An archive of frequently asked tax questions illustrated with photos of companion animals submitted by friends and clients. If you have a question or a picture of a beloved pet you would like to contribute to the cause of tax education, feel free to contact me!

The IRS relies on a computerized matching system for finding errors and fraud on tax returns. If there is an obvious mismatch between what has been reported to them, and what you report, it is likely they will catch it and make attempts to correct it. Often it will begin with passive aggressive letters sent to the last address they have on file for you. Things that result in you getting refunds and credits are more likely to be acted upon, than things that have little effect. Other things it is fairly unlikely they will check unless it stands out as exceptional in relation to the rest of your tax return, or patterns in tax returns, in general. If you lie and say you bought a new business phone for $1000, it is highly likely they will ignore it. Whereas if you try to claim your cat as a dependent child by making up a tax ID number for it, it is likely you will get caught.

You can actually deduct expenses if you don’t have the receipts or documentation for them … a lot of the time. A good faith estimate is acceptable. However, just because you can do this, doesn’t mean you should slack on record keeping.  Making a point of paying for things with a check, card, or electronic payment method is a good way to make sure you have at least some documentation of your expenses. There are types of expenses that you need to be able to provide receipts for, mainly related to travel and meals .

If you use a portion of your home for a business that generates a net profit, you can deduct a pro-rated portion of your rent, utilities, mortgage interest, insurance, property taxes and home value as a business expense

The new tax laws are the biggest change to the income tax rules since Gramm-Rudman in the 1980s. One major change is the elimination of deductions for Unreimbursed Employee Business Expenses. Gone. All gone. 

This has led to confusion for some self-employed people who misinterpret this as applying to them. If you are self-employed, and file a Schedule C (or if you have a partnership or S-Corp), you can still write off the things you normally do, though the Meals & Entertainment deduction has been restricted to only food and drink. You can no longer write off taking a prospective client or collaborator to a concert or monster truck rally, however, buying a nice bottle of wine (see picture) to share with your client, is still deductible.

If you are a small business owner, an independent contractor, a freelancer – whatever you or the people who pay you call it – you are subject to self-employment tax. This is in addition to regular income tax. Self-employment tax is 15.3% of your net profit as opposed to your gross income. The rate is equal to the percentage of Social Security and Medicare taxes that would be withheld from your pay, were you paid as an employee plus the equal percentage that your employer would pay.

Besides the positive feeling that you are contributing to funding the social safety net, the one good thing is that you can deduct the expenses you had earning that income, and you are only paying tax on the net result.

For tax purposes, equipment is another term for an asset. An asset is something you purchase for your business that will last more than a year and costs $500 or more. You will want to keep records of what date you purchased and started using it, whether you purchased it new or whether it was a gift or something you inherited, and when you dispose of it and if you sell it, for how much. Assets are generally depreciated over a period of years. The number of years it gets depreciated will depend on what type of equipment it is – a laptop is 5 years, a table saw is 7 years, computer software is 3 years.

If the item in question does not meet both criteria: costs $500 or more, lasts more than a year – then it is a supply, and you can add it to the total of supplies purchased for the year and expense it.

The tax consequences of cashing out your 401(k) or other retirement plan depend on your age and other life circumstances. If you are 55 or older or disabled, then you won’t be penalized for doing so. If you are younger, and just want to take a break from working, then you face a federal tax penalty of 10% of what you take out, and you might see a similar penalty from your state (e.g. California has a 2.5% penalty for early distributions).

Why are you penalized for doing this? Is it Capitalism? No, it is because the income you put into your retirement plan wasn’t subject to income tax. And the reason you got this tax break is because the IRS believes saving for “old age” is a worthwhile thing to subsidize. By taking money out early, you are not “saving for old age,” and thus, there is a penalty.

As a licensed tax preparer, I am required to encourage you to pay your income taxes in a timely manner. However, I am not required to make you do so, if you feel morally compelled to protest the current state of the U.S. Government in this manner. However, I am going to let you know the consequences of not paying your federal income taxes. 

If you choose to not pay taxes as a form of protest, the IRS will not see your lack of payment as any different from someone who doesn’t pay taxes because they are lazy, irresponsible, or broke. Penalties and interest will accrue, and you will receive notices requesting payment. They will start sending notices via certified mail. This part of the collection process could last a year or two. If you still do not pay, the IRS will move on to the liens and levies stage, where they will garnish your wages (if you are an employee) and/or take funds out of your bank account until they have received the amount owed. 

This is assuming that you have filed a tax return with a “balance due.” If you do not file, and you owe, there are additional penalties for failure to file. If you do not file, and you are actually due a refund, the statute of limitations for refunds only lasts 3 years: for example, if you wait until a potentially more palatable president is inagurated in 2021 to file your 2016 taxes (the ones due this April), the IRS doesn’t have to pay you any refund due. This 3 year limit does not apply to the collections process.