Top Tax Myths Debunked

The turning of a new year marks the beginning of another tax season, which runs from Jan. 1 through April 15. While most Americans make an effort to submit their returns on time, some will make serious errors because they believe some common tax myths. Remember, a sincere belief that a tax myth is true won't help when the IRS notifies you that you have unpaid tax liabilities and owe penalties. The agency can also force you to repay any tax refund you may have received based on misinformation.

Many myths about the federal income tax have thrived online, leading more Americans than ever to learn that "one simple trick" will significantly reduce or eliminate their tax bills. Believing in these myths can end up costing you far more than the money you saved because the IRS can impose penalties and charge interest. In some cases, they can land you in jail. 

To help keep you out of trouble with the IRS, FindLaw has compiled a list of five common tax misconceptions and the truth behind them.

Myth #1: Federal Income Taxes Are Illegal, Invalid, and Voluntary

The myth that you aren't required to pay the federal income tax can take many forms, with some of the most common being:

• Paying the income tax is strictly voluntary.
• Wages don't qualify as taxable income.
• The 16th Amendment, giving Congress authority to enact an income tax, is invalid because it wasn't properly ratified.
• Filing an income tax return violates the Fifth Amendment right against self-incrimination.

Many people who make these arguments about the tax system back them up by citing official-sounding sources like the U.S. Constitution, U.S. Supreme Court rulings, and the U.S. Tax Code. People have been making many of these arguments since the 16th Amendment was ratified in 1913, but no American has been successful in court using them.

The fact these arguments have landed famous people like actor Wesley Snipes and Survivor winner Richard Hatch behind bars in recent years has done little to dampen the enthusiasm of those promoting these mistaken tax law theories.

The bottom line is that these arguments claiming you don't have to pay taxes are based on the wishful thinking of the people making them more than they are based on fact. The IRS is often successful in getting judges to find that the arguments are a frivolous waste of the government's time and resources, allowing the agency to impose additional fines on the taxpayer making them.

Myth #2: If You Do Any Work at Home, You Can Claim the Home Office Deduction

Many Americans misunderstand the home office tax deduction, and taxpayer claims for the deduction are often rejected. Just because you have a desk and a computer in your home does not mean you qualify for the home office deduction. In fact, the IRS has very specific guidelines for claiming the home office deduction.

Most of those who qualify for the home office deduction are self-employed or contractors. However, in some limited situations, you can claim the deduction while working full-time for an employer. To do so, filers must prove that their home office is for the employer's convenience. 

An employee of a Chicago-based company who works from a home office in Florida could claim the deduction if the employee can show they need to be in Florida to work with clients based there. If the employee is working remotely from Florida to avoid Chicago winters, the IRS will likely reject the deduction.

According to the IRS, taxpayers can claim this deduction for the business use of a part of their house, apartment, mobile home, or other dwelling in the following circumstances:

• The space is only used for conducting business on a regular basis and for no other purpose
• The home is your principal place of business

While the IRS denies it, some tax experts believe that the deduction is misused so often that the agency views all claims for the deduction with suspicion. Therefore, if you think you are eligible to claim the home office deduction, you must be able to provide evidence supporting your claim in the event of an IRS audit.

Myth #3: Gambling Losses Can Be Used To Offset Other Income

The IRS does allow you to claim a deduction for gambling losses, but only against your winnings. The losses can't be used to reduce the taxable income you received from other sources. For example, if you lost $1,000 gambling in 2023 and won $500, you could only claim a deduction of $500.

You can use gambling losses doing one activity to offset winnings in another. So, if you lose $500 playing roulette at a casino, you can claim a $500 deduction to offset $500 in winnings from the track in the same year. Remember, you can only claim the deduction against winnings that have been reported to the IRS.

Myth #4: Tips Aren't Included in Your Income

Many people who work in restaurants, hair salons, hotels, or other industries where tipping is common believe they don't need to report their income from tips to the IRS. If you receive more than $20 in tips in a month, you are required by law to report those tips to the IRS by the 10th of the following month.

One of the reasons that tips have been underreported over the years is that they are often a customer handing cash to the person being tipped. However, the increased use of electronic payments that include a tip has made it much easier for the IRS to track that income. The IRS has also given employers in the service industry incentives to report the tips their employees receive.

Myth #5: Money From Cryptocurrency Trading Isn't Taxed

Many of those who buy and sell cryptocurrencies like Bitcoin online believe that the money they make isn't taxed and, even if it is, the IRS will never know. The IRS treats cryptocurrencies like any other asset, which means you will be taxed on any profit you make from buying and selling them. If you hold the cryptocurrency for longer than a year, you will pay capital gains taxes on the sale. If you hold the currency for less than a year, it will be taxed as ordinary income.

The fact the IRS has been dedicating resources to better tracking online cryptocurrency transactions may come as a surprise to those who believed the IRS could never learn of their online assets. In recent years, IRS agents have become so good at tracking crypto transactions that other federal agencies are using them to investigate money laundering. 

In addition, the IRS has been going to court to force banks working with crypto exchanges to turn over financial information on customers earning income on the exchanges.

Still Have Questions? Talk to a Lawyer

If you have questions regarding the legality of tax tips you learned online or from a non-tax professional, it might be a good idea to speak to a local tax attorney before you use that advice to prepare your federal tax return. A tax lawyer can let you know if the recommended actions are legal given your tax situation and the penalties involved if they are not. 

An attorney can also represent you and ensure your rights are protected if the IRS has discovered you have fallen for misinformation that caused you to file an incorrect return. If you have questions, a skilled lawyer can provide you with answers and offer important advice.