Who You Gonna Call: Tax Myth Busters

Tax Notes reporters Jonathan Curry and Caitlin Mullaney set the record straight on 10 common tax myths.

This transcript has been edited for length and clarity.

David D. Stewart: Welcome to the podcast. I’m David Stewart, editor in chief of Tax Notes Today International. This week: TikTok tax.

There are a lot of bad ideas on the internet. Some of them are mostly harmless, but others can get you into trouble. Have you ever heard that you don’t actually have to file taxes? Or that a limited liability company is the best way to write off personal expenses?

Well, today we’re talking about 10 of these tax myths. To help me out, I’m joined by Tax Notes reporters Jonathan Curry and Caitlin Mullaney.

Jonathan, Caitlin, welcome to the podcast.

Jonathan Curry: Hey Dave.

Caitlin Mullaney: Hey.

David D. Stewart: We’re going to talk about some myths that are floating around out there. Why don’t we just start off with the big one that leads into maybe all the rest, and that is this idea that paying taxes in the United States is voluntary.

Jonathan Curry: Oh, but wait, Dave, it says right there in the IRS’s instructions for the Form 1040 that our tax system is “voluntary.” Hey, problem solved. Right?

David D. Stewart: Well, that sounds pretty conclusive. What gives?

Jonathan Curry: Yes, it is voluntary in as much as tax payers have to do the work themselves to determine how much they owe and then complete their appropriate tax returns, as opposed to letting the IRS do all that work for you up front. But no, it’s not voluntary to file your tax returns and pay your taxes. If you don’t, you run the risk of civil or criminal penalties.

Have you ever heard of sovereign citizens?

David D. Stewart: Oh yes, absolutely.

Jonathan Curry: I think we can all agree: don’t be like these people.

These are the folks who claim for some odd reason or another that they are not under the jurisdiction of the federal government. Therefore, they don’t have to pay federal taxes. They’re their own sovereign entity. My understanding, I think you would agree, is that’s not going to work.

I know the Tax Court has dealt with this many times, and they now usually just resort to an immediate Will Smith-like slap down along the lines of, “We will not painstakingly address these assertions with, ‘somber reasoning and copious citation of precedent; to do so might suggest that these arguments have some colorable merit.'” The answer is they don’t.

You don’t have to love it, but you still got to do it.

David D. Stewart: Caitlin, why don’t you take on our second myth? Let’s say you’re a student. You just don’t have to pay taxes?

Caitlin Mullaney: Well, students might get a lot of benefits with that student ID, but unfortunately for them, their status as a student does not exempt them from paying taxes. That ID will only take them so far.

Whether or not they need to file a tax return is still based on their total gross income and if they can still be claimed as a dependent. I’d also note that for scholarships and grants, they are typically tax free for students, but that’s not always the case. Students really do need to check on those on an individual basis.

David D. Stewart: Now that we’ve established that you absolutely do need to file and pay your taxes, we can talk about getting it wrong.

Everybody is filing their taxes in the April time frame. They know the IRS has access to a lot of information about them. They really want to get it right. But sometimes they won’t.

So, getting it wrong means going to jail, right?

Jonathan Curry: I’m actually going to get a little personal here. I actually owed taxes for a few years when my wife started a side hustle. I thought, “Hey, I’m a tax reporter. I got this.” Nope. We owed thousands of dollars that first year.

Then the next year I thought, “Hey, I’ll shake it off. We’ll get it right this time.” Nope. Finally, I went to an accountant, we got all our ducks in a row, and then things did get a lot better after that. It’s been a little bit more straightforward.

The point being, though, at no point during this experience did I go to prison. The key in this myth is you may not always go to prison, but under the right circumstances, you still might.

It was only about 10 years ago that New York congressman Michael Grimm was indicted for criminal tax fraud. He spent eight lovely months in prison. If you go back to the Watergate era, Vice President Spiro Agnew got sentenced for income tax evasion in exchange for a plea deal on a whole bunch of other charges. He resigned.

The point is: Pay your taxes. Then you don’t have to worry about whether you’re going to go to prison or not.

David D. Stewart: What separates the just getting it wrong from criminally getting it wrong?

Jonathan Curry: The biggest distinctions I’m aware of is intent. If you were trying to avoid paying taxes and you knew what you’re doing, that’s going to get you in big trouble as opposed to making mistakes. When it comes to mistakes, the IRS is a bit more understanding.

David D. Stewart: Let’s move on to potentially a big mistake and potentially an intentional one. I’ve seen advice that says that if you want to write off some personal expenses as if they were business expenses, what you need to do is create an LLC and it’s smooth sailing.

Caitlin Mullaney: I’ll go ahead and take this because I think we’re talking about the same TikTok videos we’ve all seen circulating social media about, “Create an LLC, get free cars, free rent.” I’m sorry to tell you, that’s not happening.

Establishing an LLC is not going to let you deduct all your personal expenses as business expenses. While having your apartment rent count as a write off sounds appealing to anyone, all the write-offs still need to be somewhat directly related to the operations of the LLC. The most you’re probably going to get for something like that is a percent of your apartment use for your business.

If the LLC business is operating for a profit, the type of business can maybe lead to a greater variety of what counts as your ordinary business deductions and what’s needed. Such as if you own a boutique, you might be able to deduct clothing samples for it or sports equipment for a coaching business.

But it’s not going to be a catchall for all those personal expenses.

David D. Stewart: This one’s more of a question of the tax structure in the U.S., and it’s the idea that the estate tax is not really a significant source of revenue.

Jonathan Curry: I’m actually torn on this one because even though the dollar amount is big to a humble wage earner like myself, relative to other sources of federal revenue, it’s not that much. So, you can be forgiven if you bought into this myth a little bit.

In 2020 the estate and gift tax combined brought in $18 billion and it’s expected to grow each year. By 2030 the Congressional Budget Office expects that the estate and gift tax revenues will hit just shy of $50 billion per year combined. That’s partly explained by the fact that the estate and gift tax exemption that was doubled in the Tax Cuts and Jobs Act is going to expire in 2026. Then that exemption is going to be cut in half. More people will be subject to it and therefore more revenue comes in.

But if you do compare this all to what the IRS has collected in total revenue for 2020, they brought in $3.5 trillion. So, it’s not nothing, but it’s also not a huge pile of revenue, relatively speaking.

David D. Stewart: Now this one might relate back to, Jonathan, your discussion of your wife’s side hustle. The idea is that if you receive more than $600 on an app like Venmo, Zelle, or Cash App, then the apps are going to report that to the IRS.

Caitlin Mullaney: I can hop in and take this, Jonathan. With that, don’t worry about that Airbnb you split on PayPal with your friends or that dinner you split on Venmo being reported to the IRS. This new rule is not meant for those transactions. It only applies to those business transactions that Jonathan was mentioning earlier on Venmo, Cash App, and PayPal.

Basically when you look at the user face, there’s usually an option for a purchase for goods or services. When you click that this goes into the column of transactions that do get reported.

Zelle is not even included in this because they don’t hold funds. They only facilitate the fund transactions between the financial institutions. So, they don’t actually do any reporting to the IRS. They leave it to the individual users to report their own transactions on that one.

David D. Stewart: This one is more of a big picture myth. It’s that business taxes only affect business owners.

Jonathan Curry: This is a fun one for all you economists nerds out there. The big issue at the core of this is a concept called “tax incidence.” That’s a way of trying to figure out who really bears the burden of a tax. Is it capital? Think the shareholders of a company. Or is it labor? The workers who in the long term get paid less or consumers who pay higher prices for products.

The concept of corporate tax incidence isn’t itself controversial. Most economists seem to assume that at least some ratio of the corporate tax burden does ultimately fall on workers and consumers. It’s just a matter of figuring out what that ratio is.

Now, the Treasury Department and the center left Urban-Brookings Tax Policy Center both assume that about 80 percent of a corporate tax incidence is born by capital and then just 20 percent falls on labor. But the conservative Tax Foundation flips that to something more like 30 percent falling on capital and 70 percent hitting labor.

Now, either way, it does give some ammo to critics of President Biden’s tax pledge not to raise taxes on anyone earning less than $400,000 a year by pointing to his huge list of corporate tax changes and then saying, “Ah ha, we got you! Your corporate tax rate increase proposal would slam normal people.”

Maybe Biden could get around that by getting more in the weeds and offering the caveat that he won’t directly raise taxes on someone earning less than $400,000.

David D. Stewart: The next thing we’ll talk about are tax havens. From what I see on the internet, there are these far off places, often sunny sandy beaches. What’s the truth here?

Caitlin Mullaney: Tax havens actually hit a lot closer to home than most people think and a lot of places where there aren’t sunny beaches.

The Tax Justice Network currently ranks the U.S. as No. 2 for the nation for financial secrecy and the 25th nation for tax havens. The growing trust industry and lenient trust regulation laws in some states are providing tax havens for wealthy millionaires and billionaires all around the world to send their money here.

The Pandora Papers were a release of over 11 million leak documents last year that showed over $360 billion in trusts in South Dakota. State lawmakers there have continuously increased protections and benefits of trust, including an uncapped dynasty rule that allows families to indefinitely pass wealth from generation to generation without estate taxes at any deaths in the passing.

In addition to South Dakota, Delaware has long been a tax haven for corporations, and Florida, Nevada, Alaska are all continuously looking for ways to bring these large amounts of money to their states by having easier routes for corporations than individuals.

David D. Stewart: Let’s say I followed in the lead of Matt Damon and I bought myself a bunch of cryptocurrency. I won’t owe any taxes on this unless I receive Form 1099, right?

Jonathan Curry: Oh, man. This one has probably caught so many people off guard.

I can’t tell you how many tweets from tax return preparers who have shared posts about clients who come to them and they’re like, “Oh wait, by the way, I don’t have to report my Dogecoin, do I?” Usually they’re pulling their hair out and very frustrated to hear that.

Now, I understand a lot of the crypto-trading platforms have been trying to gain legitimacy and not be in the crosshairs of the IRS and Justice Department. They’ll automatically calculate your tax consequences for you.

But just because you don’t get an official Form 1099 in the mail does not mean that you’re off the hook. If you have crypto assets, it’s your responsibility to properly report them regardless of what your trading platform of choice does or in this case does not do.

Also, this is definitely a priority area for the IRS. They know that there’s a lot of noncompliance here and they’re coming after it. So, if I were you, I wouldn’t take your chances.

David D. Stewart: All right. Finally, let’s talk about a thing I’ve heard many, many times: American companies pay the highest corporate taxes in the world.

Caitlin Mullaney: A lot of corporations would like you to believe that, but that could not be further from the truth. The U.S. corporate tax rate doesn’t even rank in the top 20 in the world.

According to the Tax Foundation’s global survey of corporate tax rates in 2021, the U.S. only ranks at the 85th highest tax rate for corporations with a combined federal and state rate of just over 25 percent.

Comoros, which is a small island nation off the coast of Africa, was actually at the top of the list with a 50 percent corporate income tax rate. On the complete opposite end of the spectrum was Barbados with the lowest corporate tax rate at just 5.5 percent.

David D. Stewart: Well, Jonathan, Caitlin, thank you for helping to dispel some rumors this week.

Jonathan Curry: It’s been my pleasure. Thank you.

Caitlin Mullaney: Thank you so much for having us.