As I am doing my own taxes and help coach others on how to minimize their tax liability, there are a few myths that drive me up the wall so I thought I would post them here:
1. If I do an extension, I will get audited.
BS ! You won’t get audited by filing an extension. You will get hit with penalty and interest charges, however, if you don’t pay the tax due on your tax return with the extension. So pay a bit extra so you’ve got that covered.
2. I want to get a lot of money back.
No you don’t. Why give the government an interest free loan? Increase your withholding and get more money in your monthly paycheck – so you can put it to use for YOU- like fund your Roth IRA, or your kids 529 Education plan.
No you won’t. The IRS knows that most businesses have large expenses especially in the first 3 years so don’t sweat it. But don’t make a habit of business losses or your business will start to look more like a hobby and you will get audited.
4. All my friends in my industry got audited so I will.
Not true. The IRS targets certain businesses or industries each year for audits. There are no crazy IRS auditors out there looking for get you. Stop the conspiracy theories. It is most like a computer algorithm that says in this certain industry the average deduction for x is this. If your amount is triple that, then yes, you are a red flag ready for audit. So if you do have some extraordinary deductions, make sure you have the receipts to prove it. There are no IRS boogeymen out there —-just computers telling them that something is fishy here or there.
5. I am so busy, I just file an extension every year.
You are not busy, just sloppy. The people who file extensions every year are people who don’t have good record-keeping. Come on, folks, it’s not that hard. Unless, of course, you wait to the last minute and scramble to organize your deductions and have a migraine after. You know who you are. You are also the first one to bitch about how awful the whole system is. Meanwhile you are the one that gets screwed every year because you end up paying more taxes than necessary because of your sloppiness.
Get envelopes, shoeboxes, spreadsheets- I don’t care what’s your tool of choice – just choose something and stick with it. It will reward you with less headache and more cash in your pocket.
6. I can’t afford the tax.
You can, but you did not put it away somewhere where you would not spend it. Now you have to pay up. You are tempted to take out an advance on the credit card. Don’t do it. Getting more and more in debt to pay tax is a loser’s game. Buckle up and as your income comes in, put the tax for it away in a place where you won’t be tempted to spend it. It may be in a separate savings account or whatever. Just get in the habit of when the bonus comes in, or the ESPP stock sale happens, or your quarterly estimated tax voucher is due, have the money ready to pay the tax so you don’t get hit with interest and penalties for not paying the tax on time.
Ok, that’s my observations during tax time? What irritates you the most during tax time?