tax Dodge," headlined The Post. But the reality is murkier; the president's accusatory rhetoric perpetuates many myths.

Myth: Aided by those overpaid lobbyists, American multinationals are taxed lightly -- less so than their foreign counterparts.

Reality: Just the opposite. Most countries don't tax the foreign profits of their multinational firms at all. Take a Swiss multinational with operations in South Korea. It pays a 27.5 percent Korean corporate tax on its profits and can bring home the rest tax-free. By contrast, a U.S. firm in Korea pays the Korean tax and, if it returns the profits to the United States, faces the 35 percent U.S. corporate tax rate. American companies can defer the U.S. tax by keeping the profits abroad (naturally, many do), and when repatriated, companies get a credit for foreign taxes paid. In this case, they'd pay the difference between the Korean rate (27.5 percent) and the U.S. rate (35 percent).

Myth: When U.S. multinationals invest abroad, they destroy American jobs.

Reality: Not so. Sure, many U.S. firms have shut American factories and opened plants elsewhere. But most overseas investments by U.S. multinationals serve local markets. Only 10 percent of their foreign output is exported back to the United States, says Harvard economist Fritz Foley. When Wal-Mart opens a store in China, it doesn't close one in California. On balance, all the extra foreign sales create U.S. jobs for management, research and development (almost 90 percent of American multinationals' R&D occurs in the United States), and the export of components. A study by Foley and economists Mihir Desai of Harvard and James Hines of the University of Michigan estimates that for every 10 percent increase in U.S. multinationals' overseas payrolls, their American payrolls increase almost 4 percent.

Myth: Plugging overseas corporate tax loopholes will dramatically improve the budget outlook as multinationals pay their "fair" share.

Reality: Dream on. The estimated $210 billion revenue gain over 10 years—money already included in Obama's budget—represents only six-tenths of 1 percent of the decade's tax revenue of $32 trillion, as projected by the Congressional Budget Office. Worse, the CBO reckons that Obama's endless deficits over the decade will total a gut-wrenching $9.3 trillion.

Whether Obama's proposals would create any jobs in the United States is an open question. In highly technical ways, Obama would increase the taxes on the foreign profits of U.S. multinationals by limiting the use of today's deferral and foreign tax credit. Taxing overseas investment more heavily, the theory goes, would favor investment in the United States.

But many experts believe his proposals would actually destroy U.S. jobs. Being more heavily taxed, American multinational firms would have more trouble competing with European and Asian rivals. Some U.S. foreign operations might be sold to tax-advantaged foreign firms. Either way, supporting operations in the United States would suffer. "You lose some of those good management and professional jobs in places like Chicago and New York," says Gary Hufbauer of the Peterson Institute.

Including state taxes, America's top corporate tax rate exceeds 39 percent; among wealthy nations, only Japan's is higher (slightly). However, the effective U.S. tax rate is reduced by preferences—mostly domestic, not foreign—that also make the system complex and expensive. As Hufbauer suggests, Obama would have been better advised to cut the top rate and pay for it by simultaneously ending many preferences. That would lower compliance costs and involve fewer distortions. But this sort of proposal would have been harder to sell. Obama sacrificed substance for grandstanding.

Californians Cling To Easily Dispelled Tax Myths

From The New York Times:

Seems like only yesterday that I was at the Orange County fairgrounds to watch Arnold Schwarzenegger drop a wrecking ball on a car, symbolically crushing the auto tax to the delight of supporters who never asked how the governor-to-be might cover the lost revenue.

Since then, he's continued to put that wrecking ball to use, crushing one campaign promise after another.

But not until the governor signed on to raising taxes, including the car tax, did GOP leaders and good citizens get angry, vowing to go after not just Arnold but any Republican legislators who voted with him on a budget that includes the new revenues.

It didn't matter that state services of every type were threatened from Chico to Chula Vista, that the bus was headed for the cliff, that inmates were packing their bags for early release, or that firing every state employee wouldn't have balanced the budget without new revenue.

All that mattered were taxes.

"California has the highest taxes in the country," a reader named Mary wrote to me.

"I guess it's our patriotic duty, as residents of California, to pay the highest taxes (or close to it) in the country, for the most incompetent government in any state," wrote Art.

Most incompetent government? We're probably in the running, but two other states I've lived in were at least as screwed up, with Pennsylvania actually taking pride in its monumental incompetence.

As for the claim that Californians pay the highest taxes of any state or close to it, I'm sorry to disappoint, given the great joy so many people seem to derive from hyperventilating.

Common IRS Tax Audit Myths

There are a lot of myths going around this tax season about IRS audits, fortunately the RDTC Tax Help Blog has posted an entry debunking 10 of the most common myths. Below are the first 5 items in the list, but you can view the full article at Top 10 IRS Tax Audit Myths.

1. Having a home office is an audit red flag.

This myth was more popular when fewer people had home offices, but is definitely not true these days. Home offices are quite common today, and it alone will no longer flag you for an audit. However, that does not mean the IRS turns a blind eye to home office deductions. They will review it to make sure that it makes sense. If there is any reason for the IRS to believe that you are improperly claiming the home office deduction, then look out.

2. The mailing documents the IRS sends you are coded with audit flags.

This is false. The IRS sends you those mailing documents to make the mailing process more secure and easier. Failing to send your return in their provided envelope will probably do nothing more than delay your return and cause you frustration.

3. You can avoid being audited by filing late, after "audit season".

You would be surprised by how many people swear this works for them every time. Sure it works, but only because you start off with the odds against you being audited. Filing late or early will not help or prevent you from being audited. The IRS can audit you three years after the tax return in question is received.

4. If you make under a certain amount then you cannot be audited.

Income levels also have no affect on your audit probability. The IRS not only sends random audits to all income levels, but they take the time to look at each and every return. No matter what you make, if they believe that you are evading taxes in any way, they will audit you.

5. You cannot be audited once you have received your refund.

Receiving your refund just means the IRS has reviewed your tax return and agreed with your calculations. However, if they receive a return from a separate party who names you and that information does not match your return, then you can still be audited. And remember, the IRS can audit a return up to 3 years after it is received.