DARRIN T. MISH: Good morning and welcome to the IRS Solution Attorney show. I am the IRS Solution Attorney, Darrin T. Mish.
KATRINA MADEWELL: I’m your co-host, Katrina Madewell. Thank you for joining us this beautiful Thursday morning. What’s new Darrin?
DARRIN T. MISH: Man the traffic was bad today. It was horrible.
KATRINA MADEWELL: The fog was worse.
PAT GEORGE: Spring break.
KATRINA MADEWELL: Oh, not yet. It’s not spring break yet, is it? It is?
PAT GEORGE: Spring break, yes, it is. Yeah, for a lot of folks up north they are coming down here.
KATRINA MADEWELL: Oh boy, and so it begins.
DARRIN T. MISH: I usually kind of get routed through this sort of rural area of the county. Today, because I had to drop my son off at school, I ended up going right through the middle of town. I feel sorry for those folks who drive in that every single morning.
KATRINA MADEWELL: We have this frosted on our bathroom window like it’s frosted covering so you can’t see out or in and then the top part is clear. It literally matched. There was so much fog.
DARRIN T. MISH: Although over here in beautiful St. Petersburg Florida it’s blue skies.
KATRINA MADEWELL: It cleared up.
DARRIN T. MISH: It’s very nice.
KATRINA MADEWELL: They finally came out now that the sun is here. We have a great show lined up for you today. We had something different planned when we came in and we were like let’s ditch that and do something else. It’s actually right on time I think for this time of year. We will take your calls. Darrin, I think we should open the show up for live interaction calls because I think people are going to love to chime in on this topic. If you have a question you can call us at 888-404-1010, 888-404-1010. What we are going to talk about today is 11 dumb, dumb, dumb, dumb stupid things that people do to actually trigger an audit, these are red flags.
DARRIN T. MISH: We get a lot of people coming in for audits. Pat George mentioned this morning right before we went live on the air that he saw a report yesterday that said essentially unless you are a big corporation or extremely well off, you are very unlikely to be audited. My response to that was well yeah but…
KATRINA MADEWELL: Sorta.
DARRIN T. MISH: Except for a bunch of stupid things that people do that are essentially going to trigger an audit almost every time. It would be like waving the red cape in front of the bull and not expecting the bull to charge.
KATRINA MADEWELL: So, thank you Pat for helping with our outline today that we did on the fly. This is going to be fun because I love the shows that we kind of disrupt and rearrange.
PAT GEORGE: Let me start with the first question. Can I claim my tips that I give waitresses?
KATRINA MADEWELL: What?
PAT GEORGE: Because I am a big tipper.
DARRIN T. MISH: Well, if there is a business, if you have a small business and you it’s used for the meal…
KATRINA MADEWELL: If it’s meals and entertainment and you are entertaining someone.
DARRIN T. MISH: I think that would come down to a reasonable exception…
PAT GEORGE: I’m entertaining wherever I go.
DARRIN T. MISH: Well, this is true.
PAT GEORGE: There is entertainment going on.
KATRINA MADEWELL: I think your version and definition of entertainment is not the same as the IRS’s Pat.
DARRIN T. MISH: I heard something about karaoke and the Wiggles and something like that.
KATRINA MADEWELL: There was tequila involved.
DARRIN T. MISH: Perhaps.
PAT GEORGE: Thank goodness for Uber.
KATRINA MADEWELL: Thank goodness for Uber because you know Pat George might keep those DUI attorney’s busy if there wasn’t Uber. I’m just kidding. He does like to have fun. Anybody that knows Pat knows that he is the life of the party.
DARRIN T. MISH: And that is why he is a great show host for us because we also like to have fun.
KATRINA MADEWELL: Yep, he always keeps it real. So, let’s dive into these 11 dumb things that people do to trigger an audit. These are some of the red flags that you will get. If you have a question on something that you think you have done that might be dumb that triggered an audit, call in we would love to hear from you. We will let you know if it’s one of these 11 things on the list. 888-404-1010.
DARRIN T. MISH: I don’t know how dumb this is, but it’s certainly a kind of a dumb mistake, if you will.
KATRINA MADEWELL: Some of these things on here are dumb that’s why I labeled them dumb so it wasn’t Darrin. I will take the heat for that.
DARRIN T. MISH: The first one would be using the wrong social security number. It doesn’t happen so often with taxpayers. It might happen if you were newlywed or whatever and you had one spouse preparing the return and the other spouse is not dialed into what the new spouse’s social security number is. I’ve been married for a long time and I have to look my wife’s up every single time. More commonly it’s the children…
KATRINA MADEWELL: But I bet Heather knows yours.
DARRIN T. MISH: Absolutely.
KATRINA MADEWELL: I know my husband’s.
DARRIN T. MISH: Absolutely does. It’s more common with the children because you want to take their deductions. We’ve talked about this before. You can’t give birth to a baby and get out of the hospital without a social security card anymore or a social security number at least. So that’s pretty common. I think I mentioned within the last few weeks that I had a case where I was representing the father and he was entitled to claim the children, he hadn’t filed in a while and he was estranged from his wife and kids so they wouldn’t give him the children’s social security numbers. He didn’t know what they were and as I’m talking to him I’m wondering how do you not know what your kids social security numbers are and he was like, well, I just don’t.
KATRINA MADEWELL: Ddo you know your kids?
DARRIN T. MISH: No.
KATRINA MADEWELL: I don’t know my kids.
DARRIN T. MISH: No, I don’t by heart but I know where to get the information within moments.
KATRINA MADEWELL: I do too but if you ask my husband where that was, he might not be able to find that.
DARRIN T. MISH: Yeah, he’s not really that, he’s not wired like that.
KATRINA MADEWELL: He’s not wired like that.
DARRIN T. MISH: After a lot of consternation and sort of scratching our heads what we decided to do is we requested a very old tax return from the government, sort of manually. We paid a small fee to get those and low and behold, the kids’ social security numbers were on that old return and we had that fixed. If you put the wrong social security number on a tax return, that’s a guaranteed audit.
KATRINA MADEWELL: So, it doesn’t matter if it’s yours or the kids? Any wrong social is a guaranteed audit?
DARRIN T. MISH: We are using the term audit probably a little bit differently. Audit doesn’t mean always bring your box of papers and come to the IRS office. Or, the IRS is going to come to your home or business and sit down with your box of papers. It doesn’t always mean that.
KATRINA MADEWELL: Yeah, I guess we probably could have started there because when most people think of an audit that’s probably what they think of.
DARRIN T. MISH: And when I think about an audit, what I think about is the IRS is looking at the return in order to propose a change. Which means…
KATRINA MADEWELL: So they think there is a discrepancy, right?
DARRIN T. MISH: Almost never are they going to propose a smaller amount of tax or a smaller tax bill, I don’t think I’ve ever seen that. They are going to propose…
KATRINA MADEWELL: So, they actually owe you money or the bill is less, they are going to skip your audit. Is that what you are saying?
DARRIN T. MISH: Yeah, I don’t think I’ve ever seen that. Although I don’t think it’s necessarily impossible but I don’t think I’ve ever seen it and I don’t think I ever will. It could be a letter or notice just saying, hey, you took this position on your tax return and we disagree and we have helpfully recalculated the math and this is how much you owe. If you agree sign here and if you disagree then you have X amount of time to give us the paperwork.
KATRINA MADEWELL: Iis that what they consider the correspondence audit that we’ve talked about?
DARRIN T. MISH: Right. That would be a correspondence audit which is different than an in office audit or an on site audit.
KATRINA MADEWELL: Does it say audit on the form or how does that come labeled when they get it in the mail? What does it look like?
DARRIN T. MISH: The minor stuff doesn’t typically say audit, it’s just the Orwellian language of proposed assessment. I say it’s Orwellian because it’s like government speak for, we want to tag you but we don’t want to call it an audit. Versus if you have an in-person type of audit you are going to get a letter that says your return has been selected for audit, congratulations. I’m being a little sarcastic there.
KATRINA MADEWELL: Well, I would imagine too if the socials are in fact incorrect that’s probably because somebody had a typo. Like they are using the 10 digit keypad and maybe they hit a 6 instead of a 3.
DARRIN T. MISH: It could be. It also could happen if you switched tax preparers any given year and maybe the new tax preparer just didn’t have it in the software yet and like you said queued it in wrong.
KATRINA MADEWELL: So, if your tax preparer’s doing it, I guess one of the tips you could, like if you are pretty confident that you are not going to get audited, you never get audited, but maybe you just changed CPA’s, this might be something to look at now that it’s tax time and make sure all those socials are correct.
DARRIN T. MISH: Which brings me to one of my pet peeves in life professionally and that is that when taxpayers have their tax returns prepared, they are supposed to review them and agree with what is on the tax return and then sign that or sign the document that says you can e-file and nobody does. Nobody reviews their returns nobody understands their returns which is pretty argument for tax reform because…
KATRINA MADEWELL: Well, that is why we hire the CPA’s right?
DARRIN T. MISH: How can a citizen comply with the law if they don’t understand the barest fundamentals of the law? I think that’s really unjust and so I think tax reform would probably be a really good idea but…
KATRINA MADEWELL: I have a feeling that’s coming too.
DARRIN T. MISH: There’s almost really not an excuse for you to review your return and check that the social security numbers are right.
KATRINA MADEWELL: That’s easy, that’s an easy thing to fix but for me, I don’t even do my own bookkeeping so literally the numbers go from one person to the accountant and that’s it. If it looks high or low he will question it and I will go back and check it and that’s how I check my return.
DARRIN T. MISH: I think what you described is better than most, at least you kind of look at it. A lot of these audits I get the people come in and I have them bring their return that is under audit so that I kind of want to be able to figure out why they got selected for audit because that’s the issue. Usually one big issue; maybe two big issues and then they throw in a half a dozen minor issues.
KATRINA MADEWELL: Just because they found the big issue, right?
DARRIN T. MISH: Yeah, just because they found the big issue and so what does that tell you? That tells you to try to avoid the big issue. Because if you avoid the big issue, the eight minor issues are not going to come up. You are going to get away with it.
KATRINA MADEWELL: And most of these big things are actually on our hit list of 11, wouldn’t you say?
DARRIN T. MISH: I think so. I’m not trying to say…I just said something that I am going to take back. I’m not saying you should get away with it, that’s not what I am saying at all…
KATRINA MADEWELL: I didn’t even hear that. It went right past me.
DARRIN T. MISH: Ok, well this is recorded so we’ve got to make sure that we fix that.
KATRINA MADEWELL: So, today’s show is all about 11 things that can trigger an audit. These are red flags. These are things that you should watch out for and we are talking about them today because we know a lot of you are still getting ready to file.
DARRIN T. MISH: Remember, the corporate filing deadline is in March on March 15th. I can tell you for sure I’ve been filing extensions. I think I am going to do that today, as a matter of fact. The extension deadline is March 15th.
KATRINA MADEWELL: Actually, I think I am going to call my accountants because I think I’m almost ready but that’s a very good reminder for the rest of the month and the last few days. So, stick around number one on our list was filing, putting the wrong social security number for you or your dependents. We will be back in just a minute.
DARRIN T. MISH: We are going to have to hurry up.
KATRINA MADEWELL: With the other ten.
DARRIN T. MISH: Welcome back.
KATRINA MADEWELL: That was right on time, Pat George.
DARRIN T. MISH: Welcome back to the IRS Solution Attorney show. I am the IRS Solution Attorney, Darrin T. Mish.
KATRINA MADEWELL: I’m your co-host, Katrina Madewell. Today has been a great show so far and it’s going to be so fun. I’m energized with this show.
DARRIN T. MISH: Wwe are talking about 11 audit red flags because we are coming up on the filing deadline on April 15th and the corporate deadline is March the 15th. If you have not filed your extension yet for the corporate deadline, you want to go ahead and do that now. That would be a great idea if you are going to file an extension by mail you want to make sure you do it by certified mail and keep the return receipt. That will be a $500 mistake if you don’t.
KATRINA MADEWELL: Ouch, and you are talking about maybe a couple of hundred bucks to mail it with certified mail, I mean a couple of dollars compared to $500.
DARRIN T. MISH: Yeah, six bucks, give or take.
KATRINA MADEWELL: That’s what I was mixing up.
DARRIN T. MISH: One time I had a dispute with the IRS. They disputed I had sent the extension in on time and the lady was kind of snotty on the phone, she said well do you have that green slip for the certified and I said as a matter of fact I do, I sent it to her and it saved me over $500. Tt saved me a 100 years’ worth of certified mail so.
KATRINA MADEWELL: Yyou are going to love this question but I have to ask it. Let’s say you go through the drive-thru post office you are dropping it off at midnight because you know how they are there collecting mail till all the wee hours so you can’t send it certified at that point but you just you want to get it in the mail so you are going to Youtube yourself and post it on social media or Youtube, it’s time stamped you can see it made payable is it to the U.S. Treasury right not IRS…
DARRIN T. MISH: Yeah, yeah, yeah.
KATRINA MADEWELL: And you are dropping it in the bin and then let’s say they challenge you. They didn’t get it on time. Can you go back to that video that is time stamped?
DARRIN T. MISH: This is why I have a co-host to make sure that she comes up with these wild and crazy scenarios…
KATRINA MADEWELL: You might think that is wild and crazy and please answer the question. I don’t do any property management but I have helped people with tenant location and one of the things we do that property managers don’t even do is we will video the property before somebody moves in. It matches the walk through check list and it gets uploaded to Youtube so it’s time stamped. So guess what happens when the tenant moves out? If the house is all jacked up and it doesn’t match, you’ve got something stamped.
DARRIN T. MISH: I’m a real practical guy so I will give you the practical answer, ok? I think you would probably lose now if this was a….
KATRINA MADEWELL: Really, you are an attorney you are supposed to say I would argue that.
DARRIN T. MISH: Well, I’m getting there. I think you would probably lose because the amount of controversy is like $500. So if you lose, are you going to take that to court…
KATRINA MADEWELL: Not over $500, but if it’s something bigger I might.
DARRIN T. MISH: Probably not. If you had to go to court, I think certainly you could win that for sure because you would have some evidence, some really good evidence that you mailed it on time. There is something called the mailbox rule that lawyers follow and it’s in the rules of simple procedure that an item that was mailed is deemed received as of the date of the mailing. Now the problem comes into place is, when was it mailed? You can say, well, if there is a nice clear postmark on the envelope, that’s pretty determinant right of course who has a copy of that? The person who is saying that it wasn’t mailed on time.
KATRINA MADEWELL: Well, if it’s metered mail and you take a picture, you could have it.
DARRIN T. MISH: Well, that’s true except what’s the exception to that? Well you can manipulate the date on the metered mail.
KATRINA MADEWELL: Can you still do that? I didn’t think you could do that?
DARRIN T. MISH: I have one of those post meters where it prints out the little thermal labels you know and you stick it on there and there’s no date on there so who knows but…
KATRINA MADEWELL: People are selling the pre-dated stamp on the black market. I’m just kidding, only I would say that.
DARRIN T. MISH: Anyway, we have to get off of this topic because we have a lot of other stuff. Item number two is, if you just have a big mouth you might get audited. What do I mean by that?
KATRINA MADEWELL: Was that me?
DARRIN T. MISH: Yeah it definitely is but…
KATRINA MADEWELL: Not in that context.
DARRIN T. MISH: Not in that context. What I mean here by having a big mouth is if you are taking in a questionable or just outright incorrect tax positions on your business tax returns. For example, you are out at the bar and you are bragging to your buddies, “Eh, I don’t pay any taxes. I don’t have to pay those guys. I do this, I do that, I do the next thing.” W,ell it’s a really bad idea and here is why. There is an IRS whistle blower statute that says if they rat you out, if they turned you in, they get paid…
KATRINA MADEWELL: Really?
DARRIN T. MISH: Yeah, so probably not a great idea.
KATRINA MADEWELL: What do they get paid?
DARRIN T. MISH: It’s a percentage of the recovery. So there is an incentive for people to rat you out so if you are doing something nefarious, which I don’t think you should do, but if you are keep it to yourself.
KATRINA MADEWELL: Just don’t be dumb and tell everybody about it.
DARRIN T. MISH: Aa really common place to find these big schemes that are inside of tax returns are former spouses. So, you might not want to have a big mouth to your spouse about these crazy things that you are doing because; number one, you are sort of making them a co-conspirator but also because if things don’t go right and you end up in divorce court, what do you think is going to happen?
KATRINA MADEWELL: You know what they say about secrets? The more people you tell, the less likely it is a secret.
DARRIN T. MISH: I get called quite a bit from people who want me to be involved in their whistle blower sort of situation. I just refuse as a matter of principle because I don’t think it’s fair or right for me to represent, representing one side at one time and the one side on the other time. Even those kinds of cases can be really quite lucrative.
KATRINA MADEWELL: To our Facebook followers, I’m going to try to read these posts as we go but Richard says the former spouses always want to report the bad stuff. It was right on time, Richard, yes.
DARRIN T. MISH: Yeah, you know a thing or two about family law I think. He’s right, the former spouse always wants to throw the guy under the bus.
KATRINA MADEWELL: It’s kind of fun to think about the fact that we are live on air but we are streaming on Facebook. I know a lot of your friends are attorneys so they are going to add a nice little spin to that and then I will just mix it all up.
DARRIN T. MISH: Yeah, we will just go ahead and bleep out all the swear words as they type them. So, the third one would be, you know this is kind of somewhat common, and that would be exaggerating charitable donations.
KATRINA MADEWELL: I know I asked you this during the break and it’s right on time for number three. I said, well, what’s the rule of thumb? What is a huge charitable donation and what is considered a reasonable charitable donation?
DARRIN T. MISH: Ok, so anything that’s over $250 requires documentation so you need a receipt. I’m not going to put you on the spot so I’m not going to ask you the question, but I noticed a number of years ago at the churches before this law changed and I don’t know how long it’s been 10-15 years or something like that, where they required documentation for over $250. At churches you would just drop cash in the collection plate. At the end of the year you would just sort of gather a number out of thin air and that would be the number that you would put on your Schedule A and that is what your charitable donations would be. Then at some point in time, the law changed and they started giving you these little envelopes with a little statement on there so that the church could keep track of where everybody was, you know who was contributing what and then they give you a statement at the end of the year. Hey, you contributed X. It’s just always sort of embarrassing cause it’s nowhere near 5% or 10% even though it should be…
KATRINA MADEWELL: Tithes supposed to be ten?
DARRIN T. MISH: Yeah, so you know trying but not necessarily always getting there. I would say just as far as the percentage that you wanted to ask is just look at it, if you make $30,000 gross and your charitable donations are $15,000…
KATRINA MADEWELL: Yeah that is ridiculous, of course, but is it really that extreme? Do you really see that?
DARRIN T. MISH: I’m just giving you a crazy example, but what if you are making, what if you are just barely getting by and you see these huge charitable donations, I think probably 10%…
KATRINA MADEWELL: Well, wait? What’s barely getting by, give me some numbers? Like hypothetical?
DARRIN T. MISH: Ok, so a family of four earn $50,000 and their charitable donations are $9,000, it’s pretty high. How do you even live on $41,000 with a family of 4? You know if you live in a low-cost area of the country it might fly and I’m not saying you would get audited. I’m just saying it looks funny.
KATRINA MADEWELL: The other question, and this of course came to my mind and then Richard asked it as well, is what if Goodwill gives me that receipt and lets me fill out whatever I want? That happens all the time.
DARRIN T. MISH: Yeah, reminds me of taxi cab drivers. They hand you their card and that is supposed to be the receipt…
PAT GEORGE: Up to $250 you don’t need receipts, but is that $250 helpful on your tax statement?
DARRIN T. MISH: Well, if there are a bunch of 250’s sure but if it’s, what if it’s a single donation of $275 what happens is the charitable donations go on a Schedule A. If you are already itemizing your deductions which means you already have high mortgage interest and things like that, you are already going to itemize then, yeah, it helps a tiny bit.
KATRINA MADEWELL: If you are taking a standard deduction it might not help but if you are itemizing then it does, right?
DARRIN T. MISH: It doesn’t help at all. If you are taking a standard deduction don’t bother with the charitable donations, they are not even going to help you so it’s not even worth your trouble. To get back to Richard’s question which was what if Goodwill gives me the blank receipt what do I do? Well, you can look it up. We used to have books for this but you can Google the cost of or the value of each shirt that you donated, each pair of pants, each sport coat. What you would do is fill that out and then that would be your receipt. Would the IRS take it if you are audited? I don’t know, it depends. I’m not sure, yeah taking pictures of the stuff you donated ahead of time would be awesome. I would totally slay them on that, but would they take that receipt? I don’t think I would walk in there and volunteer, hey, they gave me a blank one and I wrote it down.
PAT GEORGE: What about a car or a boat?
DARRIN T. MISH: What I think you are going to do is you are going to take the Kelly blue book or NADA value and then you are going to have a little bit of a dispute over low value versus high value versus condition of the vehicle and all of that. I think pictures or video would be fabulous for that.
KATRINA MADEWELL: So, we were using that scenario like $9,000 your total household income is 50 when you think of a tenth, you know a tithe a tenth typically, right, is what the bible says? I would imagine for IRS rules it would make common sense that it would be at that 10% mark or less right I mean that might not be exact but does that make sense? We have to take a break we will be right back to the IRS Solution Attorney show.
PAT GEORGE: Such a beautiful IRS love song.
DARRIN T. MISH: Welcome back to the IRS Solution Attorney show. I am the IRS Solution Attorney, Darrin T. Mish.
KATRINA MADEWELL: I’m your co-host Katrina Madewell and that’s Pat George back there adding that beautiful Congress lullaby. Where did you get this Pat?
PAT GEORGE: I’ve got a million of them.
DARRIN T. MISH: So, the funny thing about that song is that Congress has actually cut the IRS’s budget significantly and the new administration is talking about cutting it even more significantly and you know just the base on their prior behavior, the IRS that is, I’m not sure that there are that many tax payers that are all that torn up over it.
KATRINA MADEWELL: Parody for the IRS Solution Attorney show. I love it.
PAT GEORGE: I’m sure Michael Bolton’s not either.
KATRINA MADEWELL: No, for sure.
DARRIN T. MISH: Although we don’t know if Michael Bolton’s had a tax problem or not we are not insinuating…
KATRINA MADEWELL: It’s just a parody of his music. So anyway, today’s show is all about 11 Red flag audit triggers.
DARRIN T. MISH: The first three we talked about was using the wrong social security number; the second was having just a big mouth telling all your friends or your family even that you have been taking a questionable tax position on your tax returns; the third is exaggerating your charitable contributions. If you make $30,000 you don’t want to write down that you are donating $15,000. Especially if you don’t have proof. If you do have proof you are going to have to have really good proof because you are going to get audited, in my opinion. Number four would be, what if you didn’t file returns at all? Well, you are going to get, you have a very high likelihood of eventually being audited because the IRS is going to prepare something called a substitute for return for you…
KATRINA MADEWELL: How can they audit you if they have prepared it?
DARRIN T. MISH: Well, it’s technically an audit, what they do is they just gather up all of the sources of income they know about and they add them up and divide that by the tax rate and then they crank out a tax return. That’s called a substitute for return. That is in fact an audit so you have a right to dispute that. That’s why it’s important we call it an audit because you have the right to dispute that in the future.
KATRINA MADEWELL: That’s interesting how there are so many different variations of an audit.
DARRIN T. MISH: Yeah, a whole bunch of them. Remember, the way I would define an audit is when the IRS is examining the return and proposing, actually just examining the return, examining any position on the return is an audit in my opinion so examining it means special…
KATRINA MADEWELL: It’s a challenge. Essentially an audit is a challenge for anything?
DARRIN T. MISH: Yeah, it would be a challenge to the position that you’ve taken on the tax return.
KATRINA MADEWELL: OK. So, the next one is Schedule C. Let’s talk about what a Schedule C is, for the fans listening.
DARRIN T. MISH: Yeah, we could talk about this for a very long time but a Schedule C filer is somebody who is a sole proprietor which means they have not elected to form an LLC. Basically somebody who has not elected to be taxed as a corporation or a partnership is by definition a sole proprietor.
KATRINA MADEWELL: They are going to itemize but they don’t have a company that they are doing it through?
DARRIN T. MISH: Yeah, let’s say you were an independent real estate agent or even an independent real estate broker and you were just Katrina real estate and you didn’t incorporate or anything like that, you are going to use a Schedule C.
KATRINA MADEWELL: Which I think most agents probably do that. A lot of agents do not have a corporation or LLC, they are just getting paid by their broker and they would itemize.
DARRIN T. MISH: They do and the Schedule C is the most commonly audited form on a tax return because it’s used, by definition, by the least sophisticated people.
KATRINA MADEWELL: So it gets audited because of that?
DARRIN T. MISH: Yeah, think about it. Who’s going to make more mistakes? Somebody who has taken the time to form a corporation and do this extra stuff ahead of time or somebody who is like, yeah, I get paid on a 1099 and I put all my expenses on a schedule C on my form 1040. So that’s the theory.
KATRINA MADEWELL: I mean unfortunately most real estate agents are not like me so I can see a lot of them doing that.
DARRIN T. MISH: Yeah, it’s a very high majority.
KATRINA MADEWELL: I mean you work with a lot of real estate people are they filing Schedule C’s without corporations or LLC is that kind of what you see?
DARRIN T. MISH: Almost exclusively and the problem with the Schedule C is it’s one of the most commonly audited returns. I want to say that audit rates are around 5%.
KATRINA MADEWELL: Now why is that? Are they putting too much stuff on there, is it all wrong? What do you think triggers that audit?
DARRIN T. MISH: You see an awful lot of self-prepared schedule C’s too and so people are using my favorite software Turbo Tax or something like that and it has a running total. It tells you how much you owe or how much you are getting back depending on where you are in the process of preparing the returns which I think encourages mistakes. They are like, wow, if I click that button I get $5000 back if. I click that button I owe $5000. We are going to click the button that gives me money back.
KATRINA MADEWELL: It kind of shows you the bottom line and people can claim and manipulate the numbers as they go and that can trigger an audit?
DARRIN T. MISH: Well, yeah, because you are not paying attention to the answer to the questions you are paying attention to the size of your return right or your refund.
KATRINA MADEWELL: Why do they even show you that until you are all the way done that would make sense.
DARRIN T. MISH: I don’t know. It’s a gimmick thing you know it’s designed to get people fired up I guess.
KATRINA MADEWELL: Get people to pay for it.
DARRIN T. MISH: So, let’s get back to Schedule C filing. It’s the most commonly audited return and the reason is all of your revenue goes on it and then all of your business expenses go on it. It’s just one of those things that there are a lot of errors. They know statistically from years and years of data that schedule C filer is going to have more errors and it’s going to generate them more money than a corporate filer.
I’ve got a funny example, they have a tendency to trigger or target cash businesses. One of the examples is a pizza parlor or liquor store let’s say. I had a case where I represented a guy that owned a liquor store and he got a 1099K at the end of the year which was for the gross amount of all the merchant card processing all the credit cards, debit cards all that stuff and the position he took on his Schedule C was the 1099K was the total revenue for the business. What’s wrong with that?
KATRINA MADEWELL: Well, you know there’s cash, there’s not only credit card receipts.
DARRIN T. MISH: Right. So his position without him even really knowing it, was there was no cash taken into this business during the course of an entire year, in a liquor store. Are you kidding me?
KATRINA MADEWELL: In a liquor store where you know people, yeah.
DARRIN T. MISH: And then it got even better that when the IRS summons the records for his, the purchase invoices for the liquor, the product right those were paid in cash. So that was kind of an interesting scenario.
KATRINA MADEWELL: I run a cashless business but I’m going to pay cash for my alcohol that I am going to sell.
DARRIN T. MISH: We got that audit settled and we got a pretty good result considering those facts because those are scary facts in a way. Don’t do that kind of stuff.
KATRINA MADEWELL: Now they look at bank statements to right at that point do they look to see what you are funneling through there?
DARRIN T. MISH: Absolutely. They are going to look at bank statements to see what is really going on. For Schedule C’s you have to watch out for hobby businesses. The classic example, a horse farm. That’s the classic hobby business. It’s like we have a couple of horses, actually don’t have any horses but I’m saying in this scenario we have a couple of horses and we let the neighborhood kids come over to have lessons every so often and we make $500 a month in lessons and the horses cost $1000 a month. So, we are going to try to write off the losses of this horse farm because it’s really a hobby so the IRS is going to slice through that pretty quickly and in that example and say no this is really a hobby, we are not going to give you those losses.
KATRINA MADEWELL: Yeah, because likely they have income on that return from somewhere else, right?
DARRIN T. MISH: Oh, yeah, almost all the time because horses are really, really, expensive. People think that horses….
KATRINA MADEWELL: In that case, shouldn’t you just do a separate LLC? Wouldn’t that make more sense and then carry those losses over to your return? Because we are talking about how to not get audited.
DARRIN T. MISH: I think my advice in that scenario would be just be less aggressive on the expenses. Make sure there is a profit because the rule, I believe, is you are supposed to have a profit three out of seven years. Don’t quote me on that it’s close not really sure.
KATRINA MADEWELL: Ok, so, if you are doing loss after loss after loss they are going to go wait a minute, why are you still in business?
DARRIN T. MISH: Yeah, if you are piling up losses, really in any endeavor if you are just piling up losses year after year after year you are eventually going to be audited because they are going to be like, come on in and show us what’s going on here because this doesn’t make any sense.
KATRINA MADEWELL: We are going to give you some business lessons from the IRS.
DARRIN T. MISH: You probably don’t want to be taking your business lessons from the IRS, but that’s just me…
KATRINA MADEWELL: That would make sense that they would audit you if you have a loss year after year.
DARRIN T. MISH: So number six on our list here is if you have been audited in the past, you are a little bit more likely to be audited in the future and why is that?
KATRINA MADEWELL: That just sounds unfair. If you have already been audited then they are just going to have you on the radar now to audit you again?
DARRIN T. MISH: We’ve been doing the show so long that I almost could have said exactly what you just said predicting that’s what you would say.
KATRINA MADEWELL: He knows how my brain works at this point.
DARRIN T. MISH: I would admit that it is unfair if in future years after the first audit that if you are not taking the same positions that got you audited in the past.
KATRINA MADEWELL: Ok, so if you are not doing the same thing.
DARRIN T. MISH: If you are not doing the same thing it’s really unfair, but if you are doing the same thing don’t you have it coming?
KATRINA MADEWELL: Stupid is as stupid does it just keeps going.
DARRIN T. MISH: So, if you claim a ridiculous amount of mileage, for example, and you got tagged on that and then you do it again five years later and then they bring you in for an audit and you still don’t have documentation and you still have these ridiculous positions I mean, I’m not sympathetic to the government but don’t you have it coming at that point?
KATRINA MADEWELL: Well, you would think after they go, yeah but when they go through an audit don’t they usually learn by that point or are these your customers basically maybe the answer right?
DARRIN T. MISH: Have you ever had to learn a hard lesson more than once?
KATRINA MADEWELL: Yes, I have.
DARRIN T. MISH: Yes, I have to so that’s what happens I’m not putting anyone down here, there’s times when….
KATRINA MADEWELL: Well, is it back to back like the same years or just skip a year?
DARRIN T. MISH: Not usually. You know let’s say they were audited for 12 and 13 and then, it could happen they get audited for 14-15 it could happen but usually there’s a couple of years intervening or what not because remember they don’t have the man power that they have had in the past.
KATRINA MADEWELL: Now if they pull you in for an audit let’s say they are auditing for 2015 how likely that they are just going to go ahead and audit everything around it so 14,16 you know other years?
DARRIN T. MISH: They are pretty much limited to auditing three years so…
KATRINA MADEWELL: So if they drag one in they are likely going to drag 3 in? It’s just what I am asking?
DARRIN T. MISH: No it’s really common.
KATRINA MADEWELL: So it’s likely going to be the case?
DARRIN T. MISH: People often come in with the audit letter on one year and I’m like well you know this is going, did you do the same thing on the year before and the year after and they are like, yeah ,ok well then we’ve got three.
KATRINA MADEWELL: The other ones are coming. So, what do you do in that scenario are you amending the other returns to try to fix whatever they jacked up?
DARRIN T. MISH: You can’t once it’s under audit, you can’t amend it.
KATRINA MADEWELL: Even though they only audited that year? Like can you amend the other years? Let’s say they bring their return in and you go oh, here’s where your dumb dumb mistake is, let’s fix this and we know they are likely going to audit the other years around it, can you amend those returns before the IRS gets them? We talked about this before the show once the audit starts it’s going to cost you more money.
DARRIN T. MISH: I believe the answer would be, yes, but in practical terms it doesn’t. Usually what happens is the other years get brought into the audit so quickly you don’t really have a chance or you explain what you just said to the client, you are like really we should go ahead and fix this on this other year that could be subject to audit do you want to do that? No, that’s the answer you get.
KATRINA MADEWELL: So, are they afraid that it’s going to just stir things up?
DARRIN T. MISH: No, they are afraid, they don’t want to pay any more tax.
KATRINA MADEWELL: They don’t want to do anything.
DARRIN T. MISH: They don’t want to pay any more tax and really that happens.
KATRINA MADEWELL: How much more is it going to cost them by avoiding it? They don’t want to pay any more tax, sure, nobody wants to pay more tax then they have to but if they are already under subject for audit for one year and you know those other years are probably coming because they did the same thing. How much more is that going to cost them?
DARRIN T. MISH: Probably going to save you at least 25% by amending, being proactive and amending.
KATRINA MADEWELL: That’s a pretty big number.
DARRIN T. MISH: Don’t take this wrong, I’m in the pain relief business you know I don’t sell prevention. If I was in the prevention business I wouldn’t have these folks as clients, they only come to me for pain relief. I would love to help them with pain prevention., I would love that that would be very rewarding to me.
KATRINA MADEWELL: Well, sometimes you do, sometimes these people come and they are a hot mess and then you actually do fix them so they don’t come back.
DARRIN T. MISH: True, but it’s future pain prevention really is all we are doing there. I would like to help more people before they got into hot messes with the IRS but that’s not really….
KATRINA MADEWELL: Well, you are listening to the IRS Solution Attorney show. We have to take a break we will be back shortly. Stay with us.
KATRINA MADEWELL: To our Facebook livers I do have to explain why I am smiling ear to ear because if you are listening on the radio you just heard that lovely rejoin music that Pat added which is just so on track for an IRS Solution Attorney show. But our Facebook livers could not hear that so you will have to listen to the Podcast.
DARRIN T. MISH: Welcome back to the IRS Solution Attorney show. I am Darrin T. Mish, the IRS Solution Attorney.
KATRINA MADEWELL: I’m your co-host Katrina Madewell and today we are talking all about flags to trigger an audit. We’ve got 11 of them we have been telling you about.
DARRIN T. MISH: It’s true and we don’t really have time to recap the prior six, but the seventh is home office deductions. This comes up all the time. I’ve fought this issue a couple of times on audits successfully. It’s kind of a hard issue to defend because there are a bunch of technical requirements for the home office.
What we really want to talk about today was just be reasonable on your home office deductions. A good example would be, let’s say you have a 2000 square foot house. It probably doesn’t make sense that 500 sq ft of your house is being deducted as a home office. If it is and it could legitimately be then, let’s say it’s your garage that could be possible.
KATRINA MADEWELL: That’s about the right square footage.
DARRIN T. MISH: Right, that’s about the right square footage. So if you are going to take that position then you are going to want to have really good documentation. You are going to want to have photos and you are want to have very clear receipts so that you can demonstrate that the entire garage. There is no car in the garage, there are no lawn tools in the garage, unless you are running a lawn business. Let’s say you are running a photo studio out of your garage, there better only be photo studio stuff in that garage. There better not be like literally a television in there unless the television gets used during the photo shoots. Because if there is, then they will say that that is not exclusively for the use of the business therefore we are going to disallow it.
KATRINA MADEWELL: Wow, I’m just thinking about that. How many, I mean it’s not uncommon to even have a TV in your office just to back ground or whatever.
DARRIN T. MISH: I think a TV was a bad example so another example would be….
KATRINA MADEWELL: Exercise equipment or something?
DARRIN T. MISH: You are claiming a bedroom for a home office there better not be a bed in there because if there is a bed in there, and it’s really the guest room, you know then you are going to lose that because it’s not exclusively used for business.
KATRINA MADEWELL: But I love how on the IRS site it says simplified options.
DARRIN T. MISH: Yeah, so there is basically what’s called a safe harbor or simplified option and there are a couple things, you are really going to have to look this up cause we don’t have time to go through it here today but basically have if your square footage doesn’t exceed 300 sq ft of your house then they are not going to look at it as hard and if you take the standard $5.00 per sq. ft as opposed to a higher amount. Then they are not going to look at it too hard.
KATRINA MADEWELL: I’m looking at this on the site going, yeah, safe harbor is kind of a good word. I think if you were to stay within these parameters you would be a lot less likely to get audited.
DARRIN T. MISH: Don’t be lulled into this 300 sq ft. If your house is 900 sq ft and you are taking 300, then that’s not all that safe right?
KATRINA MADEWELL: What I’m saying legitimately measure your office, legitimately that’s your office space that you are using what is that square footage take that…
DARRIN T. MISH: Better than measuring, take the square footage that is on the property appraisers website here in Florida and just use that because that is what they are going to use, they are not coming to the house to measure and your measurements could be off or maybe a reality, maybe in reality the room is actually a different size then the property appraiser has.
KATRINA MADEWELL: 80% of what the property appraiser has is wrong, either the bedroom, bathroom count will be wrong, the measurement will be wrong something will be wrong.
DARRIN T. MISH: But take the public records is what I’m saying or maybe the site plan, maybe the blueprint of the house.
KATRINA MADEWELL: But that was my point, if the IRS is looking at that hints instead of measuring it, use what public records has.
DARRIN T. MISH: Take the one that is bigger. I didn’t say that. Take the actual measurement, but the one that you can prove.
KATRINA MADEWELL: Yes, the one that makes sense will not get you audited. So, home office be very, very careful with that one. Number eight on our list you’ve got to love this. If you are rich.
DARRIN T. MISH: If you are rich you have a much higher chance of being audited then if you are poor. And this actually sort of makes sense. Why run around auditing a bunch of poor people who are not going to be able to pay? If you are rich, then there is much more likelihood that the IRS is going to find, if they find a 1% change or 1% discrepancy on a 5-million-dollar income return then you know…
KATRINA MADEWELL: And not that I want to go down this rabbit hole but when the elections where happening and a lot of people were saying Donald Trump’s returns have been audited every year and we’ve talked about that we are like…
DARRIN T. MISH: That’s why I mean, I don’t know what his income is nobody knows, but let’s assume that it’s in the hundreds of millions or even potentially a billion. Well, tiny errors or tiny aggressive possession in his return are going to generate big dollars.
I have the stats right here, it says while the IRS only audits 1% of taxpayers overall those odds rose to 7% for people with income between 1 million and 5 million and about 21% for 5 million to 10 million and 30% for people earning over 10 million dollars. So what does that mean? That means if you make over 10 million dollars every three years, you are going to get popped, you are going to get audited. But here is the good news…
KATRINA MADEWELL: It means the IRS needs money and you are a target.
DARRIN T. MISH: Well, here is the good news. If you earn over 10 million dollars, you can afford to have basically a full time accounting staff that is documenting everything and the audit may not be all that big of a deal.
KATRINA MADEWELL: Exactly. Alright, so the next one foreign assets.
DARRIN T. MISH: I don’t have a whole lot of time here either but if you have foreign assets, if you have a bank account in a foreign country…
KATRINA MADEWELL: Which you have to report on your return.
DARRIN T. MISH: You have to report using a form called an FBAR and if you don’t do that. you are going to get caught and you may go to prison.
KATRINA MADEWELL: How will they know?
DARRIN T. MISH: It’s an audit of sorts. How will they know? It’s a great question. Remember when we were kids, a Swiss bank account meant or a Cayman Island’s bank account meant that it was secret and that no one would ever find out about it? Well what happened is after 911, the US government strong armed all these countries, strong armed all of these banks and now there are no secret bank accounts for Americans anywhere in the world.
KATRINA MADEWELL: Yeah, a lot of stuff has changed since 911.
DARRIN T. MISH: Because this is the home of the brave and the land of the free.
KATRINA MADEWELL: Land of the free yes. Number 10, guessing on your investments on your Schedule D. Quick, what’s schedule D and what do you mean by that?
DARRIN T. MISH: If you have stock accounts. The profits for the losses for those stock accounts when you buy, or really when you sell you have to report that on a schedule D. Now you have to have really specific information for each stock trade so this is a nightmare if you are a day trader it really is, it’s a nightmare because you have to know the purchase date…
KATRINA MADEWELL: Oh my gosh, their Schedule D is like 25 pages long.
DARRIN T. MISH: I’ve had them hundreds of pages,, so you need to know the purchase date, you need to know the value on the purchase date so what you paid for it then you need to know the sale date and what the value was on the sale date then you have to determine the profit was the plus or minus of whatever happened and here is what people don’t…
KATRINA MADEWELL: That gives me a headache just thinking about it.
DARRIN T. MISH: Here’s what happens is people buy a thousand shares of GE and then they sell 200 shares and then they buy 300 shares then they sell 400 shares and then they buy 300 shares…
KATRINA MADEWELL: You’ve got to keep track of all of that. Wow.
DARRIN T. MISH: You’ve got to keep track of all that. If you are guessing on your schedule D, there is a very good chance you will be audited because the IRS does have some of these records or if the position you’ve taken just looks like it was a miracle that you didn’t have to pay any tax then a miracle that you’ve had these huge losses, they are probably going to ask you what’s going on.
KATRINA MADEWELL: Alright, number 11 you guys get popped for this one a lot unreasonable mileage.
DARRIN T. MISH: This is really, really common. The IRS wants you to have a contemporaneous mileage log, what does that mean? Well it used to mean a coffee stained like little notebook that you kept in the pickup truck if you are a construction worker and it was written in blue ink sometimes in black ink, sometimes there is coffee stains, ketchup stains and obviously it was a year old and that kind of thing. Nowadays what we would like to see is we would like to see you use a smart phone app like Mile IQ. There are a couple of others where it literally tracks every single trip that you take in the car and some are going to be business use and some are going to be personal. There’s lots of mistakes that I see on mileage or car and truck expenses on mileage in particular and they would be things like you are just taking to many miles for what you do.
KATRINA MADEWELL: Yeah, it’s all relative to what you put your profession is at the bottom of that return.
DARRIN T. MISH: We talked about before the show you are a real estate agent you are going to have a lot more mileage allowance then a lawyer for example. Some lawyers go to court every day and they have to go to different counties and they drive a lot and some lawyers like me pretty much go to the office which is not deductible and they sit there.
KATRINA MADEWELL: For me, I have a totally separate car that I use for work than I do for personal.
DARRIN T. MISH: Which is fabulous. Here is one last tip on this, keep the service records on that car.
KATRINA MADEWELL: Got them all.
DARRIN T. MISH: Because if you keep the service records then you will be able to prove that at least that number of miles went on the car during the year in question.
KATRINA MADEWELL: I use Shoebox I love it. All that stuff goes into the magic blue envelope at the end of the month. This was a great show Darrin.
DARRIN T. MISH: I think so.
KATRINA MADEWELL: It will be on Podcast if you missed any part of it. Check it out we will be here same time same place next week. This is the IRS Solution Attorney show.
DARRIN T. MISH: For today we are out.