3 Tax Myths That Could Cost You Big Time

The U.S. tax code is a complicated set of rules that the typical person may not be 100% familiar with. And frankly, that's OK. Unless you're an accountant or tax professional, you probably don't need to know every single rule the IRS puts out.

The problem, though, is that there's a lot of misinformation about the tax code out there and how it works. And if you buy into certain myths, like these, you could end up getting hurt financially.

1. I won't get audited unless I'm rich

In 2019, the tax audit rate among filers with an income of $50,000 to $500,000 was 0.10%, according to IRS data. Based on this, you might assume that you don't need to be so careful with your tax return if you're a lower or moderate earner.

But actually, it may surprise you to learn that the audit rate among filers with an income of $1 to $25,000 is 0.40%. And among filers with an income of $25,000 to $50,000, it's 0.20%.

Overall, these are all very low rates. But it's worth noting that the likelihood of being audited increases slightly if your income is on the lower side.

What this means is that it's important to be honest on your tax return no matter how much income you're reporting. You may end up more likely to get audited with an income of $20,000 than $400,000.

2. I'm guaranteed to get audited if I itemize on my tax return

When filing a tax return, you could either take the standard deduction or itemize deductions. You might assume that itemizing on your return will open the door to an audit. But that's not automatically true. And if you don't claim tax deductions for fear of getting audited, you could lose out on major tax breaks that result in a lot of cash savings.

As long as you itemize legitimate deductions, there's nothing wrong with going this route. It's when your deductions start to look iffy that the potential for an audit becomes more real.

So let's say you're a freelance copy editor, and you're deducting the cost of internet service and a laptop you purchased for work purposes. That makes sense given your line of work. But if you start deducting all sorts of trips and travel expenses, that might raise a red flag. The typical freelance editor doesn't travel to exotic locations to do their job.

3. I don't have to report small amounts of income

You might assume that the $42 in interest income you earned in your savings account is a small enough amount that you don't have to report it. The same goes for the one freelance project you did that earned you $620.

But in these situations, you're likely to get a 1099 form from your bank and client, respectively, summarizing that income. And it's not just you who's likely to get one of those forms. The IRS is likely to get a copy as well. And if it has income on record you don't report, the agency might dig further and penalize you for understating your earnings.

That's why your best bet is really to report all of the income you earn. The IRS is likely to catch you if you don't, anyway, so why run the risk?

Falling victim to bad tax information could be a big problem for you -- and a costly one. So do your best to avoid buying into these specific myths this tax season -- and every other tax season going forward.