Differences Between Tax Fraud and Tax Negligence

Share on Facebook0Share on LinkedIn0Pin on Pinterest0Tweet about this on TwitterShare on Google+0

DARRIN T. MISH: Alrighty, this is Darrin T. Mish, your IRS Solution Attorney. Katrina, today we’re going to talk about something that comes up in my practice just about every single day. And that is we’re going to talk about the differences between tax fraud versus just good ol’ simple negligence. Almost every day. Not every day, but several times a week. People come in to my office and we do initial consultations about their tax problems and the biggest concern by far is, am I going to go to jail, Darrin? I can’t sleep at night. I’m afraid the IRS is going to come in to my home or business and take all my stuff. But I don’t want to go to jail, I don’t look good in stripes, that kind of thing. I have been accused of having a sick sense of humor in the past. I don’t think that would work out real well. I don’t think having a camera in the consultation room would work out real well either. We have none of those things, folks.  Click here to watch or read more information on IRS Back Taxes.


DARRIN T. MISH: We’re making light of it, but I have a lot of sympathy for people who go sometimes years, sometimes decades where this is really the biggest problem in their life and they really are having trouble every night going to sleep because they just know that the IRS is going to be knocking on the door. Short story about that…

KATRINA MADEWELL: I can imagine how good that would feel, Darrin, to have this lingering for years and years and years and then finally be like, oh my gosh, I can sleep in peace.

DARRIN T. MISH: Just recently I was hired by a heavy metal rock star. Kind of a second tier heavy metal band. Really, really cool guy. He called like on a Wednesday and we couldn’t get him in to an initial consultation until Monday. When I talked to him on that Monday, he said, you know Darrin, just last night I heard a noise outside my window and I was totally convinced it was the IRS and they were coming in to get me right before I could talk to you, man, so I’m so glad I could talk to you.

KATRINA MADEWELL: He’s thinking they’re outside, dressed in black, ready to jump in.

DARRIN T. MISH: You know the black Suburban’s are coming.

KATRINA MADEWELL: You can see that picture in your head, when you say that I can totally see it.

DARRIN T. MISH: We’re not laughing at him. We’re certainly…

KATRINA MADEWELL: We’re laughing at the situation.

DARRIN T. MISH: We’re laughing at how our imaginations can really get the best of us sometimes. I was able to very quickly dispel that notion out of his head and say, no no no, we have a very straight forward path.

Click The Image Above (Or Here) To Start Podcast!

Click here to listen to other IRS Back Tax Help episodes.

KATRINA MADEWELL: For you, it’s not a scary thing, Darrin, because you do it every day. For most people, I can see why they would think that.

DARRIN T. MISH: Yeah, and I’m really working on this. A lot of times people make a passing comment, sometimes they act like they’re joking, about going to jail and stuff when we first start talking. Sometimes I just gloss right over it because it’s so silly and ridiculous in most cases that it’s not even worthy of discussion, but I’ve really been trying to focus on this and circle back to that almost immediately and say, no, no, let’s just get this out of the way. You’re not going to jail, at least no one so far has ever had any possibility of going to jail. So we try to dispel that notion. It causes so much anxiety, it hurts the relationships, it hurts their quality of life. And that’s really a bummer. It’s not something you should let IRS problems do to you.

KATRINA MADEWELL: I think, I mean I would imagine most of your people, when you come in and meet with them, they obviously didn’t choose, but somehow something happened and they ended up in this situation. Then it’s like a snowball, it gets out of control and they don’t know how to deal with it.

DARRIN T. MISH: You know, I love to pick on realtors. Because you happen to be one. The stereotypical sort of client would be a realtor who lives closing to closing and just hasn’t mastered the concept yet that they’re supposed to be taking some money out of every closing check and sending it in to the government as an estimated tax payment. Especially when you’re first starting out, maybe you’re doing 30 and 40 thousand dollars a year in closings. And maybe you’re living on your own.

KATRINA MADEWELL: I think the average agent closes like five deals a year.

DARRIN T. MISH: Yeah, ok, so what’s the average deal? Depends on where they are.

KATRINA MADEWELL: Our average sales price in the bay area hovers around 225.

DARRIN T. MISH: Yeah, so your commission’s five to ten thousand maybe?

KATRINA MADEWELL: Yeah, it depends. One side usually roughly 3%.

DARRIN T. MISH: So you’re doing five closings a year, that doesn’t leave a lot to live on. Nobody really explains that concept of making estimated tax payments. Accountants tend to say, well, ok, you owed $8,000 last year and what we want you to do is make a $2,000 quarterly payment and here’s the due dates and here’s the coupons. Well, we’ve talked about this before on this show. That’s really sort of a silly concept for most people. Because typical American human beings at least don’t budget on a quarterly basis, I mean who does that? We budget, if we’re lucky, we budget on a weekly basis, but we can kind of get by on a monthly basis, we can understand that concept. If we broke that $2,000 quarterly down in to a monthly number, it’s like $650, $675, something like that. That is something that people can kind of get behind. But for realtors, or people that get paid big chunks at a time, I would typically recommend you take that 20-30% out and just go ahead and send that money to the government. What people do is they borrow the tax money. I think they have good intentions.

KATRINA MADEWELL: Yeah, that’s a good point.

DARRIN T. MISH: They borrow it for something that comes up. My classic example is baby needs diapers, right? But diapers aren’t that expensive. That’s what happens is something comes up in life and they borrow the money, they intend to pay it back, but life happens. They didn’t budget, they don’t understand and it just gets behind them. When I was doing the research for today’s show, I knew that the percentage of tax crime convictions was really very low. I did not know it was this low. The stat is, only .0022% of all tax payers are actually convicted of a tax crime in any given year. So, think about this…

KATRINA MADEWELL: That’s not even a tenth of a percent.

DARRIN T. MISH: Yeah, we’ve got my buddy the rock star who’s staying up at night thinking they’re outside the window, and his odds are .0022 that he might be convicted. Now, actually, we’ve talked about this in the past too, in that our system is based upon voluntary compliance, which doesn’t mean that taxes are voluntary, it means we voluntarily file tax returns and we basically self-assess. We calculate the tax, we tell the IRS how much we owe and then they try to collect the money. In his case, since he has a little more notoriety than average, he might actually have a potential of being prosecuted, if, again this is really important, we haven’t talked about this, if the government was able to prove that his failure to file tax returns and failure to pay was a willful, intentional event. For the most part, the IRS understands that people don’t go around willfully not filing their tax returns.

KATRINA MADEWELL: In that lifestyle, I can’t imagine it was willful anyway, because he probably spends a lot of time on the road, right? His lifestyle’s totally different than someone that shows up in a 9-5 job every day.

DARRIN T. MISH: I’m going to have him listen to this show, I think he’ll appreciate that he was the big example in the opening segment. But, yeah, he was telling me that they at times don’t even have a tour bus, they have a tour R.V. I forget how many guys, four guys or five guys all traveling around in a motor home, breaking down and things like that. Absolutely, you’re right, Katrina. It wasn’t a matter that he willfully didn’t file.

KATRINA MADEWELL: Right, and you look at a period of twelve months, how much is he home? I’m going to guess 2, 3 months at best, in a 12 month period.

DARRIN T. MISH: Exactly. And he’s not handling the money either. It’s someone else who is collecting the money from the different gigs and venues, and then that’s getting dispensed out to the guys in the band. They have no bookkeeping system or account system. They really have nothing.

KATRINA MADEWELL: It can happen so easily. I told you my example. I was in my twenties and I had a bookkeeper that set everything up, an accountant, a CPA gave us bad tax advice. I thought someone else was making the payments. I had no idea that they weren’t until an IRS person showed up at my door. Talk about scary. I wish I knew you then.

DARRIN T. MISH: I’ve told the story many times that I actually started out in this business because I didn’t have one tax problem. I had two tax problems. I had one of each. I had one personal 1040 tax problem because I didn’t get estimated tax payments. Nobody in law school ever tells you how to run a business or anything about taxes unless you took income tax. Then they’re not going to talk about estimated tax payments, they’re going to talk about higher, more lofty principles of income tax. But I also had a payroll tax problem because I hired somebody, because I couldn’t do all the work. I couldn’t answer the phone and do all the pleadings and stuff. Didn’t quite get the whole 941 payroll tax deposit thing. Eventually I figured it out and I realized I was in trouble and that led to me figuring out how to solve my own problem and then realizing there weren’t a whole lot of people out there that could help.

KATRINA MADEWELL: I think everything happens for a reason. And I think God gave you that problem so you could do this.

DARRIN T. MISH: Yeah, I was telling someone yesterday, sort of an interesting fact, but when I was 18 years old, one of my first jobs was I was a customer service rep at a printing company that actually printed tax forms.


DARRIN T. MISH: So for three years, 40 hours a week, I sold w-2’s, w-3’s, and various tax forms. I actually had a little bit of knowledge starting out in the practice of law.

KATRINA MADEWELL: I wonder if that was your sign when you were 18 and you missed it.

DARRIN T. MISH: It could have been, I don’t know. I’m just glad that I didn’t go and become an accountant. Not because I have anything against accountants at all. I love accountants, I have some that work for me. But the way my brain works and the way an accountant’s brain works…

KATRINA MADEWELL: They’re not wired the same way.

DARRIN T. MISH: Entirely separate. Accountants, I’ve said this before, accountants really live in a world of black and white and lawyers live in this awesome shade of gray, all the time.

KATRINA MADEWELL: For sure. You guys get paid to argue for a living, it’s what you do.

DARRIN T. MISH: Yeah, when I was a little kid, my mom used to tell me you’re probably going to go to law school because you’ll argue with a fence post.

KATRINA MADEWELL: That sounds like conversations with my son, Nick. I’m like, do something productive with that mouth. Be an attorney or something since you love to argue.

DARRIN T. MISH: I have a young son who’s doing the same thing. At age 13, he’s already parsing words and saying, well, you didn’t say…

KATRINA MADEWELL: Yeah, isn’t that so how an attorney’s brain thinks?

DARRIN T. MISH: Definitely, some attorneys for sure.

KATRINA MADEWELL: If you can try and take that young energy and turn it in to something productive, it works out.

DARRIN T. MISH: Well, if they can turn it in to studying and motivated and goal-driven so they get good grades and do well, that’s a good thing.


DARRIN T. MISH: Let’s talk about some different things that could constitute tax fraud, as fun as our conversation is, lets provide some value here. One of the things that people do, or potentially be a crime, is intentionally failing to file an income tax return.

KATRINA MADEWELL: How do you intentionally fail to file? What’s the IRS’s definition of that?

DARRIN T. MISH: Well, I’ll give you an example. I have spoken with some people over the years, who I actually don’t even remember. But they say, well, you know I was kind of toiling along, I was making 30 or 40 thousand dollars as a self-employed person, but in this one year, in 2006, I hit the lotto, or I did this or I did that. I made a whole bunch of money and they want to know, it’s been so long now, do I have to file that return? I would suggest that that would be an example where you knew you had a windfall and you just intentionally failed to file. There’s some other people, and we’re going to talk about some of these news stories later on in the show, where it’s pretty clear. In fact, just a little teaser, there’s one where you won’t believe how they found this guy where he certainly intended to commit tax fraud.

KATRINA MADEWELL: So it’s a flat-out avoidance. They’re just like, I’m just not going to do it.

DARRIN T. MISH: In the law, we talk about, indicia of fraud. I try not to use too much lingo on the show, but it’s like indicators of fraud. There’s just things that, acts that could be completely innocent, taken in a vacuum, one by one that would be completely innocent. But when you start stacking those things together, it’s pretty clear that you intended to fail to file a tax return. I would suggest that the longer this period goes on, and the more money you make, then that’s probably a better, clear indicator of tax fraud. I don’t want everybody listening to start freaking out because they haven’t filed a tax return in 10 or 20 or 30 years. That’s not necessarily a problem.

KATRINA MADEWELL: Where does somebody start? That’s a great example and a good point to bring up. If someone hasn’t filed. Let’s say it’s been like it just something happened one or two years and it’s turned in to this pattern. I’ve seen it myself in my business where they just haven’t filed taxes in 10, 20 years. Where does somebody like that start?

DARRIN T. MISH: My personal record is a gentleman who had not filed since 1960. He came in to the office, and I’m not going to disclose my exact age but…

KATRINA MADEWELL: And he’s not that old.

DARRIN T. MISH: I was born after 1960, significantly after. He was pretty freaked out. He was pretty much convinced that he was going to be going to prison. Remember, the statute of limitations for the crime of failure to file a tax return is only six years and the IRS has a semi-official policy that says if you file your last six years tax returns before they began a criminal investigation, they’re not going to prosecute you. So ding ding ding, most people are winners in that scenario. Right? We just saw, or we just heard that only .0022% of taxpayers are prosecuted and convicted. And by the way, most taxpayers who are prosecuted are in fact convicted, so that’s a pretty good number.

KATRINA MADEWELL: But if you don’t and they start the investigation, that’s where your trouble starts?

DARRIN T. MISH: Yeah, you’re going to be in some pretty significant trouble. I would suggest that if you’re a high-level media personality, movie start, rock start, judge…

KATRINA MADEWELL: Somebody they can make an example of.

DARRIN T. MISH: Judge, lawyer, politician, doctor. I can tell you in the Tampa Bay area that lawyers get visits from revenue officers with very small liabilities. There’s some kind of code on our files that we just get special love from the internal revenue service and doctors do too. I think it’s because if you have to prosecute a doctor or a lawyer, it’s probably going to end up in the newspaper. They don’t typically, from my understanding, they don’t typically prosecute people who don’t get any notoriety. If they’re going to prosecute my lawn guy because he doesn’t pay the tax on all the money he makes from me, it’s probably not going to end up in the newspaper. It’s just not that interesting. But if judge so-and-so gets prosecuted, it’s going to be interesting and it’s going to make it in at least the local newspaper and then everybody’s going to think about it and say, oh , maybe I shouldn’t be fibbing on my taxes.

KATRINA MADEWELL: That’s a good point. I love to hear this. When I run in to that again, I’m going to be like you need to connect with Darrin and take care of this now. Don’t wait for them to show up because that’s when it gets ugly.

DARRIN T. MISH: In some respects it can be a race. It can be a race to get your stuff done. Especially if you’ve gone 1960 to now. 55 years.

KATRINA MADEWELL: But they’re wiping out everything, right? Except for the last six years?

DARRIN T. MISH: Yeah, pretty much. If you haven’t filed for the past six years. So let’s say year seven, so that would be 2008 now. They’re probably not going to ask you for that return, so that’s kind of a good thing. I don’t think anybody listening should take that as advice not to file and wait six years. So let’s talk about the next one. Willful, and I forget about this, well, not forget but I don’t talk about this very often, and that’s willfully failing to pay your taxes due. This is a little bit finer point. So when does your failure to pay become a willful event? Well, I’ve not seen a lot of these cases. I’ve not even seen this threatened very often, but I have seen a couple court cases where, in fact, it was a lawyer as I think of this. A lawyer who maybe owed $100,000 and then shifted around $300 – $500 thousand dollar’s worth of cash and assets. Put them in other people’s names, buried in the back yard and that kind of thing. At some point, it’s going to be willful failure to pay. I don’t think most regular people who owe half a million dollars or something and make $50,000 a year, they’re not going to prosecuted for willful failure to pay. It’s not a willful failure. Any court that looks at it is going to see, ok, well, you did not have the ability to full pay. I even think that most people who, let’s say you owed 100,000 dollars and you had 200,000 dollars equity in your home, but there was a federal tax lien filed in the county that you live in. I don’t think that’s going to be a willful failure to pay either, because the IRS …as much fun as they are to poke fun at and to think that they’re the devil…

KATRINA MADEWELL: My exact word I was thinking.

DARRIN T. MISH: For the most part they’re not going to force people to move or sell their primary residence to full pay a tax debt. For the most part. There are people that poke the tiger just a little bit too much and they get a little extra attention and sometimes the IRS might come down hard on those people. But for the most part, they’re not going to demanding that you refi or sell your primary residence to pay a big tax bill. There’s exceptions to everything.

KATRINA MADEWELL: If that’s reported on your credit, you’re not going to refinance anyway.

DARRIN T. MISH: Well, that’s the funny thing. I just had a case this week where one of the demands that the IRS…they’re actually threatening to seize this guy’s primary residence, but they want proof that he has attempted to refinance the house.

KATRINA MADEWELL: If he has a tax lien showing on his credit, it’s not going to happen.

DARRIN T. MISH: I won’t tell them what two institutions to go to, but I said go to this big bank, and go to that big bank.

KATRINA MADEWELL: He can go to any bank, Darrin.

DARRIN T. MISH: Yeah, I just like the big banks just because you may as well waste their time.

KATRINA MADEWELL: With the day and age of change and we’re experiencing more change even next month. It’s not going to happen.

DARRIN T. MISH: Yeah, so, he’s going to go ahead and get two loan denials. We’re going to send them over to the IRS and he’ll be all good. He’ll be fine. A third thing that can cosntitute tax fraud is intentionally failing to report all of your income. Now this is far, far, more common than any of the other two things we’ve talked about so far. Let’s talk about who intentionally fails to report all of their income. Well, gee, just about every waitress, every hairdresser, and every person who deals in cash. I love waitresses and hairdressers.

KATRINA MADEWELL: I’m just saying, ouch. So this is not the person that got maybe 10 or 20 1099’s and forgot one or two?

DARRIN T. MISH: No, that’s going to be negligence for the most part. Unless they’re only the two big ones, then that might be in an indicator of fraud. But for the most part, even if you forgot the two big ones, the IRS is probably just going to slap what’s called a negligence penalty on you. Charge you 25% penalty. Pretty steep. Because frankly, they just don’t have the time, money, and resources to prosecute everyone who “forgot” to file all of their 1099’s. That’s very common. But it’s the people who deal in cash that do intentionally fail to report all of their income. But again, .0022%.

KATRINA MADEWELL: How the heck do you chase cash anyway? You can’t.

DARRIN T. MISH: That’s a very interesting question.

KATRINA MADEWELL: They call it currency for a reason, it moves fast.

DARRIN T. MISH: There are audit guides for lots of different professions that the IRS has. The cool thing is, they’re public records. You paid for them. So you can get these audit guides. I often give away the attorney’s audit guide to other attorneys.

KATRINA MADEWELL: We should talk about that. We should do a show, an audit guide for different professions.

DARRIN T. MISH: Yeah, it goes all through it about what to look for. Lots of attorneys get paid in cash. Think criminal defense attorneys get paid in cash a lot.

KATRINA MADEWELL: I didn’t even know that. Now I do.

DARRIN T. MISH: I may have gotten paid in cash a lot in my former life as a criminal defense attorney.

KATRINA MADEWELL: Think about your clientele, I can see why they want to get paid in cash, I just didn’t think they did.

DARRIN T. MISH: Of course, I reported every single penny of that cash. Most certainly.


DARRIN T. MISH: Think about drug dealers and people like that. They don’t really have bank accounts and they’re going to pay you in fives and tens.

KATRINA MADEWELL: Well, their business activity is illegal anyway, so why would they file a return?

DARRIN T. MISH: Big disclaimer, there’s a law against being paid with money that you know is from illegal sources. For criminal defense attorneys, that’s always something that’s kind of worrisome. Intentionally failing to report all of your income is actually tax fraud and it is something you’re going to need to worry about. One of the things they can do is they can pretty easily summons your bank records and just look at them and do an analysis. I have a situation right now where we’re representing a business. Won’t even say what kind of business it is. It’s a business that you would expect a lot of cash to run through and absolutely no cash was deposited in to the bank. It was all credit cards.

KATRINA MADEWELL: But you can track all that.

DARRIN T. MISH: So an audit was instituted because there was zero cash. The return matched exactly the 1099 for the credit cards. So those are some of the ways that they can find you.

KATRINA MADEWELL: So what happens if you get to that place and it is intentionally failing to report all of your income and they have started this investigation and they’re summoning’s your stuff. Where do those cases usually land?

DARRIN T. MISH: What happens is they can be assigned to the criminal investigation division, or the CID, of the IRS. This is kind of a little cool tip, and that is typically if an IRS person comes to your door, they’re going to show you kind of like a plastic badge kind of thing and they’ve got no gun on their hip. That’s a revenue officer. That’s someone that’s doing administrative work, it’s a civil situation at that point in time. But if two guys show up with gold badges and guns, you need to not talk to them. You need to say, oh, nice to see you. I have an attorney, I have no wish to make any further comment because at that point they’ve already been conducting an investigation on you, usually for quite some time and you’re going to be criminally charged. Do yourself a favor, you cannot talk your way out of it.


DARRIN T. MISH: You cannot talk your way out of this. When I was doing criminal defense many years ago, I can tell you that a very high percentage of my cases I could have mounted a very serious defense, but for the statements made to the police by the defendant when he was trying to talk his way out of the situation. Not talking to law enforcement if you have a fear that you’re going to be criminally charged is really good advice. Even police officers would agree with that. Reluctantly.

KATRINA MADEWELL: Good visual observation too. Someone showing up with a badge versus someone that looks like men in black.

DARRIN T. MISH: Yeah, if they have gold badges, you’re in big trouble, man. Let’s talk about another one. Making fraudulent or false claims is obviously tax fraud. False. Fraud. So what does that mean? I would say an understatement of income could be a fraudulent or false claim. So you make two million dollars and you claim 20,000? That’s the kind of thing we’re talking about here. But even circling back to the guy that I said didn’t report all of the cash. He’s not really a candidate for being criminally charged.

KATRINA MADEWELL: Because he didn’t deposit any cash, right?

DARRIN T. MISH: Well, I think the government could theoretically make a case that it was cash fraud, but I don’t think it’s worth their time and effort. He’s probably going to end up with a negligence penalty. Not even with a civil fraud penalty. There’s something that can happen in an audit where the IRS thinks that it rises to the level of fraud, but they choose not to criminally prosecute it. In those cases, they call it civil fraud and they assess a 75% penalty. I have a funny story about this.

KATRINA MADEWELL: I guess that’s better than going to jail.

DARRIN T. MISH: Yeah, it is. I have a funny story about this. I’m working on an audit for a client, and this is many years ago, and we’re going through checks and the auditor stops and looks me dead in the eye and she says, do you realize that your client has altered these checks?


DARRIN T. MISH: I had the same reaction. I’m like, no, I have absolutely no understanding that that’s what’s happening. That’s when I learned that on the bottom of a cancelled check, there’s a bunch of numbers. The numbers actually coincide with the number on the check. What he had done is, he had whited out the cancelled checks, wrote in different numbers, but he didn’t know about the numbers along the bottom. It was a surprise to me and ultimately, I’m not even sure he was charged with civil fraud, I think he was.

KATRINA MADEWELL: Seriously, if you’re going to hire an attorney to help you do something, don’t lie to the person that’s in your court.

DARRIN T. MISH: Yeah, for sure.

KATRINA MADEWELL: Really, how can you help someone that lies to you? You can’t. You don’t have the whole picture.

DARRIN T. MISH: We would actually have done better if he had not done that than after he did it and got caught. I like that story because I learned something in that story. I learned that those numbers along the bottom of the check mean something. I always thought it was just kind of gobbledygook.

KATRINA MADEWELL: No, that I knew. Routing, account, check.

DARRIN T. MISH: The last kind of fraud that’s pretty common is preparing and filing a false return. A lot of these things are sort of closely related, but a false return would be any return that doesn’t accurately portray what the situation is. I think it has to be very false.

KATRINA MADEWELL: Like, what’s an example of that?


KATRINA MADEWELL: Prepares and files a false return. Like making something up? Adding numbers?

DARRIN T. MISH: Well, we have a news story that we’re going to talk about a little bit later where they basically wrote off all kinds of personal, I mean really big personal things. I think that’s preparing and filing a false return. Where, these aren’t judgement calls, these are clearly examples of things you cannot write off as a business budget. Like golf clubs. Maybe if you’re Tiger Woods, golf clubs would be a tax deduction.

KATRINA MADEWELL: Well, it depends, isn’t it questionable? Here my attorney brain is on. If you network and you do stuff on the golf course and can clearly prove that’s where your revenue comes from, perhaps? Right?

DARRIN T. MISH: I think that’s a very long stretch. You know, Tiger Woods, it would be a tool of his trade. It would be like a mechanic with wrenches, but I don’t play golf, but I actually think a golf course is a poor example of a perfectly good rifle range.

KATRINA MADEWELL: Well, I’m just thinking about the whole debate I had with my accountant about having my CWP and the weapon being a tool and a tax deduction.

DARRIN T. MISH: Yeah, I don’t think…

KATRINA MADEWELL: There was just robberies and everything else like yesterday.

DARRIN T. MISH: That’s interesting. I have not seen anybody…

KATRINA MADEWELL: It’s not like I’m buying ten. I bought one.

DARRIN T. MISH: I don’t know. I haven’t seen anybody try to write off their carry firearm.

KATRINA MADEWELL: The funny part is my husband, myself, and the tax lady and she’s like, here’s Katrina, here’s the rest of the world. And she’s going the IRS doesn’t work like this. And I’m like, well, I could argue that.

DARRIN T. MISH: Well, we’re kind of kidding around here, but you don’t want to do things that are so aggressive that they pop an audit on you. Because an audit is going to be a painful, expensive experience for everyone. Even if you win and you get a no change audit and even if your represent yourself, there’s still going to be time and anxiety wrapped up in trying to get the receipt for the little carry gun so you can prove that it was a necessary and ordinary business expense.

KATRINA MADEWELL: Yes, my accountant use that exact word. Necessary and ordinary business expense.

DARRIN T. MISH: I think it’s time for a break. When we come back, let’s talk about that really crazy story. The guy who is being charged with tax fraud and how the police found out.

KATRINA MADEWELL: We’ll pick right back where we left off. We’ll be back in a minute.


(Commercial break)


DARRIN T. MISH: I’m the IRS solution attorney, with my cohost, Katrina Madewell.

KATRINA MADEWELL: That’s me. Welcome back to the show. We had a fantastic first part of the show. If you missed it, catch it in its entirety on a podcast under IRS Solution Attorney Show. We’re talking all about fraud versus negligence and shared some really good stories and examples of what each of those mean.

DARRIN T. MISH: In doing the research for this show, I came across this really great example that’s currently in the news. It’s a story out of Pittsburgh, Pennsylvania. The way I remember the story is, there was a gentleman, actually there were some law enforcement agents that were flying in and out of Pittsburgh Airport on a regular basis and they noticed on the flight plan over the course of about a year, that there was just an unbelievably enormous house. Probably better characterized as a compound. As I recall, the square footage on the house was about 35,000 and it was the biggest single residence in the whole state of Pennsylvania. As they were flying in and out of this house, there might have been a little bit of envy going on with these cops. I’ve seen a picture of this particular house and it’s like a castle. They were kind of wondering, who lives in the house and what’s the deal and how could this person possibly afford it and what’s the story? Turns out that there was a local business man that lived in the house and he had a straw person, he had an employee who was basically hiding some income and writing off all of this income and paying for this big mansion for this business owner to live in. I would suggest he’s in pretty hot water. He’s probably going to do a couple years in prison.

KATRINA MADEWELL: This says the criminal complaint alleges construction of the home, upkeep, the swimming the pool, a Rolls Royce, other vehicles, chefs, butlers, all put on the books as a business expense.

DARRIN T. MISH: So your question was, what’s a false return? That one. That one’s a false return.

KATRINA MADEWELL: What was his business? Do you know what he did for a living?

DARRIN T. MISH: I think he was in construction. Which kind of makes sense. I’m not sure, I don’t recall exactly. That would be an example. Someone who is clearly committing fraudulent acts. There’s an old saying that most people probably heard and that is pigs get fat and hogs get slaughtered. This guy was very hog like in his behavior. There’s lots of people that might fudge, might forget to actually report some income or might take an excess deduction. They might actually claim their firearm as a business expense, as a realtor. But you know, things like that, that’s pig-like activity. That’s not hog-like activity.

KATRINA MADEWELL: That’s debatable. Oh, pig-like. Ok.

DARRIN T. MISH: Yeah, pig-like.

KATRINA MADEWELL: Wait a minute, I was going to say. One, little one, not a freaking 50 cal. Come on.

DARRIN T. MISH: But is it debatable that this guy writes off the Rolls Royce and the butler.

KATRINA MADEWELL: Yeah, right. Well, according to the attorney, he says it’s a tax dispute, nothing more.

DARRIN T. MISH: Well, any good attorney is going to make a statement like that. I would venture to guess that that attorney right now is probably having discussions with the U.S. Attorney and trying to cut a sweetheart deal and trying not to have all of his client’s assets forfeited.

KATRINA MADEWELL: I was just looking at this article that you gave. It was talking about different…it says, should be told where the ledger is on the books, where the checks should go, what category they should go in. This is basically what the defense person is saying. All too often, they were going in to write off categories, business expense categories, when in fact they were personal expenses for his superiors.

DARRIN T. MISH: Yeah, there’s probably a conspiracy claim for that underling. And that person has probably already cut a deal to avoid any kind of prison time or anything like that in exchange for their testimony. So, the defendant in that case, the primary defendant we’re talking about. The guy that wrote off the butler and the Rolls Royce, I would suggest he’s probably in pretty hot water. I think the investigation in that case has been going on forever. A year. The federal government doesn’t really prosecute like the state government. The state government tends to charge you first and then sort of fix their case as they go. The federal government doesn’t do that. They make their case, rock solid, and then they let you know.

KATRINA MADEWELL: Which would make sense.

DARRIN T. MISH: So, it’s a little bit different. I think there’s different, clearly different, resource levels available at the federal level, other than at the state level.

KATRINA MADEWELL: So how does the IRS actually distinguish an error as a results of negligence versus willful evasion tax law?

DARRIN T. MISH: One of those would be my guy that falsified the checks. That’s pretty clearly falsification of documents, that’s going to be an indicator of fraud. Versus I can’t find the checks, or I don’t know where they are, or there was a flood, fire, hurricane, I can’t find them. Typically those kind of financial documents can be summons. If your cancelled checks differ from the checks they got from the bank that were summons, you’re probably going to have a problem of falsification of documents.

KATRINA MADEWELL: That’s just crazy. Like, who does that?

DARRIN T. MISH: Circling back to our guy with the Rolls Royce…

KATRINA MADEWELL: Chefs and the butlers.

DARRIN T. MISH: That was pretty clearly an overstatement of deductions and exemptions. He was obviously very hog-like in his behavior in taking deductions that he clearly, or should have known, were not allowable deductions. So a third kind of category would be concealment or transfer of income.

KATRINA MADEWELL: So this is your example you used earlier, where the guy might have made two million dollars and spread it all out between different peoples. Put the money in different accounts. Is that the same thing?

DARRIN T. MISH: They got Al Capone on tax evasion, not racketeering and being a gangster. That’s how they get a lot of drug dealers to this day is technically if you deal in illegal substances you’re supposed to file a tax return, claim all the income, put your deductions on there.

KATRINA MADEWELL: How do you file that? Illegal drug dealer.

DARRIN T. MISH: I don’t really know. I think there is a way. I think I’ve seen…I’ve done a little bit of research on this and there is a way.

KATRINA MADEWELL: At the bottom where they sign their name, it says consultant.

DARRIN T. MISH: I guess, it could be a recreation consultant, right?

KATRINA MADEWELL: Oh, my gosh. This is getting fun.

DARRIN T. MISH: So, concealment of transfers of income to avoid the payment of tax, pretty clearly going to be indicators of fraud. These things strung together in particular are going to be bad, bad news. Some of these things taken all by themselves might just be negligence, might be civil fraud. If you start stringing this stuff together, you’re going to have a problem. Another one, this is favorite, and this makes sense and people are really going to get this. Two sets of books.

KATRINA MADEWELL: Do people really do that?

DARRIN T. MISH: Bad. Yes. Even regular businesses will have two sets of books.

KATRINA MADEWELL: I hate doing that, so one set enough is a chore, let alone two.

DARRIN T. MISH: You might have a pizza parlor that has a cash register where sometimes the cash doesn’t make it in to the register and then there’s a paper ledger so they can actually keep track of the cash and the credit cards. So, two sets of ledgers are bad. If those are just slightly apart, that’s not going to be a huge problem. Like some small transactions are inadvertently left off, I doubt that would be a huge problem. But two sets of clearly different books are going to be a problem. Another one would be the falsifying of personal expenses as business expenses. Now, we’ve kind of beat this like a dead horse today. The golf clubs…

KATRINA MADEWELL: Is there a list somewhere? There has to be a list on the IRS’s site that talks about what’s ordinary and necessary? Or a list of allowable deductions? Because really, this is not something everybody knows.

DARRIN T. MISH: There’s case law on what are ordinary, reasonable, necessary business expenses.

KATRINA MADEWELL: is there a general list? Or no? It just has to relate to your business.

DARRIN T. MISH: Maybe I’ll put a list together of just clearly crazy deductions that you should not take. I’ll tell you one that doesn’t, it doesn’t necessarily make that much sense. I’ve said this before, I’m not a real big fan of the home office deduction. It’s not because it’s not a legitimate deduction, it’s because it’s so often challenged by the IRS.

KATRINA MADEWELL: Right, if it’s going to trigger an audit and question every other little deduction you have, why would you even take it.

DARRIN T. MISH: They won’t allow that home office if there’s a bed or a television in that office, they’re not going to allow it. They’re going to say, nope, that’s your guest bedroom and you’re just trying to write-off that little bit of square footage off your tax return.

KATRINA MADEWELL: So playing devil’s advocate, you know I have to ask…you know you love these conversations with me…I don’t take a home office deduction either. I probably should because I do have a home office, but I don’t. Let’s say for example you talked about the t.v. or the bed. So there’s obviously no bed there, but a t.v., like somebody like me keeps an eye on the markets and what it’s doing all day because it directly ties in with interest rates.

DARRIN T. MISH: You’re going to end up making that argument to the auditor probably.

KATRINA MADEWELL: I’m just curious. Even in our office, the one we have now don’t. But most of our offices most of the time, we would keep the news ticker on and pay for cable. Cable was a legitimate expense because we would watch CNBC all day.

DARRIN T. MISH: I’ve told this story before. I fought a home office deduction one time. Actually, my client had two bedrooms in his house that he was using for his business. So we dutifully brought pictures. Contemporaneous photos of the offices to the audit. And it really was being used for business and there’s bookshelves of business books and papers strewn all over the place. The auditor looks at me and says, sure is messy, I don’t think I’m going to allow it because it’s messy. And I just laughed and said well, you ought to come over to my office.

KATRINA MADEWELL: I don’t think I could write anything off if that was the case.

DARRIN T. MISH: Exactly. Maybe if you had a television and you had a good answer. I would suggest if you’re going to take the home office deduction, that you take photos and you have very clear records and you might not want to efile that return. Here’s a little trick to audit proof your returns and that’s if you have something that might be questioned like that, you go ahead and attach all of your documentation proving it. Then you do a cover letter and you send in a paper return. What you’re going to do is it’s going to have to be manually processed by a human being, as opposed to a computer, and as they get that thought, oh, maybe this is something good for exam. They’re going to go, darn, look, there’s all the documentation proving this kind of weird deduction. So that’s a tip people can use.

KATRINA MADEWELL: So it’s better to actually explain that in advance and physically file it like that versus…

DARRIN T. MISH: Absolutely.

KATRINA MADEWELL: …wait and see?

DARRIN T. MISH: Absolutely. Because remember, we’ve talked about the DIF score in the past. The DIF score where every line on the return has a score associated with it and if your return goes too far out of the range on any particular item on the return, you’re going to at least be considered for an audit. So for some of these things, there are weird circumstances that can come up in people’s lives. You know, you have a legit deduction, but it kind of trips the DIF score. You don’t want to trip an audit for no reason if you can help it. Another indicator of fraud, this is kind of obvious, a false social security number. Ok, well, that’s going to be fraud.

KATRINA MADEWELL: Explain this to me, people like me don’t do this so I don’t always get the story. Are you saying, like I’ve heard the stories about using dead people’s social security numbers. So that’s literally what they would do, say they’re this person working under that social?

DARRIN T. MISH: Katrina, wasn’t it two weeks ago, we did an entire show on I.D. theft?

KATRINA MADEWELL: Yeah, I know, but I’m not thinking about using someone else’s social.

DARRIN T. MISH: It happens a lot with illegal aliens where they want to file a return and get a refund but they don’t have a social security number so they’ll just borrow someone’s. Sometimes legitimately they have the tax payer’s permission and they’ll file a second, third, fourth, fifth tax return. Not usually a good idea. No tax return after the first one is going to be a least seamlessly processed. It’s going to be kicked out.

KATRINA MADEWELL: Maybe they’re related to the same thing, but they look different. Someone filing a return trying to swoop someone else’s refund, which is a lot of what that show was about.

DARRIN T. MISH: Absolutely, the guy with the chrome car, he was kind of like the guy with the big house. The guy with the chrome car in Tampa got popped for I.D. theft. Tax fraud. Because he couldn’t help it. He was making so much money, he ended up buying a big fancy car and he chromed it. Tampa vice detectives noticed this guy because who drives a chrome car in the ghetto? They eventually figure out…they pull him over for some pretext stuff, and they find like an entire console full of social security cards and refund checks. I’m pretty sure he’s still in prison. I think the car probably got seized too.

KATRINA MADEWELL: That, I just can’t even fathom that.

DARRIN T. MISH: I kind of wish I got to see the chrome car. That must have been spectacular.

KATRINA MADEWELL: You probably can, just google it.

DARRIN T. MISH: Probably. Too bad we’re not on t.v. here. We’re talking about radio, so we’ll just have to use our imagination and imagine how shiny that was. Until it got rained on. Another one would be claiming an exemption for a non-existent dependent, such as a child. This was really common in the past.

KATRINA MADEWELL: So this is like your fake child, and making stuff up.

DARRIN T. MISH: My kids, who are over ten years old each so this has been going on a long time. You can’t leave a hospital now without that kid getting a social security number. The reason is, probably in the 80’s and before, people used to claim their pets. They used to write fake names down and claim the kids. And a kid is a pretty good tax write off. It comes nowhere near paying for the kid.

KATRINA MADEWELL: I know, right, it’s not even a wash.

DARRIN T. MISH: It’s not even close. If you could invent kids to just put on there, that’d be a pretty good thing. Well, not necessarily a good thing. I mean, there are some people that think that would be a good way to reduce their tax liability.

KATRINA MADEWELL: This can get crazy too. If you have split parents. The way I understand it, if you have split parents and it’s not really clearly defined who is supposed to claim the kid and they’re both try to claim it, or maybe the one thinks they’re entitled to claim it or the kid lives with the other parent the whole year, or most of the year. But they pretty much go off of who files first, right?

DARRIN T. MISH: Well, yeah, and the IRS goes with basically the race theory. So whoever races to get the tax return done first, gets the deductions. Now under state law, the family law court order would dictate who got to claim the kid. But the IRS doesn’t necessarily look at state law with any authority and so their…

KATRINA MADEWELL: So two people are filing, they’re just going to reject the one that filed second and say no, you can’t claim that dependent. That social has already been claimed.

DARRIN T. MISH: Right, I get those calls every year. Every single year.

KATRINA MADEWELL: And you tell them what? To go to the state and file a claim? To get it in writing?

DARRIN T. MISH: I’m certainly not a family law attorney, but I believe their only recourse is to go back into family law court, file an action, and have them in contempt of court for not doing what the court ordered and at some point that gets expensive.

KATRINA MADEWELL: The way some of them were written before, they didn’t even acknowledge it. So the divorced decrees we’re seeing now, it seems like they do. At least if they say ok, the mom takes the kid on the odd years and the dad on the even years. That’s at least even.

DARRIN T. MISH: I think it’s something that the family law attorneys have figured out as a contention point and they’re trying to take care of it in the settlement. So those are the things you need to avoid if you don’t want to get charged with criminal tax fraud. Again, it’s .0022 percent change of being caught.

KATRINA MADEWELL: I love that percentage. I’m so happy you put that together. That’s crazy. Looking at this, it’s not even a tenth, it’s not even .01, it’s .0022.

DARRIN T. MISH: I’m going to go ahead and suggest if you build a 35,000 square foot mansion that is the largest in the state of Pennsylvania that’s in the flight path of the Pittsburgh airport, you might want to not go ahead and do those things.

KATRINA MADEWELL: Like you said, pigs get fat, hogs get slaughtered and if you’re running around town with bling and being flashy, you’re going to get some attention.

DARRIN T. MISH: I’ve been pretty casual here today about talking about and laughing and joking about the difference between fraud and negligence. By no means am I suggesting that anybody should understate their income or fail to file or accidentally claim their handgun or anything like that.

KATRINA MADEWELL: I love how I get thrown under the bus.

DARRIN T. MISH: Absolutely. So you should make a good faith effort to file your taxes on time, pay your taxes on time if you can and that will keep you out of trouble for the most part.

KATRINA MADEWELL: So I have to go back to this, just because you brought it up again. So dead realtors and property. Really? Not a tax write off?

DARRIN T. MISH: You’re going to try and write off a dead realtor?

KATRINA MADEWELL: No, I’m talking about not being one of those. Someone to get robbed in empty properties. There’s a lot of them on the market now, you know. Florida still has the highest number of bank owns right now than any other state. Most states have weeded out all of their foreclosures and Florida is still number one in the nation.

DARRIN T. MISH: I’m not going to say it’s not deductible, I’m just going to say I don’t think it’s something I would strongly encourage you to do. I think there’s potentially an opportunity for you to write off the cost of the training that you get. If a realtor wanted to go get some firearm training or self-defense training. Potentially that could be a write off I suppose.

KATRINA MADEWELL: So I have it all backward. I paid cash for that.

DARRIN T. MISH: If you have continuing ed and you could get that certified as continuing ed, for sure.

KATRINA MADEWELL: Our continuing ed is ridiculous, what we have to have.

DARRIN T. MISH: For sure that would be deductible. I see a question that came in here.

KATRINA MADEWELL: Twitter, I believe.

DARRIN T. MISH: It says, does that mean if I owe the IRS, I don’t have to worry about getting thrown in jail. In math, .0022 is a pretty small percentage, why should I worry about prosecution. Pretty good question. I don’t think most people need to worry about prosecution. That is an infinitesimally small number. If your name is Wesley Snipes, you might want to worry about criminal prosecution. If you’re a federal court judge, you might want to worry about it.

KATRINA MADEWELL: That’s an example, again.

DARRIN T. MISH: If you have a 35,000 square foot mansion in the flight path of Pittsburgh airport, might be something you want to consider. Worry about.

KATRINA MADEWELL: Derrick from Facebook, he wanted to know, could he be prosecuted for his business owning back taxes, even if he can’t pay at the moment.

DARRIN T. MISH: We don’t talk about payroll taxes on the show that often. Payroll taxes are certainly a very serious kind of tax problem. The business theoretically holds a large portion of the payroll taxes in trust for the benefit of the government and for the employee so typically you do not see criminal prosecutions for a one time failure, like the first time you get way behind on your payroll taxes you typically wouldn’t see a criminal prosecution. But I have actually had several clients who ran a big payroll tax bills, hundreds of thousands of dollars, close the business, liquidate the assets, give the money to the IRS, but then they do it again. There’s actually a name for that. It’s called pyramiding. Most pyramiders don’t get criminally prosecuted, but on the second, third, fourth go around, the IRS is much less understanding and there’s a higher propensity of seizures and really negative collection actions that occur. Payroll taxes are very important. On the other hand, if you’re talking about business taxes for corporate income tax…

KATRINA MADEWELL: Yeah, it was a pretty broad scaled question. It didn’t really specify.

DARRIN T. MISH: Yeah, that’s the problem with questions in writing. If you’re talking about corporate income tax, not any more of a big deal really. Potentially even less of a big deal than personal income tax. I have a big case right now where there’s a $400,000 corporate income tax, but it’s just as a result of failure to file the s-corp election for four years. This person didn’t get very good advice, they were being treated as a c-corp operation. It’s kind of too complicated to talk about here that much. But it’s basically…

KATRINA MADEWELL: Oh, gosh, that happened to me.

DARRIN T. MISH: But it’s basically an accounting error cause $400,000 in tax. The IRS has actually been a little bit more understanding about that case because of how it was created then in the payroll case where you’re literally borrowing permanently.

KATRINA MADEWELL: It really is bad tax advice, compared to like you said, borrowing Uncle Sam’s money.

DARRIN T. MISH: Permanently. Yeah.

KATRINA MADEWELL: Uncle Sam doesn’t like it when you dip in his pocket and borrow his money.

DARRIN T. MISH: No, not at all. It’s about that time for the IRS Train Wreck of the Week. I’m really excited about this one. Just settled it yesterday and here’s the facts. My client, we’re going to call him Luke. Not his real name, but Luke is a really really good guy. He’s kind of a good ol boy southern guy. He came in to the office and he told me this story. He said, I’m really afraid of being criminally prosecuted. I owe the IRS over a hundred grand. Turned out to be 111,000 dollars. What happened with ol Luke is he used to own a Pest Control company and before the economy took the downturn, he was doing really well. There was lots of houses, lots of businesses, everybody was doing well, so there was lots of money that people had to use discretionary to pay for pest control and whatnot. I think he went through a divorce and then the economy went down. I don’t know what order that happened in.

KATRINA MADEWELL: All at once, as far as he’s concerned, I’m sure.

DARRIN T. MISH: Yes, I hear the stories quite a bit. The economy got me, then I had a tax problem and then I had a divorce and then I turned in to an alcoholic or whatever. Don’t do that. So Luke is telling me this story and he says, now I’m barely making a living, I’m working at the pest control company instead of owning it. I make about $30,000. Darrin, what can you udo for me? Remember, he owned 111,000 dollars and when we went through the offer calculation, remember that’s monthly disposable income times twelve plus his assets, equals the amount of his offer. Well, he had negative monthly disposable income, and he had no assets. So, I just went for it. I went ahead and filed an Offer in Compromise and I offered $50. That’s the lowest I had ever offered ever. I just did it honestly because I wanted to see what would happen.

KATRINA MADEWELL: So the guy has no money, he’s spending all of it. His expenses far out exceed anything coming in.

DARRIN T. MISH: I told Luke, I think they’re probably going to counter and want more than $50. But if we get it done for under a thousand, I mean, this would be a huge win, right. He said, Darrin, if you can get it done for under $5,000, that would be absolutely phenomenally fantastic.

KATRINA MADEWELL: And he had $111,000?

DARRIN T. MISH: $111,000. Well, we got the acceptance letter on that case yesterday at $50. So Luke is pretty darn happy. You know, it feels good to help people like that. This was by far the biggest problem that Luke had in his entire life and it’s kind of a weighty responsibility that I take on, where people trust me and have faith in me to take care of the biggest problem they have in their life. Everybody has problems, but I get the biggest problem they have in their life? Well, we settled it for $50. He still has to write a check for $40 of that because he had to pay $10 as a down payment. The advice I gave him was, hey you need to send that right away. Don’t wait five months.

KATRINA MADEWELL: So he literally made installments on a $50 settlement? Really?

DARRIN T. MISH: Well, you only have to put 20% down, so if my math is right, he had to pay $10 down to get the…

KATRINA MADEWELL: He’s really showing that hardship.

DARRIN T. MISH: So, it worked out really well for Luke. It will not work out that well for every client or every situation, there’s plenty of people that don’t quality for an Offer in Compromise, but if your facts and circumstances line up, really spectacular things can happen.

KATRINA MADEWELL: Well, you never know. You may get someone on the other side of the table that’s having a good day.

DARRIN T. MISH: That’s why it makes sense to go ahead and if you have a tax problem, to give me a call and at least we’ll talk about it. I’m going to give you the straight scoop every time. If you’re not a good candidate, I’m going to tell you off the bat. I have no desire to work with people where they’re not going to get a good result.

KATRINA MADEWELL: I remember one thing you told me a long time ago. You said, unlike most businesses, I really don’t like repeat customers.

DARRIN T. MISH: You know, we’re starting up…

KATRINA MADEWELL: You’ll take the referrals, just not the repeats.

DARRIN T. MISH: It’s kind of depressing, honestly. When I was doing criminal defense work and the crack dealer would come back, 3, 4, 5 times it wasn’t really something, it didn’t really float my boat. I understand that people need second chances and need to start their life over, but it gets a little depressing when I’ve given somebody advice, taken care of the biggest problem in their life and they come in with the same problem, 2, 3 years down the road. I’ll help them, but we’re going to have a different kind of conversation because it sounds like that person needs a little bit of tough love. I still want to love them, I still want to fix them.

KATRINA MADEWELL: I’m thinking, if you’re tougher on them, it’s a lot better than the IRS being tough on them.

DARRIN T. MISH: And if I’m a little bit tough on them, it’s just because I care and I don’t want them to end up in bigger trouble.

KATRINA MADEWELL: Carl had a great email question, we want to make sure we have time to get to it. He said I’m currently on a payment plan with the IRS, but I’m afraid I won’t be able to pay next year’s taxes on time, that will put me in default. Should I cancel my payments I’m sending now and use the funds to hire you instead?

DARRIN T. MISH: You gave me six seconds to answer that, Katrina. Generally speaking, you’re going to want to pay current taxes. Probably ought to just call me and we’ll have a discussion about what the right strategic thing to do is in that situation.


DARRIN T. MISH: That’s 888-438-6474. I’m Darrin Mish, your IRS solution attorney.

KATRINA MADEWELL: I’m your cohost Katrina Madewell and for this week…

DARRIN T. MISH: We’re out.

Share on Facebook0Share on LinkedIn0Pin on Pinterest0Tweet about this on TwitterShare on Google+0