Cheating On Your Taxes

Cheating On Your TaxesPin

8 Ways You May Be Cheating on Your Taxes

There are many ways you can be cheating on your taxes without even being aware of it. Often times a well-meaning friend or relative will tell you that some type of income isn’t taxable because they’ve been doing it for years and the IRS hasn’t said anything. Ever hear that?  We all have, I believe.

Doing all you can to legally avoid taxes is okay, but it’s never okay to evade taxes. Maybe we’re “old fashioned” here at our firm, but we firmly believe that everyone should follow the tax code and save money if you can, but always pay what you legally owe.

We all know some taxpayers, that for some reason, think they can stay just outside the tax code requirements when they file their taxes. There are also some that just intentionally break the law, thinking they can fly just under the IRS radar, and not ever be detected.

In most situations, however, you might be in that group who doesn’t pay certain taxes that are due, and are not aware you may be cheating on your taxes. As a practicing accountant and tax preparer, I can tell you the current tax code is not only complicated, but out of date in certain areas, and not written for the average taxpayer to understand.

It’s easy to see how you can make an honest mistake when you’re preparing your tax return. We have an awesome solution for you…our online tax filing program is designed so that you don’t have to understand the convoluted tax code. We have a simple interview method of getting your information to help you prepare an accurate return. Simply by answering those questions, the program will prompt you for the required information.

Failing to report all taxable income

This is one of the issues that the IRS watches closely. They have copies of 1099’a, etc. that were sent to them by the payers and they match those with the income shown on your tax return. In addition, there may be income that you didn’t report because you didn’t get a Form 1099. If your return is being audited, they could discover the non-reported income. Un-reported income has no statute of limitations. They can nail you as far back as is necessary. Even cheating on your taxes unintentionally can cost you.

If you’re wondering what types of income are taxable and reportable, the IRS has a Publication 525 that covers this topic quite well. It also includes non-cash income like bartering, so be sure to report all income.

Tips are reportable income too

For those who work as a bartender, cab driver, waiter, and several more occupations, you’re required to report all of your tips received to your employer, and also on your tax return. This is another area that the IRS watches closely. Our online tax preparation service will figure this out for you.

If you get $20 or more in tips for the month, you’re required to report them to your employer. The employer, in turn, reports those tips on your W-2 form. The employers prepare an annual form to the IRS showing their gross sales and tips received. If the amount of tips reported doesn’t equal or exceed 8% of gross sales, then additional tip income is allocated to the tipped employees W-2 forms.

If you get the idea the IRS monitors this closely, you would be correct. Keep accurate records for each day that you work showing all cash and credit card tips received. There is a severe penalty that could be assessed against you for cheating on your taxes by failing to report these tips.

As a part of your records for the tips received, keep track of the amount of your tips that your employer requires you to share with other employees. (Indirect tips) Having this proof could save you a lot of headaches and money if the IRS should question if you are cheating on your taxes.

Ever hear of the nanny tax?

If you hire a nanny for your kids, a maid, gardener, or some other household employee, and you pay them a certain amount of money each quarter, you’re required to withhold Social Security and Medicare taxes and report the annual amount on a W-2.

A few politicians and other professionals were caught several years ago paying cash under the table to the worker instead of withholding and proper reporting. Cheating on your taxes sure got some of these folks in trouble. This is where the term nanny tax had its beginning. When you file your personal tax return, a Schedule H is used to report these taxes.

Claiming high values for non-cash charitable donations

Several years ago, many taxpayers would give bags of clothing to Goodwill or some other charity, and pull a number out of the air to list on their tax return. The charities don’t assign a value, or list the items being donated, and thus this area of giving became a method of cheating on your taxes.

Today, you have access to various websites where you can get the deductible value of clothing and other household items. The IRS pretty much passed the responsibility to the tax preparer who has to police these types of charitable contributions. At our firm, we require a listing of the items donated, the date, and a receipt from the charity. We check the values claimed to a list the Salvation Army publishes, to make sure of a proper valuation.

If you donate an auto that has a fair market value of $500 or less, you can deduct that value, no matter what the charity sells the vehicle for. If the market value is higher than $500, then you can deduct the amount that the charity sold it for.

If your non-cash donations exceed $500, you must use Form 8283 to report them on your personal tax return.

If your non-cash gift deduction is $5,000 or more, a formal appraisal is required. The problem here, however, is finding a qualified appraiser in your area for the type of donation you have. The IRS has a limited list of appraisers that they find acceptable, and usually they are not in your area.

Volunteer work deductions

First of all, the value of your personal time or labor spent for the charity, is never deductible. You can deduct travel expenses only to the extent they were used all directly for the charity. That includes meals too. As long as they were all incurred for the charity work, and no part personal, you’re good.

Any materials or supplies that you buy for the charity, plus parking and tolls are deductible. All of the above can be deducted as long as the charity doesn’t reimburse you in any way.

Can you deduct hobby expenses?

This area is one of the most controversial without a doubt. You’re trying to prove your interpretation to be a business to the IRS, and they are saying it is a hobby. If your operation is a hobby, the money you receive is taxable income under other income, and the expenses you incur to earn that money is not deductible. Under the old tax law, you could at least deduct the hobby expenses up to the amount of your income on Schedule A.

The difference between a hobby and a business is that a hobby is something you begin for recreation and/or pleasure. A business is something you engage in to make a profit. With a bona fide business, assuming you operate as a sole proprietor, you report all income and expenses on Schedule C. With a hobby, you report all income as other income on page one, with no deduction for expenses.

The IRS looks at these activities with a close eye, and judges each one on a case-by-case basis. If your activity is reported on a Schedule C, they try to determine if the intent is to make a profit, and if you are keeping accurate books and records plus the following.

They want to know if you put in enough time to be able to generate a profit, make changes to operations to make a profit, to see if you have the experience or expertise to operate that type of business, or hire someone who does. They usually use the rule of the business making a profit in three of the last five tax years.

Not reporting winning from gambling

Truthfully, you’re supposed to report all gambling winnings, even those that were not reported to you on a Form W-2G. If your winnings are $600.00 or more, casinos and race tracks issue that form to you and also a copy to the IRS.

You can’t offset those winnings by your gambling losses either, and only report the net amount, you must report the gross amount won. Your losses are reported on Schedule A under Other itemized deductions, not subject to any 2% floor. Unfortunately, you must be able to itemize your deductions to get any benefit from the losses. In addition, the losses that you list can’t be higher than your winnings. Taking the new standard deduction AND gambling losses cannot be done. This particular area is still being used by some for cheating on your taxes.

Are your alimony payments deductible?

Even though you might not be able to itemize your deductions, you can deduct alimony payments to your ex-spouse. It depends, however, when your decree of divorce was done. The Tax Cuts and Jobs Act that became effective for tax years 2018 and forward made some changes to the Code.

 You can deduct alimony provided that your divorce decree was done before December 31, 2018. Any decree done January 1, 2019, or later, can’t be deducted, nor is the alimony taxable income to the ex-spouse. There are rules that apply in deducting alimony payments.

  • The alimony must be spelled out in the decree
  • Voluntary payments or child support don’t count
  • The alimony payments must stop when the ex-spouse dies
  • Payments must be made in cash or cash equivalents such as check, money order, etc.
  • Property settlements & upkeep of a home are not considered alimony

Don’t let the confusing tax code lead you into cheating on your taxes. Why take that chance? Use our intuitive tax service and file your taxes online the easy and guaranteed accurate way.

Gust Lenglet
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