14 Aug 5 Most Common Questions About Taxes
In a letter to Jean-Baptiste Leroy in 1789, Benjamin Franklin said that “Our new Constitution is now established, and has an appearance that promises permanency; but in this world, nothing can be said to be certain, except death and taxes.”
But while death is pretty straightforward, accepted, and somewhat understood, taxes are fraught with confusion and frustration. That said, nobody needs to feel embarrassed that they don’t understand their taxes, because, in reality, very few people do. Below are several common questions about taxes that may help shed some light on the issue.
What’s the Point of Paying Taxes?
The reason we pay taxes is so that the government can fund various programs and services to keep the country going. A good analogy is to say that the country is a business, and the taxes collected represent its annual profits. These will be used to maintain, improve, or create new products and services for customers (citizens) to consume. Federal and state taxes cover things like social security, education, science and medical research, national defense, infrastructure, Medicare, Medicaid, public safety (police, firefighters), etc.
What If I Didn’t Pay My Taxes?
If the IRS notices that there are wages, loans, and bank accounts associated with your Social Security number but no tax return, it will file a substitute for return, which is its own approximation of what you owe. After April 15 (Tax Day), the IRS will also start applying failure-to-file and failure-to-pay penalties for each late month. These can go as high as 25 percent of what you owe. If taken to court, you’ll be charged with tax fraud or tax evasion. Tax fraud adds 75 percent of taxes owed, while tax evasion can land you in prison.
What Are Deductions, Exemptions, and Credits?
- Deductions – These represent items or expenditures subtracted from your gross income to reduce the amount of income subject to income tax.
- Exemptions – Somewhat similar to deductions, exemptions apply to people in your family. Personal exemptions will be discontinued as of 2025, but dependent exemptions (for children under 18) will double in size.
- Tax Credits – Unlike deductions or exemptions, tax credits reduce the actual amount owed, as opposed to the amount of taxable income.
Will I Get Audited by the IRS?
IRS computers are programmed to look for various red flags regarding tax fraud. Though chances of being audited are minimal, you can further lower them by providing the IRS with your entire income. Don’t claim business expenses on things that you don’t have records to prove, and don’t claim huge charitable contributions on a modest income.
What If I Made a Mistake?
Due to the general complexity of tax returns, many people fail to comply with the tax code to some extent. Mistakes and oversights do happen. And when they do, you should report it as soon as possible. The longer you wait, the more you’ll have to pay in interest. You will, however, have to fill out a new 1040 form and a 1040x form with the corrected information.
If you would like to know more, or you need help dealing with the IRS, feel free to contact us. We at Golden Tax Relief specialize in helping you deal with the IRS. We make it our job to know how the tax system works and how you can work out any financial and tax-related problems you might have.