How businesses pay taxes, though, and whether they pay their fair share of those taxes to the government is one of those areas that is often up for debate. The government cannot function without enough revenue on which to operate. There are plenty of home business owners (and others) who feel as though the government is spending money that it does not have and should not be spending. These individuals may feel as though their tax dollars are being wasted - and that can make them frustrated with the government. In their frustration, they do not want to sort through pages and pages of information on a deduction that they might be considering. Even people who are not frustrated with the government do not want to look through that much material.
They wonder what would happen if they get it wrong, and they are fearful of an audit, because the government has many rules and regulations for the self-employed, like the home office deduction and health insurance deductions.
Because of the large number of regulations, and because of the complexity of deductions such as those for a home office, many small business owners end up giving more of their revenue to the government than they would actually need to. If they had a simplified system, they would be able to take their deductions - and there are more than 5 million people who would be eligible for the home office deduction.
A standardized option would help to ensure that they were taking the deduction properly, and that would help the IRS keep better track of who was paying their taxes correctly and who was not paying correctly.
Reducing man hours needed by the IRS would save that agency a large sum of money, and everyone would benefit from a tax system where deductions were easier to manage and where taking deductions would make more sense because the instructions for them were not complex. Many home business owners are not familiar enough with the tax codes to take the deduction for a home office. Of those who do take the deduction, many end up getting it wrong - meaning that they are either still overpaying, or they are not paying enough. That could subject them to an audit, or to back taxes, fines, fees, interest, and penalties if they are audited or the IRS flags their return for a closer look. On the other hand, the IRS will not let those who have overpaid or may be eligible for the home office deduction know that they should take that deduction. It is the taxpayers' responsibility to get the deductions right and make sure that his or her taxes are paid correctly.
Self-employed individuals must report their income from self-employment on Schedule C.
If they are taking the home office deduction, they will also complete form 8829. The main problem that they face with the home office deduction, though, is that they do not have any kind of certainty as to what they are supposed to do and how they are supposed to take the deduction, specifically.
Because they lack certainty in their tax situation, they tend to err on the side of caution and not take the deduction. It is not always about whether they feel they qualify, but about whether they can perform the calculations that will tell them how much they are supposed to deduct.
The standard home office deduction that has long been proposed would be $1,500.
This would be the amount that someone with a home business would be able to deduct, provided that they qualify for the deduction. Understanding whether one qualifies for the deduction is much easier than understanding how to take the deduction, so the qualification issue is not the part that needs to be simplified. Still, to add more certainty to the issue there has been talk of also simplifying the process of qualification. That can make it easier for anyone who may be able to take the deduction for a home office to make the determination of whether he or she qualifies for that.
If the rules were to be simplified, more people would be eligible - even if they did not use their home office full time, or even if the used their home office for other things besides their business activities. For example, having a home office that was used for both personal work and professional work would be able to qualify.
Because the rules would be more relaxed, it would be possible for anyone who qualified that way to get the deduction and to be able to take the standard deduction. So much of the confusion would be removed that there would be a much improved degree of certainty for anyone who has a home business. In addition, it would make things easier on the IRS because there would be fewer people who made mistakes on their returns. Whether those mistakes were accidental or deliberate in nature, the number of them would diminish.
Nearly 1/2 of all the taxpayers who claimed a home office deduction in 2001 made mistakes on their return.
That is a large number, when one considers how many millions of people that actually encompasses. Not only would a standard home office tax deduction make tax time much easier and less stressful for home business owners, but it would also raise the level of compliance because the rules for the deduction would be much better understood.
One of the main reasons that people do not comply with the current tax rules for home offices is because they do not understand those rules. Certainly there are some people whose mistakes are deliberate attempts to cheat the IRS, but most people who overpay or underpay their taxes do so because they honestly do not realize that they have the rules and regulations wrong and are not figuring their taxes correctly.
Having simplicity in the guidelines is a vital way to make sure that everyone who deserves the deduction will be able to take it and that those who should not be taking the deduction will clearly see that they do not qualify. Some of them may take the deduction anyway, but if they do and they are caught they will not be able to use the confusing guidelines as a reason to avoid penalties and punishment. In other words, the simplification of the guidelines will help the people who want to claim the home office deduction legitimately and will also help the IRS cut down on people who claim that they did not understand the guidelines correctly and took the deduction by mistake.
It can be difficult to prove that these people are lying or defrauding the government, and punishing honest mistakes by taxpayers who are trying to do the right thing seems unfair.
Minimum Tax Gap
The minimum tax gap is related to intentional non-compliance.
This is the number of people who will see the guidelines, realize that they do not qualify for the home office deduction, and take the deduction anyway. While these people may be few and far between, there are always people who will try to go against the system or take deductions for which they do not qualify.
This is something of which the IRS is aware, but it is not realistically possible to stop everyone who may do this from taking the chance that they will not get caught. With the exception of serious cases of actual tax evasion, there are many incorrect tax returns that are not noticed each year.
The issue when it comes to the tax code and whether it should be changed comes down to whether the current code or a new code would be better, and in what aspects it would be better. By changing over to a standard deduction for a home office, it is possible that more people who should not be taking the deduction will do so.
However, at the same time it will also make it much easier for those who really need the deduction - and legally qualify for it - to see that they can and should take that deduction. The addition of a questionnaire of some kind, under penalty of perjury, that would indicate the person has the right to take the deduction, has been suggested by some researchers.
Whether that would be acceptable to the IRS, and whether it would cut down on intentional misuse of the home office deduction, should it become a standard deduction, is difficult to address. There is no actual way to know whether it would correct any current or future problems without trying it, and the tax code changes frequently enough without making adjustments that might simply be changed back the following year. It is clear that the current tax code generally discourages the intentional misuse of the home office tax deduction, though,…