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, thanks for joining us today, we are glad that you are here.
DARRIN T. MISH: How are you doing Katrina?
KATRINA MADEWELL: Doing great.
DARRIN T. MISH: Is it a beautiful day in the neighborhood or not?
KATRINA MADEWELL: Always, always. I think we just say that when we do this show in a different studio. It’s a little hike from where we live, but it works out.
DISCOVER SEVEN SECRETS THE IRS DOESN'T WANT YOU TO KNOW
DARRIN T. MISH: Yeah, you know it’s not a problem, as the crow flies it’s not far at all, but the problem is you got to get on the roads with traffic and bridges and…
KATRINA MADEWELL: And with people that don’t know how to drive, so you’ve got to stay safe out there because all the snow birds are here.
DARRIN T. MISH: Yeah, no offense to our northern friends who come down here in the winter and clog up the roads. After each winter we are kind of happy you are gone. No offense but…
KATRINA MADEWELL: We love you guys, so buy a house here and pay taxes will ya?
DARRIN T. MISH: Yeah, or just buy a lot of stuff while you are here during the winter and pay a lot of sales tax that’s good too. That works for us.
KATRINA MADEWELL: So, what’s today’s show about Darrin since I do not have an outline?
DARRIN T. MISH: Today we are going to talk about Common Errors When Preparing your tax return. We are in tax season right now, and most tax preparer types; CPA’s and accountants are pulling their hair out because it’s starting to get busy. I thought we would do a show today just about talking about how not to screw up your tax return.
KATRINA MADEWELL: It’s right on time. There are a whole bunch of people that use those automated systems, and it amazes me. I talked to a couple that I’ve known for a long time today, and I’m like hey who’s your CPA, who’s your tax preparer, and she is like, me.
DARRIN T. MISH: Turbo tax. That’s her tax preparer.
KATRINA MADEWELL: Yeah, me I do it online.
DARRIN T. MISH: Or like our guest the other day was 1040.com right.
KATRINA MADEWELL: Exactly.
DARRIN T. MISH: He had the free software that you could use to prepare your tax return. Yeah, that can work you know if your stuff is simple. I’m ok with you preparing your own return.
KATRINA MADEWELL: If it’s not simple, don’t prepare your own return.
DARRIN T. MISH: Yeah, I have doctors’ wives who do the tax return for the medical practice, and it’s not a good idea.
KATRINA MADEWELL: I don’t think so either, not unless it’s her background and…
DARRIN T. MISH: If she has experience and that’s fine. I’m not talking about that, but I am saying If taxes are not your thing and you haven’t gone to school for it and got a lot of education about it. Then you probably shouldn’t be doing your own tax return. But if you are going to do your own tax return we are going to talk about things today that you shouldn’t do.
KATRINA MADEWELL: So these common tax snafu’s, do they mostly apply to the self-employed?
DARRIN T. MISH: Well no, not necessarily. There is a big long list. We have about 20 different items today, so we broke down all those things in great detail. It’s not going to be one of the more fun shows that we do. We are not going to talk about like we did the other day about roosters and cruises and passports and things like that. This is a much more technical show where we talk about how to do things right. How to not do things wrong.
KATRINA MADEWELL: So, we’ve got some good tips for you. Stick around we will have a bunch of good information as you prepare to move to filing those tax returns.
DARRIN T. MISH: If you make mistakes the bad things can happen to you. You can have late payment penalties; you could, have negligence penalties which are like 25%. You could if the things go badly you can be…
KATRINA MADEWELL: Wait what’s a negligence penalty?
DARRIN T. MISH: Negligence penalty is when you are audited. And because of your negligence, there was a significant mistake on the tax return, and the negligence penalty is 25%.
KATRINA MADEWELL: But what’s an example of that?
DARRIN T. MISH: Let’s say you are audited, and you had high car and truck expenses, and then you can’t prove those which is very, very, very common. After those are disallowed, and they will be if you don’t have a mileage log, then you are going to be hit with the negligence penalty on that in addition to tax. So, let’s say you owed $4000 in additional tax. Well, you are going to get hit with a negligence penalty of 25%. So, another $1000 and then interest back to the due date of the return April 15th of whatever year on top of both the tax and the penalty.
KATRINA MADEWELL: What about the self-employed? They get multiple 1099’s, and one is missing, is that an example?
DARRIN T. MISH: That is also an example because you know…
KATRINA MADEWELL: They figured they should have known.
DARRIN T. MISH: Yeah, it’s all attributable to you. Another penalty that can happen if you make a simple mistake is civil fraud. Now civil fraud is really bad. Civil fraud is where the IRS has decided that they are not going to pursue a criminal fraud case against you. But they are going to assert an alleged civil fraud. Meaning they are not going to put you in jail, but they are going to whack you pretty hard, so the civil fraud penalty is 75%. It’s usually used in bigger cases, at least in my experience. So the tax payer might owe hundred grand in additional tax and then think about it civil fraud penalty of 75 grand.
KATRINA MADEWELL: I think we should give an example of each thing as we are going through them. So, what’s an example of that?
DARRIN T. MISH: So civil fraud, I had a couple come in a couple of weeks ago, and they owned a really large repair shop. And I won’t even talk about what kind of repair but mechanical kind of repair. They grew really fast, and they had sloppy bookkeeping, so they didn’t report all of their income. And when I talk about they didn’t report all their income I mean they left millions of dollars off as unreported income. Your best option at that point other than, hey, this is civil fraud is, no we were like way, way negligent I mean that’s your second-best option, right.
KATRINA MADEWELL: So pay that 25% penalty we talked about.
DARRIN T. MISH: 25% is a great deal compared to 75%. And then once you are hit with a civil fraud penalty. My understanding of the law is that civil fraud penalty cannot be discharged in bankruptcy ever either. And so, if you have a negligence penalty eventually the timing is right for bankruptcy and everything else. Then you can go ahead and discharge the negligence penalty and late filing and late payment and all of those other penalties. But not a civil fraud so it’s pretty bad. Could also be subject to obviously to additional interest if you make a mistake because if you owe more tax, you are going to owe more interest.
KATRINA MADEWELL: Everything is like adding taxes, interest, and penalties. It’s not just the taxes; it’s all the extra stuff.
DARRIN T. MISH: Theoretically you could be charged with tax evasion. I think it is unlikely for most people all though in the example I gave you before was millions of dollars of unreported income. It could end of being a criminal case because you are talking about real money and it’s just not a fact pattern that looks real good.
KATRINA MADEWELL: Was that one year, several years just curious?
DARRIN T. MISH: I think, it’s usually a couple of years I don’t remember off the top of my head, and I don’t want to get them in any more trouble…
KATRINA MADEWELL: No, no just curious, though.
DARRIN T. MISH: But, yeah, it was awhile and what happened was they just started the business and then it just unexpectedly really took off and this is common in businesses where…
KATRINA MADEWELL: Hire a bookkeeper.
DARRIN T. MISH: The same system that you use to keep track of your bookkeeping. When you are making $50,000 a year is different than the system you need when you are making $250,000 a year. Which is different from 500 which is different from a million which is different from multi-million.
KATRINA MADEWELL: Yes.
DARRIN T. MISH: So they went from zero to multi-millions in like a year or something and so…
KATRINA MADEWELL: That’s a lot of steps along the way.
DARRIN T. MISH: To me just as my, not only as my experience as being a tax problem resolution lawyer. But also as a business owner, it’s not surprising to me that they had significant problems preparing that tax return. They should have gotten help, and they didn’t those are self-preparer…
KATRINA MADEWELL: So, they didn’t have a CPA to file them no?
DARRIN T. MISH: No, no it was just like a family member prepared their return using the best available information. Which was not very good, so there were significant errors.
KATRINA MADEWELL: Well, like you said, there’s extra income, but there’s a bunch of expenses. And so you have to have a bookkeeper if they are making millions doing whatever they are doing. They should be doing what they are doing and leaving the bookkeeping up to somebody else.
DARRIN T. MISH: Boy that’s a really good point right. And I think I said that to them it’s like you don’t need to be doing the $17 an hour or the $27 an hour or even $50 an hour bookkeeping work. And you don’t need to have your face stuck in Quickbooks, that’s not your place. But you do need to have somebody who’s doing that.
KATRINA MADEWELL: And that loops back right around to what you said that your process is different if you make $10,000, $25,000 a quarter million, a half of million and up like your process and the people you hire will….
DARRIN T. MISH: If you’ve got a hundred-grand gross running through your business, you really don’t have that much money to spend. Now I know that might sound a little bit (inaudible) or something like that I don’t mean it that way. I just mean when you only have a hundred-grand gross. It’s just not that many transactions unless you have a lot of one dollar transactions or something, which is not that much.
That’s the kind of business that maybe the owner can do the bookkeeping. It’s going to be painful because it’s just not fun stuff to do and there are people that would do it for hardly anything. But I want to share this too because we don’t talk about bookkeeping very often on the show.
I just recently discovered that the big banks. Like Chase and Wells Fargo and Bank of America have a built-in interface with Quickbooks online. Quickbooks online is cheap; it’s like $20 a month or something. Literally, Quickbooks online could interface with your bank account. And suck to transactions straight into Quick Books online. Then you just need a bookkeeper type person to just kind of look at those transactions. Make sure they are coded correctly so that they know that every time you go to Sam’s club, that’s office supplies for example.
KATRINA MADEWELL: Before they will ask like my bookkeeper will ask she is like what’s this and you know…
DARRIN T. MISH: Yeah, if it’s weird stuff then they certainly should ask. But then if you go to Sam’s club once a month and every time it’s office supplies they are going to know ok well that is where he buys his paper for example.
KATRINA MADEWELL: And do your transactions separate that’s what I do. Like if I go to Sam’s and I am buying something. You know if I get audited whatever. I’m going to have two transactions the same day same time, one’s going to be from my personal account, and one’s going to be from my business account.
DARRIN T. MISH: That’s a really good point, and that’s the exact example that I give a lot which is ok. So you go to Sam’s club, and you’ve got copy paper, pens, highlighters and then strawberries, milk, and bread. Ok, that doesn’t go in one order. Ok, what we want you to do is we want you to go up and separate those things in the business pile and the personal pile. Pay for the business pile with the business debit card, pay for the personal stuff with either cash or personal debit card.
Whatever it doesn’t even matter, just keep them separate and don’t try to write off the strawberries, milk, and bread. Because when I’m handling your audit and I show them the receipt from Sam’s club, and there’s strawberries, milk, and bread on there. Maybe it’s ten bucks but that’s not the point, the point is it’s a pattern of sloppiness at best, dishonesty at worse. But sloppiness for sure and if you start to see that pattern, they are going to look for that pattern throughout every expense on your tax return.
KATRINA MADEWELL: And on that note, we are going to take a quick break cause it’s about that time we will be back in just a minute.
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.
DARRIN T. MISH: Today’s show is all about common errors when preparing your tax return. What to do, what not to do since we are in tax season now and we want to make sure we can minimize the number of errors that you have in your tax return. So that you don’t have problems which could result in significant penalties and interest.
One of the things that I want to say, and this is really important because I see this happen all the time, before you file your return, even if you are using a professional preparer you have to make sure it’s complete and correct. You have to review the entire return. You really need to understand the entire return. Which is really not that complicated when you boil it right down and if you don’t understand it ask the preparer.
KATRINA MADEWELL: Ok so when you say review it, understand it like I don’t look at my stuff I’m like…
DARRIN T. MISH: You’ve got to look at your return.
KATRINA MADEWELL: I give my bookkeeper all my stuff, I answer all their questions, the tax man asks me questions they file it, and I sign it, that’s it.
DARRIN T. MISH: If you don’t have just a fundamental understanding of how the money flows through a tax return then I would venture to guess that there are significant mistakes on the tax return every single year.
KATRINA MADEWELL: I mean I do look at it, but if, I don’t study it like you are saying, I should know where everything goes. That’s what I hear from it.
DARRIN T. MISH: Well let me give you an example. You are probably a corporation, and so on your corporate return you should be looking at the gross income, hey does that look about right…
KATRINA MADEWELL: Yes.
DARRIN T. MISH: That’s about what I thought it would be so that would be one thing….
KATRINA MADEWELL: I’m always surprised by that number.
DARRIN T. MISH: Yeah, sometimes, ok…
KATRINA MADEWELL: It is what it is…
DARRIN T. MISH: So I want you to look at gross income in your case and then I want you to go and look down the expense categories including the supplement under there. and just roughly eyeball those like if there’s a notation on there for I don’t know. I am trying to think of something bizarre, you know seminars, and it’s $29,000, you know that might be correct, or it might be way, way wrong.
KATRINA MADEWELL: Or it might be that I need to split them up into some other better sub-categories.
DARRIN T. MISH: Yeah like look at your categories too so that it doesn’t look really funny. You know like maybe in the instance I just gave you $29,000 should have been $2900 and that would be a more reasonable number. I don’t know because you might have high continuing education I know you travel a lot so…
KATRINA MADEWELL: I do.
DARRIN T. MISH: And that’s fine but a lot of that travel, in fact, most of that travel shouldn’t be under seminars.
KATRINA MADEWELL: It should be separated.
DARRIN T. MISH: It should be under travel because there is a line for travel, seminars would be just whatever the thing, whatever the event cost was…
KATRINA MADEWELL: The cost of the event?
DARRIN T. MISH: And maybe in some industries the cost of the event is $195.00 and some industries it’s $19,000. It just depends on your industry and what you are doing and what not.
KATRINA MADEWELL: And there are seminars also continue educations so you could divide that up. So I imagine what you are saying is pay attention to those details. So that if you can sub categorize stuff better or make sure there’s not an extra zero added or an extra zero left off.
DARRIN T. MISH: I just looked at a tax return yesterday, the guy is under audit, and he is basically in a service business, and he had a big number for the cost of goods sold on two different tax returns. The cost of goods sold is what does it cost you to buy the good that you later sell for a product.
KATRINA MADEWELL: To move the product.
DARRIN T. MISH: So I’m like looking at the return, and I’m like so what’s up with this? What good did you sell and he is looking at me like I have no idea. So, then we kind of dove into it deeper and he was like photo copies that he gives to clients and software subscriptions. Well, that doesn’t go under costs that get sold. This is a really good kind of example. They know based on what’s called the SIC code. The industry code that you put on the tax return, they know that he’s in a consulting type of business that he doesn’t have any Cost of goods sold.
KATRINA MADEWELL: So, they know what matches with your industry and what doesn’t.
DARRIN T. MISH: That single line may have been what got him audited.
KATRINA MADEWELL: Wow.
DARRIN T. MISH: So I want you to take a look at the return and make sure that it kind of makes sense because it’s not uncommon. I look at lots of people’s tax returns and I look at returns and I’m like that just doesn’t make any sense. If you’d fixed that you wouldn’t be in the mess that you are now. So let’s talk about some common errors here so we can provide some value to some people who are listening, especially on the podcast. You know if you submit your tax return electronically. It’s supposed to be greater, more accurate because it eliminates the person that has to open the envelope and key in the data. So E-Filing is almost mandatory anymore so you should e-file unless there is some really big exception. Give you an example of an exception sometimes…
KATRINA MADEWELL: You owe IRS debt and you can e-file.
DARRIN T. MISH: Well it’s not that. If you have really old tax returns, you can’t e-file. If you have to file 2012, you can’t e-file that because it’s too old. Another example would be let’s say you have one really big expense that’s unusual even for your industry. You have all the documentation to prove it.
KATRINA MADEWELL: I’m a real estate agent give me a weird expense.
DARRIN T. MISH: Let’s use that last example the $29,000 in seminars?
KATRINA MADEWELL: Ok.
DARRIN T. MISH: Ok what we would do in that case is we would go ahead and attach. We would paper file, and we would attach all those receipts with a cover letter that said. “Hey, we thought you might be interested in knowing that this number is high but here’s all the documentation.”
KATRINA MADEWELL: So we know it’s weird, but we are attaching this, so you don’t flag it.
DARRIN T. MISH: Yeah and so it will serve the purpose of avoiding that audit on that issue in advance.
KATRINA MADEWELL: So you think it would draw more attention cause it’s the tax or do you think it’s going to do the opposite?
DARRIN T. MISH: Well what I think happens is a human being has to look at that return and then it gets. Somebody eyeballs it, and they are like yeah that looks good. They just go ahead and process it, and they should avoid an audit on that particular issue. Otherwise, you are going to want to E-File because it’s more accurate. With paper filing, returns are filed, but you could have an input error. Where the person just literally inputs the social security number wrong on one of your kids or something like that. and that’s going to pop out a letter, computer generated and it causes headaches for you as a taxpayer. They are going to generate the letter and then if you don’t deal with the letter correctly, which most people don’t know how to do, then the IRS is going to write back and say. “ok now you owe us two grand because we disallowed the kid cause of the social security number.”
KATRINA MADEWELL: So you have to amend your return basically if you have let’s say two flipped numbers on the social?
DARRIN T. MISH: No you don’t have to amend your return. What happens is the IRS will issue a letter called the CP2000. and there will be instructions that will say here’s what we think is the problem. and here’s, if you agree just sign here and you owe us more money or if you disagree here is what you need to do and here is the deadline and things like that. People just, most of our society anymore just doesn’t communicate well in writing.
KATRINA MADEWELL: Well they don’t look at mail. I mean think about it, everything is so automated. Sometimes I don’t look at mail for a long time because I’m traveling, I’m moving, I’m working. Everything is auto debited. It’s not like if I don’t open the mail, they are going to shut off my electric bill. Because everything is automatically paid and debited, I don’t look at that.
DARRIN T. MISH: Yeah you are a little younger than I am and I’m still really kind of tied to mail because…
KATRINA MADEWELL: So do you write checks?
DARRIN T. MISH: I do write some checks. I don’t write a lot of checks, but I probably write, write ten business checks a month and five personal checks a month.
KATRINA MADEWELL: I mean I write business checks but I just don’t write a lot of personal checks, and you know the only thing I write checks for personally is lunch money because I don’t want to pay that $5.00 fee that they charge to do it online so I choose to write a check.
DARRIN T. MISH: I will tell you on the, on the business side most of the statements still come in the mail for sure. So anyway, you are going to want to go ahead and e-file your return if humanly possible. Because it’s going to be processed faster and you are going to have your delays and what not.
Also, make sure you check with your tax preparer that the return was received by the IRS because I’ve seen this mistake many times where the tax preparer thinks that the return was e-filed, but it wasn’t acknowledged by the government. So it never did get filed. That does happen from time to time, so you want to make sure that if it’s e-filed that the guy does have the electronic acknowledgment.
I just won this particular issue in an audit where I had a gentleman who is in construction and has a construction crew. He has 4 or 5 guys that are with him at all times working on houses and every day they go to McDonald’s. I had a stack of McDonald’s receipts, and typically that would be like a weird red flag. Like that’s strange, but the explanation was no, he takes them to McDonald’s. Because he can tightly control how long there are gone and how long it takes and so they can get back to work.
KATRINA MADEWELL: That’s a great argument.
DARRIN T. MISH: And that actually, that was fine.
KATRINA MADEWELL: But that makes sense, think about it.
DARRIN T. MISH: It makes sense to me you know, and it’s not like they are going out to you know Outback every day or something that is really expensive I mean it’s McDonald’s. I forget how much it costs to feed five guys it’s like ten bucks or 15 bucks or something ridiculous.
KATRINA MADEWELL: It’s worth the time of not having labor cost in the field.
DARRIN T. MISH: And if those guys all took their pickup trucks and you know they go to God knows where. Like who knows how long they are going to be gone or if they even come back, so they all pile into one truck and go to McDonald’s pretty much every day.
KATRINA MADEWELL: And on that note, we are going to take a quick break.
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, having a good time today talking about tax things that you should pay attention to to make sure that you get it right.
DARRIN T. MISH: Yeah, and today we are talking about common errors that you can avoid when preparing your tax return. So far, we’ve only hit really one, and that was make sure that you E-File your tax return if humanly possible. There are lots of good reasons to do that, it does tend to be more accurate, and it does tend to speed up your refund and or the processing of your tax return period. The next thing that I wanted to mention. Did you clearly print your name and social security number and current address including your zip code directly on the return?
KATRINA MADEWELL: Did you say print?
DARRIN T. MISH: Well, either has to be printed with a computer or handwritten. I do see hand-written returns still, but it’s got to be clear you know you’ve got to spell your name right. It’s just obvious stuff, but you know because of the business I’m in I see all kinds of crazy stuff where especially with kids. The kid’s social security numbers are wrong or transposed or whatever. I had a case; I’ll tell you this story real quickly.
I had a case where the husband and wife were divorced, and the husband was a non-filer for many years but was entitled to claim the kids, the 3 kids for that entire time since they were divorced, and he didn’t know what the kids social security numbers were, the kids refused to tell him and the mother refused to tell him, so it was, you know he was looking to me, what are we going to do, well finally I came up with the idea…
KATRINA MADEWELL: You can apply for it?
DARRIN T. MISH: We did the 4506 T for a return we knew was filed, had the kid’s social’s on it, and that is how we got the social security numbers.
KATRINA MADEWELL: Makes sense to me.
DARRIN T. MISH: So the next one would be, you could choose only one correct filing status. So sometimes people choose more than one filing status, they might you know the head of household and single well that is wrong. You don’t want to do that.
KATRINA MADEWELL: And so they could accidentally pick 2?
DARRIN T. MISH: Yeah, sometimes, the software won’t let you do that, but if you are preparing returns by hand sometimes people make silly mistakes like that. The next one would be, did you check the appropriate exemption boxes for your personal, spousal and dependents exemptions. Did you enter the total number of exemptions? So, if you have a family of four exemptions you want to make sure you put four in the right place. Otherwise, it’s going to be really screwed up, and you are not going to. Your tax return’s going to have a problem with it, and you are going to have to amend it later or deal with the IRS one way or the other.
KATRINA MADEWELL: We have 20 things to go through. Did you see 20?
DARRIN T. MISH: We will go fast, we will go fast. The next one is, did you enter the names and taxpayer Id numbers for everyone listed on your return? Like we talked about with the kids you’ve got to make sure that all those names and numbers are correct. And if you had a name change, for example, you know after people get married.
Typically, in our society, the wife changes her name and what not. You’ve got to make sure you go to the social security department and change your name ahead of time of filing the return. Otherwise, wife’s name should be a maiden name, otherwise. For example, if your maiden name was Smith and now it’s Jones. Then you are going to want to make sure that you go ahead and make sure with Social Security they have the correct name at that point.
Did you enter your income on the correct line? I see this all the time where you know maybe that the income goes on the. Maybe you are self-employed, and you know you do the Schedule C, and you move the income over, and you subtract all the expense and what not. I can’t remember off the top of my head which line is. I think it’s line 12 that the income should go on. A lot of times people put it on like line 1 where wages go, where if you’ve got a w-2 they just put it on the wrong line.
It’s guaranteed to cause an audit of some sort it’s not necessarily going to be an office audit, but the very least it’s going to be a CP2000 kind of deal where it’s a correspondence audit where the IRS is going to want to know. Why screw that up? You know it’s just really messed up. Make sure that you do that correctly.
Make sure when you review your return that you pay the tax preparer to prepare to make sure that the income is on the right lines. I know there are people listening right now that are like well that is why I pay that guy but you’ve got to make sure that you do it correctly otherwise, because you are ultimately responsible, that’s the thing that I am trying to stress here is even though most of us in our society are somewhat ignorant about how to prepare a tax return, how to review a tax return, how to you know…
KATRINA MADEWELL: I would think that is why you hire the expert.
DARRIN T. MISH: It is why you hire the expert, but you also ultimately it’s your rear on the line, it’s your reputation. It’s your money on the line; it’s your responsibility, it’s not delegatable. You cannot say well the return was wrong because the CPS messed it up; therefore, I shouldn’t have to pay penalties and interest. You can try that, but it will not work it’s not a delegatable responsibility. So, the next one would do you calculate deductions and credits correctly. Did you put those on the right lines and did you attach the necessary forms and schedules. So especially for tax credits you know there is an education tax credit, there’s a whole bunch of tax credits.
If you are going to take the credits, then you have to attach the correct form and work sheet that shows the computation of that credit. You don’t do that you are going to get audited. Happens a lot with those education credits. There are like 2 or 3 different special, different kinds of education credits, not special education credits but…
KATRINA MADEWELL: It sounds like we should have started the show with a list of questions you should ask your CPA before you ever higher them.
DARRIN T. MISH: Yeah, well, you know especially with CPA’s I have a lot of respect for CPA’s, they have an official license, state license accreditation. They have a fairly high minimal competency, but just human beings make mistakes. I’m not going to say I’ve never made a mistake of any kind. I make mistakes fairly regularly but not necessarily on client matters. I cut people off in traffic by accident, things like that because humans just make mistakes. Usually a short list of things that we want…
KATRINA MADEWELL: That’s right, so if you are driving and you are listening that person might have accidentally cut you off he does not have road rage.
DARRIN T. MISH: We do have a tendency to think if somebody’s driving badly, that it’s intentional and I think it is most of the time but not always so. The next one would do you put brackets around negative amounts?
So, let me give you an example. You could have a loss from your schedule C or your schedule E; Schedule E is when you have a, typically either a rental real estate or a corporation. Then and you have a loss, you have to put that loss in brackets on your tax return. Otherwise, it’s going to add it instead of subtracting it, and it’s going to cause a problem with your tax return.
Even if you’ve done, even if you leave the brackets off and you obviously subtracted it. Because you can tell from the numbers as you go down the return that the computer is still going to choke on it basically and it’s going to be a problem. So, the next one would be if you are taking the standard deduction, is this making sense to you so far?
KATRINA MADEWELL: Yep…
DARRIN T. MISH: And check any box indicating that you or your spouse are 65 or older or blind that you calculated the correct standard deduction. Because those two things 65 or older and blind gives you a higher standard deduction.
KATRINA MADEWELL: It’s the only two things like there is no Veterans or any other deductions in there?
DARRIN T. MISH: No, those are pretty much the only two things. But we just want to make sure that if you are going to go with the standard deduction as opposed to itemizing. That you get what you have coming to you because if you. That’s an example where if you don’t do that right then your refund is going to smaller or you are going to owe more tax. The IRS is not going to fix that for you they are not going to go hey we’ve got good news…
KATRINA MADEWELL: We owe you some more money.
DARRIN T. MISH: That just doesn’t seem to happen. The next one would do you figure the tax correctly? You know if you are manually preparing returns with a pencil or whatever did you use the tax table correctly? Did you follow the line across?
Did you enter that tax correctly? If you didn’t enter that tax correctly, I promise you. I guarantee you are going to get a CP 2000 the government is going to reach out to you and say hey you screwed that up and we want you to fix that. This one I see absolutely all the time, did you sign and date the return? I see it all the time.
KATRINA MADEWELL: It sounds so simple.
DARRIN T. MISH: If you are E-Filing there is an E-filing authorization form that the preparer is supposed to get you to sign.
KATRINA MADEWELL: Electronic signature.
DARRIN T. MISH: They don’t always do it, but they are supposed to have that form signed by you. If you are paper filing you absolutely, positively must sign and date the return. I do not believe that the IRS will accept what looks like a facsimile sort of signature. If it looks like a photo copied kind of signature or a computer-generated signature, they are not going to take it. The best way to sign anything with the IRS is in blue ink so that they can tell that it’s original. They will accept black ink, I think they will accept red ink I don’t know, don’t even ask me about green or purple I have no clue.
KATRINA MADEWELL: So blue or black.
DARRIN T. MISH: I just say blue. You can use black ink if you use black ink then there. It is subject sometimes to them saying they are trying to assert that it’s a photo copy and unacceptable but typically if it’s especially if it’s like a ball point pen they are going to take that because they can tell it’s an actual signature.
KATRINA MADEWELL: But those gel pens they are hard to tell.
DARRIN T. MISH: Yeah and we’ve had wars with the IRS over the years where…
KATRINA MADEWELL: Yep this pen in black.
DARRIN T. MISH: I’m using one of these Pilot G-2’s. It’s kind of like a roller ball ink kind of pen, and from time to time over the years, the IRS will state that either a ball point pen doesn’t look right and then we will start to use Sharpies. Then they are like, no, those don’t look right. Then we start using roller pens like this. Then they eventually say, no, those don’t look right, and then we go back to the ball point pen, and we just start over. There seems to be a cycle. and it’s probably just somebody at the unit that processes powers of attorney that just gets bored and decides to pick on you or whatever.
KATRINA MADEWELL: To change the pen this time of year.
DARRIN T. MISH: Yeah, I’m not sure what’s going on there. One thing is if you get a W-2 you get wages, and you are employed, did you attach the copy B of the W-2 to the tax return? Now I don’t think this is a really big deal, but it is something that’s required that you should do because if you don’t do that sometimes that could delay your refund.
KATRINA MADEWELL: It sounds so simple.
DARRIN T. MISH: It is simple but it’s something that we forget about it because we are self-employed although we both get W-2’s, I’m sure.
The next one would be if you get a 1099R, which is for retirement, there is going to be withholding on that typically or possibly. If there is withholding on that, you want to make sure that you attach that to the tax return too. Otherwise, if you claim the withholding from it and you don’t attach the 1099R, they are going to have a problem with it, and they are going to ask you about it. I think why they want these attached is because the W-2’s and 1099’s now are both due at the end of January.
Let’s say you file your return on February 4th, well the IRS doesn’t even have the W-2 and 1099 in the computer yet. So if you sent the paper copies, then they will be able to process that more expeditiously then if they have to wait for the W-2’s and 1099’s to be processed by social security and get put in the computer and all of that stuff. If you are a non-filer and it’s been many years, you are not going to have copies of these documents, and that’s fine. Because by then the IRS will already have processed those 1099’s and W-2’s into the computer and it should all work out just fine.
KATRINA MADEWELL: So doesn’t matter at that point.
DARRIN T. MISH: At that point, it doesn’t matter. The next one would do you attach all your fixed schedules and forms in the order of the sequence numbers shown in the upper right-hand corner. So basically what I’m saying here is the schedules have to be all there obviously, and they all are supposed to be in a particular order so…
KATRINA MADEWELL: If they are not, it freaks them out?
DARRIN T. MISH: I will tell you what I see a lot is. I will see a self-employed person who’s supposed to be filing a Schedule C and the numbers will all be on the 1040 part of the form. But the Schedule C will just be missing, just gone. Somebody either lost it or didn’t send it to the IRS or whatever and that’s guaranteed audit. Guaranteed you are going to get audited because they are going to be like hey what’s up with this? Why is the Schedule C missing? So it just can’t be missing.
KATRINA MADEWELL: Well you are listening to the IRS Solution Attorney show we have to take a quick break we will be back to finish up that list.
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 sidekick hanging out talking about some of these tax things that is a little bit of my scope of knowledge here. But we are having fun anyway.
DARRIN T. MISH: Katrina and I have been doing the show together for about a year and a half, and I’m looking at her right now, and her eyes are glazed over, she is looking kind of glassy-eyed and anyway it’s just an important show for some people.
KATRINA MADEWELL: You can tell by how much Pat jumps in or doesn’t.
DARRIN T. MISH: Yeah for sure, Pat’s like in a coma over there. But, anyway, we are almost done with the list here. The next one would be, did you mail the tax return to the right address? You would think this is very simple, right?
KATRINA MADEWELL: Well I mean with all due respect, there are a bunch of different addresses that the IRS has, so this could be a simple one that anybody could mess up.
DARRIN T. MISH: So, you’ve got to make sure that if you are going to paper file that you mail the return to the right address. Now, the next one is almost as obvious; did you put enough postage on the tax return? Most people’s tax returns are going to be you know multiple pages right, so it’s going to be more than one stamp, so you’ve got to make sure that it got sent.
My little tidbit would be if I were going to mail in return a hundred percent of the time. I’m going to send that thing certified mail, and if you are going to send it certified mail, you need to stand in line at the post office anyway. So you might as well let them calculate what the right postage is, make sure you keep the little green receipt and all that kind of thing. If you haven’t…
KATRINA MADEWELL: But you can ask them to post mark it and take a picture thanks to smart phones.
DARRIN T. MISH: Yeah, I guess you could do that.
KATRINA MADEWELL: I would do that.
DARRIN T. MISH: The next one would be if you owe tax did you enclose a check or money order made payable to the United States Treasury? Not the IRS, the United States Treasury and then in the memo line, we’ve talked about this before, you are supposed to have your social security number…
KATRINA MADEWELL: Wait a minute, why can’t it say the IRS has to say United States Treasury?
DARRIN T. MISH: It should not say the IRS. The reason is that over the years people have figured out that IRS is very easy to turn into Mrs. and then it could be Mrs. whoever and then it’s easier to forge a check. So, don’t write the check out to the IRS, make it out to the United States Treasury and that should avoid that problem.
I believe that they will cash the check if it’s made out to the IRS, but if it’s intercepted or lost or whatever in the meantime it’s much easier to forge a check made out to the IRS then to the United States Treasury. So, if you owe tax did you put the check in there? Did you properly notate on the memo line your social security number, the form 1040, what year, all those things? If not, there is a pretty good chance that payment is going to be misdirected, it’s going to end up in the wrong place. I’ve had this happen to me twice in the last six months.
KATRINA MADEWELL: So what do they do with it if it just gets in the wrong place? It just floats around the IRS indefinitely?
DARRIN T. MISH: Seriously I just had a case where we sent a big check like 45 grand, and we put it…
KATRINA MADEWELL: I’m surprised they don’t want that wired.
DARRIN T. MISH: They take personal checks all day long. Anyway, they put it on 2008 which already had a credit balance. and then they left it there and then they didn’t note the credit balance. So, I had to get involved and raise all kinds of heck and they eventually “found” the money, and now we are in the process of getting that money moved and fixed. That is what happens sometimes, the money goes there, they cash the check, you can prove they cashed the check, and then it just gets lost.
The next one would be if you do a refund and you request a direct deposit, double check your routing and account numbers. This is really important.
KATRINA MADEWELL: What happens if it goes to the wrong place? What if it accidentally goes to Pat George’s bank account?
DARRIN T. MISH: I honestly do not know what happens if the routing and account numbers are wrong, my guess is…
KATRINA MADEWELL: Somebody else got it?
DARRIN T. MISH: That is my guess, that you are just out of luck. So, make sure that’s correct. I don’t know if I would want to put a direct deposit for my refund or not. I’ve never done it, I like the satisfaction of getting a check back, but my refunds are usually like 13 bucks or something, so it’s not that big of a deal.
The next one is, this is important this is the last one on this long list. Did you get a copy of the signed return and all the schedules for your records? How often, even in your business, how often do you have somebody, or for a mortgage they need a copy of the last two years’ tax returns, and they don’t have a copy.
KATRINA MADEWELL: We’ve got to get it from their accountant, sometimes we’ve got to order the tax transcripts. They are never signed.
DARRIN T. MISH: I would say more than 50% of people do not have a copy of their tax returns.
KATRINA MADEWELL: We see it too. I don’t know how they could not have a copy, which is weird because I always have a copy. They might have initialed when they filed, and they made a little tweak, and then they filed one that was just slightly different, not a big deal.
Maybe they added expense or some income they got or whatever, so they gave us the first set of tax returns. What happens is since we are in a high fraud state, all of our tax returns are subject to an audit. They pull a 4016 and verify that what you gave your mortgage person is the same as what you gave the IRS. If those numbers are off, they freak out like you are trying to commit fraud. It’s bad it could be like a $10 difference, and they would freak.
DARRIN T. MISH: Yeah. So, make sure you have a copy of the signed last filed a return. I think it’s important in today’s day and age of cloud storage and how cheap storage is. You really should just have access to that so that you can pull it up anytime you want. I did a mortgage recently, and I must have got asked for tax returns like seven times. And each time I was like whatever here you go, it took me 3 minutes to give them a copy of the tax return.
KATRINA MADEWELL: Well it’s about that time.
DARRIN T. MISH: The train wreck of the week. This is the segment of the show where we talk about somebody who came in with a significant tax problem. And after we got involved they ended up smelling like a rose.
The husband owed about $257,000 in tax debt, and he and his wife were living in Florida. He had to move to a state out west for work. We decided to file an offer in compromise, and we claimed the expense for both households, the one in Florida and the one out west. The reason we did that is that, in my opinion, that second household and all those intended expenses were necessary for the production of income. He had this good job out west, and if he wasn’t living there, he couldn’t work there. It wasn’t an online kind of job it was a kind of job where he has to go someplace and do things…
KATRINA MADEWELL: Physically show up.
DARRIN T. MISH: And so when we did that, the numbers worked out really good. We offered some very low amount of money and because we had all these extra expenses. It was completely legit. Well, what happened is in the middle of my offer in compromise the couple decides we are just moving out west. So, they sell their house, which was owned by the wife so it wasn’t a problem, sell the house and they both move out west.
Where’s the problem? The problem is now we don’t have two sets of household expenses. We have one set of household expenses, and so their offer did go up tremendously. We ended up settling for $49,817.00 which is still a really good deal on $257,000. We saved them over $200,000.
KATRINA MADEWELL: What would that number have looked like?
DARRIN T. MISH: It might have been under $5000, but this train wreck really illustrates that you should keep your lawyer in the loop. You should not be, and this goes for anyone…
KATRINA MADEWELL: Any profession as well.
DARRIN T. MISH: Yeah, you should keep him in the loop because they retained me and hired me for my expertise. If they had asked that simple question, hey what happens if we move, if the wife leaves Florida and moves to Colorado what happens then? I would have told him, well, I’m not going to say don’t do it but your offer’s likely to increase significantly.
KATRINA MADEWELL: This goes for a mortgage, it goes for real estate, it goes for everything. If you are hiring a pro to help you, a true pro, you shouldn’t make a move, you shouldn’t sneeze without asking.
DARRIN T. MISH: So in this particular case the wife is not real happy with the outcome. But $50,000 or $49,817.00 on $257,794.58 is still a very good deal. I had to explain that to her, she is not over the moon thrilled about it, but it’s still a good deal, and I really do think that it’s the best thing for them to do.
KATRINA MADEWELL: She could have asked you if selling the house would have impacted the offer.
DARRIN T. MISH: Yeah, she very well could have. But I’m happy for both of them. It is going to get this monkey off their back, and they are going to be able to move forward.
KATRINA MADEWELL: And that is what you do. You can get Darrin at 888-get-mish.
DARRIN T. MISH: 888-438-6474 getirshelp.com.
KATRINA MADEWELL: That’s all the help we’ve got this week we’re out.