If there's one thing the U.S. tax code is notorious for, it's being frustratingly complicated. Given the abundance of rules at play, it's not uncommon for taxpayers to make their fair share of mistakes. In fact, the IRS estimates that 17% of filers violate the tax code in one way or another when preparing their returns.
But while honest mistakes happen to the best of us, there are a few tax myths out there that could really come back to bite you if you wind up falling for the wrong one. Here are a few major misconceptions about the tax code -- and the truth behind them.
Myth No. 1 -- I can pay all of my estimated taxes at once
Though it's usually self-employed individuals who need to make estimated tax payments, if you're a salaried worker who earns a lot of money from investments, you may be liable for estimated payments as well. Generally speaking, you'll need to make quarterly estimated payments if you expect to owe $1,000 or more in taxes when you file your return. But contrary to what you may have been led to believe, you can't just pay those taxes all at once in conjunction with preparing that return. Rather, the IRS wants its share of your money as you earn it, and if you don't make those payments over the course of the year, you could face penalties and interest on whatever amount of tax you underpay.
Not only that, but neglecting those quarterly payments might lead to a situation where you don't reserve enough money for taxes and find yourself unable to pay your bill at the end of the year. Making quarterly estimated payments isn't just a good way to comply with the law; it's also a means of keeping yourself in check.
Myth No. 2 -- I don't have to report cash income
The great thing about getting paid in cash is that there's no paper trail, so you can pocket that money without having to worry about taxes, right? Wrong. Just as you're required to report and pay taxes on income you receive via paycheck, so too must you pay the IRS its share of your cash earnings. This especially holds true if you work in a cash-heavy industry or receive a large percentage of your yearly income in cash.
Of course, you may be wondering, "If I get paid in cash, how will the IRS find out about it?" Here's the answer: Maybe it will, or maybe it won't. But given the penalties involved for underpaying your taxes, are you really willing to take that chance?
Now, it's true that certain professions are more likely than others to fall under IRS scrutiny. If, for example, you work as a server or bartender and don't report any tip income, the IRS will likely get suspicious. On the other hand, if you're a teacher who occasionally takes cash for tutoring students on a one-off basis, the IRS probably won't dig deeper into the matter -- probably. But if it does, you could end up in hot water. A better bet is to keep a detailed record of the cash payments you receive during the year, and report them. All of them.
Myth No. 3 -- I don't have to report income from a missing 1099
Just as you're required to report all cash income you receive to the IRS, so too must you pay taxes on earnings from freelance work, savings account interest, dividend payments, and investment gains. Typically, when you earn additional income, you'll get a 1099 form summarizing your payments for the year. Sometimes, however, 1099s get lost in the mail or simply aren't sent out when they should be -- but that's not an invitation to get out of paying taxes on that income.
The thing to remember about 1099s is that they're also filed with the IRS, and it could be the case that while your copy has gone missing, the IRS has a record of whatever it is you've earned. So if you're aware of the income in question, don't try to hide it. Otherwise, you could land an unwanted spot on the IRS audit list.
Myth No. 4 -- If I can't pay my tax bill, I'll just file for an extension
While a tax extension will give you more time to submit your actual return, it won't grant you any leeway when it comes to paying your bill. If your sole reason for requesting an extension is to buy yourself more time to tackle your tax bill, don't bother. Instead, file your return on time, pay what you can, and get yourself on an IRS payment plan to keep your penalties and interest to a minimum.
Now, if you owe money on your taxes but don't have your paperwork ready in time for the deadline, requesting an extension definitely makes sense -- especially because if you don't file a return, you'll be hit with a failure-to-file penalty, which can be 10 times higher than the failure-to-pay penalty. But even if you do file that extension, your best bet is to start paying whatever portion of your tax bill you can manage immediately. The longer you carry that tax debt, the more it'll end up costing you.
Falling for the wrong tax myths could spell trouble in more ways than one. The more you read up on tax laws (boring as they may be), the better equipped you'll be to distinguish myth from reality -- and save yourself money and aggravation in the process.