DARRIN T. MISH: Good morning and welcome to the IRS Solution Attorney show I am your host THE IRS Solution Attorney Darrin T. Mish.
KATRINA MADEWELL: And I’m your co-host Katrina Madewell your voice is a little deeper than normal today.
DARRIN T. MISH: That was my radio voice, Katrina, how are you doing today?
KATRINA MADEWELL: Doing great.
DARRIN T. MISH: Fabulous. You know we are going to talk about something that is near and dear to most people’s hearts, I have a hard time believing that there’s that many people that aren’t going to be interested in today’s topic it’s how to avoid…
KATRINA MADEWELL: Oh I like this topic, this one’s good.
DARRIN T. MISH: How to Avoid an IRS Audit like just take it from me I handle lots of audits, not my favorite thing to do but I do handle lots of audits. The reason why it’s not my favorite thing to do is because most of the time they don’t go that well because people don’t have that great of documentation and I can’t just wave a magic wand and make it all go away. So audits are really hard for me to handle because most of the time people’s documentation is not great and some definite adjustments are made.
KATRINA MADEWELL: I have to give you kudo’s this is an excellent show today. I don’t know if there is anybody listening that will not want to listen to how to avoid an audit because not everybody has an IRS problem.
DARRIN T. MISH: Exactly and I would think the only people that would not be interested would be retired people solely living on Social Security, unemployed people I don’t think they have a big chance of being audited at least in this year, in the year that they are unemployed or people who just don’t work for whatever reason you know, they don’t work and they have no source of income.
KATRINA MADEWELL: Well they are probably not listening to talk radio so we are good.
DARRIN T. MISH: So we are all good. So let’s talk about how does the IRS, how do you win the lottery, the bad lottery, how do you win the bad lottery and get chosen for an IRS audit.
KATRINA MADEWELL: So understanding the selection process like how do they pick me, pick me for the audit.
DARRIN T. MISH: Absolutely. So the IRS uses a fancy algorithm called the discriminate income function. It’s DIF we are just going to call it DIF. And every person or every tax return is assigned a DIF score. So what I want you to imagine is for every, every position you take on a tax return there’s like boundaries, there’s things on the low end and there’s things on the high end. All that in the middle is ok, that anything to low or too high, usually too high if you are talking about expense deductions, is going to be red flagged by the computer and at some point if you get enough of those red flags then it’s going to kick it in my imagination it kicks it down the audit chute like in the Willie Wonka movies, it just kind of goes down this chute and eventually it ends up on a human beings desk and that person eyeballs it, he looks at the return and he goes yep that’s one that we should send an audit notice on because if that position is that obviously wrong then we probably got problems with the rest of the return. One of the things that I do on every case that comes in that is an audit is I look at the return before I look at the audit letter and the reason that I do that is I’m trying to guess, you know from my own experience, I’m trying to guess which position on this tax return is really the cause of this audit letter and I am almost always right. It’s almost always something that you look at it and you go that number right there….
KATRINA MADEWELL: Like some big deduction?
DARRIN T. MISH: That number right there is just crazy. Yeah it’s usually a deduction, it can be, we will talk about it later on in the show the different positions you can take that you just really shouldn’t or that they are just ridiculous. But the thing that comes to mind is you know I will give you an example: Remember we talked about a lawyer recently that I represented and her car and truck expense was based on so much mileage that her position basically was she was driving from Tampa to Orlando 5 days a week. Well number 1 if that was commuting that’s not deductible. So if you really were driving from Tampa to Orlando 5 days a week for a job that would probably be characterized as commuting miles but let’s just say….
KATRINA MADEWELL: So going to the office versus traveling for work?
DARRIN T. MISH: Right exactly so the rule is if you are going to your home from your office that’s characterized as commuting no matter how far it is.
KATRINA MADEWELL: Even if they relocate you? Curious question.
DARRIN T. MISH: Well if you relocated more I think that it’s more than 50 miles from your residence then the moving expenses can be tax deductible.
KATRINA MADEWELL: Oh so you have to move I got it.
DARRIN T. MISH: But in this case she was just driving around to different court houses and different places where dependent children were and stuff like that and wasn’t you know it wasn’t a 160 miles a day or I forget how much miles she was taking but it was a lot and it was obviously wrong and in my mind that is why I believed that particular return was audited. It turned out ok when, she got dinged a little bit for the truck expenses.
KATRINA MADEWELL: So excess miles, that is why she got dinged?
DARRIN T. MISH: Yeah she got audited because her mileage, it was just crazy it was just way too high.
KATRINA MADEWELL: Is there any trait that you see that it seems like they get audited more than another?
DARRIN T. MISH: For sure I mean cash businesses for sure are targeted more.
KATRINA MADEWELL: So restaurants…
DARRIN T. MISH: Restaurants, bars and the corresponding jobs that go with those businesses so like waitresses, bartenders, hair dressers people that survive on a lot of tip income are going to have a higher instance of being audited just because there is a lot of cash running around and that’s one of the reasons the IRS wants, they want to move us more into more of a cash less society. You remember a few years back, Congress passed this really dumb law that said that for any transaction between 2 businesses in excess of $600 a year you had to issue a 1099. Now at first pause that seems sort of logical and reasonable, it’s not because there is like, I forget how much commerce exists in this country any given year but it’s in the trillions of dollars.
KATRINA MADEWELL: Yeah it’s too much to do it for $600 a pop.
DARRIN T. MISH: What happened was the IRS realized that it was going to generate billions of extra 1099’s a year and they just, there computer system just couldn’t handle it and then they were just going to choke on all that data. But they are trying to get us to that point where we don’t use currency, we just use plastic, we use debit cards or credit cards or whatever because they kind of….
KATRINA MADEWELL: Want to regulate everything.
DARRIN T. MISH: There opinion of a Utopian society is where every single dollar that you spend can be traced and therefore can be taxed appropriately.
KATRINA MADEWELL: What’s the likely hood of that do you think? I mean we do a lot of cash less but I don’t see it going away too soon.
DARRIN T. MISH: In the next 5 years I think the chances are zero, in the next 10-20 years I think the chances are like nearly 100%. Because well if you watch Science Fiction sort of shows they don’t pull green backs out of their wallets, they I don’t know they just kind of show up and there is like a chip in their body or something and that is how they pay for things.
KATRINA MADEWELL: See there is some job security for Ryan after all.
DARRIN T. MISH: Yeah for sure like get people chipped.
KATRINA MADEWELL: Yeah your son wanted to be an attorney so 20 years from now when he takes over the firm.
DARRIN T. MISH: I don’t think it’s going to be 20 years.
KATRINA MADEWELL: Do things a little different.
DARRIN T. MISH: It might only be 15. He’s you know he’s on his way. But you know cash businesses get audited quite a bit I mean there are people that say you know doctors, lawyers and even accountants get audited more than other professions, I think it could be, well I’ve seen a lot of funny positions that doctors take and one if the reasons is and no offense to doctors is a lot of doctors still do their own tax returns, which is a really bad idea and doctors are brilliant, I mean they are really some of the smartest people in our society there’s just things that they should just stick to being doctors.
KATRINA MADEWELL: Well I mean that’s the thing you wouldn’t go to like a CPA to get medical advice no more than you would go to your doctor to get tax advice and you could be super smart but there are laws that change every year.
DARRIN T. MISH: Yeah for sure every year they are different changes and what not and you just have to rely upon a professional that keeps up with that stuff. There is actually like sort of a complexity level that I think people should use a professional preparer. At some point it doesn’t pay to do your own return because the 300 bucks or the 500 bucks that you are saving, you are not really saving because you are not taking advantage of deductions that you should be but worse you could be taking deductions that are just absolutely ridiculous but since you are using Turbo Tax and it says you could take it you are going to take it and that’s where that experience and that sort of discretion comes into place using a professional tax preparer.
KATRINA MADEWELL: And they do look at self-return prepared right, that’s a target, your target versus having a CPA’s number on the bottom of the tax return. They are not really liable but they are held to a certain standard where they are expected to only report correct information.
DARRIN T. MISH: Yeah I think we’ve talked about this in the past and one of the things that happens is you know there is little mom and pop sort of tax preparers in the neighborhood, I’m just going to characterize it as in the neighborhood and there not necessarily even a professional they don’t have an enrolled agent certificate, they are not a CPA, they are not a lawyer obviously. There’s a dirty little secret and that is there is no education or special credentials, there’s no test to call yourself an un-enrolled tax preparer. So what I’m saying is……
KATRINA MADEWELL: So like a book keeper?
DARRIN T. MISH: What I’m saying is anybody can say I’m a tax preparer and that’s….
KATRINA MADEWELL: That is scary.
DARRIN T. MISH: That is frightening so what happens is the guy in the neighborhood right, so he gets business by word of mouth, he gets businesses by getting people the biggest refunds or has the smallest tax bills. So what happens is there’s continuous pressure on that tax preparer to perform in that way and so word gets around……
KATRINA MADEWELL: Sing monkey sing.
DARRIN T. MISH: And every year he pushes the line just a little bit farther, he just keeps pushing the line and then we end up seeing things like I’ve been seeing recently which is you know tax payers that are wage earners that get paychecks that have taxes taken out of there W-2. I mean these guys are putting Schedule C’s on their tax returns with big losses so what that means in simple terms of English is they filed a return with the IRS like that tax payer had a small business that was losing money to try to offset the tax so that they could get a bigger tax refund. It’s totally illegal, it’s crazy but they can get away with it for a while but what happens is every person who prepares a tax return professionally has what’s called a PTIN, it’s an identification number and what happens is the IRS starts to pick up the anomalies from that preparer and then they go and they audit every return they ever did.
KATRINA MADEWELL: So the bottom line is look for an enrolled agent?
DARRIN T. MISH: Either look for an enrolled agent, law firm or a CPA firm or a reputable company like Jackson Hewitt, Liberty Tax, H&R Block you know the big guys.
KATRINA MADEWELL: The chains.
DARRIN T. MISH: Those guys are pretty good I mean they are pretty good at the simpler stuff but you just have to be careful about the neighborhood sort of tax preparer.
KATRINA MADEWELL: Well you are listening to the IRS Solution Attorney show, that sound means we have to take a quick break, we will be back in just a minute. Today’s show is all about How to Avoid an IRS Audit so stick around we will be back in just a minute.
DARRIN T. MISH: Welcome back to the IRS Solution Attorney show I am your host Darrin T. Mish, I am THE IRS Solution Attorney.
KATRINA MADEWELL: With the Punisher cuff links and all. I’m your co-host Katrina Madewell thanks for sticking around with us after the break.
DARRIN T. MISH: Yeah I do have a cuff link sort of fetish, I like to wear cuff links because, you know men don’t get to wear that much jewelry right I mean we are kind of limited. Women can dress themselves all up with all kinds of shiny stuff and men are kind of stuck.
KATRINA MADEWELL: You could do it to but you might look a little funny.
DARRIN T. MISH: Yeah exactly you look like Mr. T. I pity the fool.
KATRINA MADEWELL: So we thought we would talk on today’s show on something that would apply to a lot more of our general audience versus just to only people that have an IRS tax problem and so if you heard the earlier part of our show then you know that the topic for today is How to Avoid an Audit.
DARRIN T. MISH: Yeah so today we are talking about How to Avoid an IRS Audit. It’s really kind of a Universal topic because I even want to know how to avoid an IRS Audit which is why I look at all my, I mean people come in with Audit letters I always look at their returns and try to figure out what the cause of the audit was so that we could not only prevent that in our practice but I want to prevent that in my returns so that I don’t get audited either.
KATRINA MADEWELL: And if you missed the earlier part of the show you can catch the whole thing in its entirety on a podcast.
DARRIN T. MISH: As well as our new app which is called The IRS Problem Solver and that app is available on iTunes and the Android store.
KATRINA MADEWELL: Awesome and so part of the things in the earlier segment was understanding how you get chosen and who’s likely the target.
DARRIN T. MISH: Yeah so there are some things, we talked about the DIF score that Discriminate Income Function score and basically every position taken on a tax return is scored and if you score outside of sort of the norms for your industry or your profession then you know you have a lot higher likelihood of being audited. So one of the things or some of the things that could cause audits are large charitable contributions that’s one thing that is becoming more and more common…
KATRINA MADEWELL: What’s considered large? Depending on how much you make?
DARRIN T. MISH: I think the threshold is $250 but…
KATRINA MADEWELL: What?
DARRIN T. MISH: If you, you know if it’s just really out of whack and we’ve seen things like Ok the person’s income is $100,000 and they are trying to maintain that their charitable contributions were $40,000. Well that’s kind of an interesting position, not necessarily wrong but be prepared….
KATRINA MADEWELL: Documents, documents, documents.
DARRIN T. MISH: Be prepared to be called to the carpet for that.
KATRINA MADEWELL: We talked about cash businesses too, if your business takes in a lot of cash you may likely be a target which leads us to our third one is Incorporate if you are self-employed.
DARRIN T. MISH: So when we are talking about being self-employed here what we are talking about is somebody that gets a 1099 basically. So let’s say you are a plumber and you get a 1099 because you are basically contracting your services out to another plumbing company or maybe more than one plumbing company and they don’t withhold any taxes and you sort of get dispatched to handle a plumbing problem. What I would suggest is that you go ahead and incorporate and form yourself an LLC or a corporation and the reason is that those returns at least for corporations are audit far less then Schedule C returns which is what you file if you are a 1099 self-employed sole proprietor type of person. The last audit stats that I’ve seen for a Schedule C indicate that something like 5% of Scheduled C’s are actually audited. That’s a pretty high rate I mean 5% is a lot. That’s 5 in a 100 people so if we were in an auditorium or something with a 100 people there would be 5 people there that were being audited in any given year, that’s a lot. So that is a really high audit rate. Conversely the 1120S or the 1120 which is what returns that are filed by corporations those are audited in like the 1% range so that one thing could cut your audit risk by an order or magnitude.
KATRINA MADEWELL: That’s awesome, good little tip. So really for anybody self-employed or getting 1099’s or extra income it’s a good idea for a lot of reasons to incorporate.
DARRIN T. MISH: Yeah there is liability protection, there is some audit reduction, audit risk reduction. There’s a lot of things that make it a good idea. Now you have to think about the fact that there are additional costs for being incorporated too, there’s some, there’s like an annual fee, you have to pay the state, there’s a tax return, there’s you know an extra tax return that has to be prepared so a lot of….
KATRINA MADEWELL: But those things are tax deductible.
DARRIN T. MISH: Yeah they are. A lot of. let’s say you are making $25,000 on a 1099 and you are just living on $25,000, probably not worth incorporating at that point because you know the risk-reward it seems kind of out of whack and I don’t know where the line is but it’s probably somewhere between 50-100,000 dollars of revenue is probably a good idea to go ahead and be incorporated.
KATRINA MADEWELL: So the interesting, I was looking at the next thing on our outline number 4 is include explanations and I’m ready to hear about this one.
DARRIN T. MISH: Yeah so in the past several years, I would say the last decade the IRS is really moved toward the sort of model where they want all tax returns e-filed. Like when was the last time you filed a paper return?
KATRINA MADEWELL: I don’t do it at all. But I think it’s been a long time.
DARRIN T. MISH: I actually filed one this year for some reasons that for some urgency reasons that I had to go file in paper but it was actually a little bit faster believe it or not that’s kind of weird right.
KATRINA MADEWELL: That is weird.
DARRIN T. MISH: But anyway I had to file in paper but you know you could include explanations for these kind of duress positions that you are taking so back to our example, the guy, the couple that earned $100,000 a year and they had $40,000 in charitable contributions, if they came to me ahead of time I would definitely do not E-file that return what we want to do is file that in writing on paper and we are going to want to attach our documentation, our proof to the return with a letter of explanation. What you are trying to do there is you are trying to head off, sort of head off the DIF thing, so what is going to happen is because it’s paper filed and there are some other documents there then hopefully the goal would be you are moving that to a human being to eyeball before the computers look at it.
KATRINA MADEWELL: So when you send the paper in a physical person gets it versus e-file?
DARRIN T. MISH: That’s my understanding and it has to be manually processed and so the idea would be to just head off the audit before it occurs. There could be lots of reasons why you would have a $40,000 charitable contribution with a $100,000 income but it’s weird so you want to be able to document why this is like a one-off kind of thing.
KATRINA MADEWELL: So I’m sure there is a form right?
DARRIN T. MISH: There’s not. You are just going to have to write a letter and you are going to have to clearly explain….
KATRINA MADEWELL: And so do you think that would actually diminish your chance of getting audited?
DARRIN T. MISH: Absolutely.
KATRINA MADEWELL: Really?
DARRIN T. MISH: We’ve done things like that in the past. If you go ahead and include the documentation, what you are doing is you are sort of almost like self-auditing in advance. Because you are providing them your documentation.
KATRINA MADEWELL: So you are saying look I know you are going to look at this funny but let me just tell you right now why I did it and here’s my explanation.
DARRIN T. MISH: Especially if you are filing a return that’s just really super inconsistent with returns you have filed in the past, that would be another instance where you might want to go ahead and file with paper with it, letter of explanation and try and handle it that way because let’s face it folks getting audited is, it’s really a bad thing. It really is I mean there’s a most, even if you have the most perfect records, let’s say you use a shoebox and you have you know everything was perfectly right, there’s still you know a physic toll, there’s an emotional toll you know getting the audit…
KATRINA MADEWELL: Oh yeah, you just stop everything you are doing…
DARRIN T. MISH: Just stop everything you are doing like right now and you have to get all this paperwork and documentation together and you know what happens? Sometimes innocent people…
KATRINA MADEWELL: Freak out?
DARRIN T. MISH: Sometimes innocent people are wronged by the government, it happens all the time. I’ve seen it a million times when I used to be a criminal defense attorney there was plenty of guilty people who were set free and found not guilty but there was plenty of innocent people that were found guilty, the system is not perfect and so you just want to avoid the audit if you can. Some other things that I’ve seen that cause audits regularly would be unreimbursed employee business expenses. Now what are those? Unreimbursed employee business expense is where you are getting a paycheck and for whatever reason you are maintaining that there are expenses that you have to pay which are not reimbursed by your employer. Now thinking about that, that’s actually rather rare right?
KATRINA MADEWELL: Yeah.
DARRIN T. MISH: It’s rather rare. I can think of a few examples where like you know you work at, work at Culver’s the hamburger stand and you got to wear a uniform and for whatever reason they don’t provide the uniforms.
KATRINA MADEWELL: Don’t they usually?
DARRIN T. MISH: Yeah they usually do but I mean I’m trying…
KATRINA MADEWELL: You are saying if they didn’t.
DARRIN T. MISH: I’m reaching here to find an example but if they didn’t then you could write off the cost of a couple of uniforms. Not thousands of dollars like a couple of uniforms which is usually like a shirt and some pants and maybe some shoes something like that but most employers are going to handle all of their employers business expenses and we see it all the time people put these crazy expenses on there, on that line and it just pops out an audit like almost a 100% of the time and if the computers really good then the DIF score for that is low, it’s, those amounts are very low and it’s going to depend on your profession or your occupation.
KATRINA MADEWELL: Do you get to see what the DIF scores are, just kind of curious what the rankings are?
DARRIN T. MISH: No that would be so killer cause you could just always like….
KATRINA MADEWELL: I’m thinking like credit score in my head of course.
DARRIN T. MISH: Yeah no it’s a top secret you know I don’t know.
KATRINA MADEWELL: They are not telling you the algorithms.
DARRIN T. MISH: Yeah they are not going to tell you how the algorithms work, you now I’m an old SEO guy, Search Engine Optimization and at one point in time I really had the Google Algorithm figured out and I could make websites rank really high and stuff like that and it’s just the way my brain works and I love, I love to learn like the framework of the rules and then figure out where all the holes in the armor are, where all the chinks and stuff are I love that, that is just kind of how my brain works. So if I could figure out the DIF score that would be really awesome for our clients.
KATRINA MADEWELL: You know at some point you may, you never know. So you are listening to the IRS Solution Attorney show we have to take a quick break but today’s topic is all about How to Avoid an Audit and if you missed an earlier part of the show the whole things available via podcast, android or iTunes and you can get it from the app store just search the IRS Problem Solver correct?
DARRIN T. MISH: Yep that’s right.
KATRINA MADEWELL: And if you want to reach Mr. Mish it’s 888-get-mish
DARRIN T. MISH: 888-438-6474 that’s 888-438-6474.
KATRINA MADEWELL: Stick around we will be back in just a minute we are going to continue talking about how to avoid an audit.
DARRIN T. MISH: Welcome back to the IRS Solution Attorney show I am your host THE IRS Solution Attorney Darrin T. Mish.
KATRINA MADEWELL: And I am your co-host Katrina Madewell, thank you so much for sticking with us through the break. Hopefully today’s topic in our show you find a lot of interesting cause I thought the outline was awesome I mean who doesn’t want to hear how to avoid an audit.
DARRIN T. MISH: Yeah I even want to hear how to avoid an audit and every day or at least it seems every week I learn a little bit more about how to prepare better returns so people are audited less frequently. Some….
KATRINA MADEWELL: Some. Go ahead.
DARRIN T. MISH: I was going to say some of those things are just don’t take ridiculous positions, think about it and if you are going to use tax preparation software like Turbo Tax, just be careful, just your kind of have to have some….
KATRINA MADEWELL: Common sense…
DARRIN T. MISH: You have to have some common sense and you got to avoid that number I think it’s in the upper right hand corner that tells you how much you owe or how much you got coming back and don’t make decisions based on that number, make decisions based upon the correct answer and at some level you have to have a professional prepare your return otherwise you are just going to stumble in one of these traps, it’s almost inevitable you are eventually going to get audited because you just don’t know what you don’t know.
KATRINA MADEWELL: The next one on our list is to avoid filing an amendment to your return and I’m thinking about this thinking well I guess a lot of people probably don’t file an amendment, but I’m sure there is a lot of good reasons why you would file an amendment to your return but I had no idea that that might actually trigger or flag you for an audit.
DARRIN T. MISH: It certainly could file or trigger an audit if you file an amended return particularly if you are trying to amend the return from reasonable positions to ridiculous positions right, I mean that makes sense.
KATRINA MADEWELL: So let me play devil’s advocate right and so let’s say from the real estate and mortgage perspective they don’t quite have enough income, the self-employed person on the last year’s tax return to average those years out and now they want to amend last years, show a little bit more income, they are going to be writing a check and send it to the IRS. What’s the likelihood they are paying more money that they will actually get audited?
DARRIN T. MISH: Zero, or pretty close to zero because the IRS is going to always love the fact that you reported more income and no additional deductions because you are going to result in you owing more tax.
KATRINA MADEWELL: So will it trigger an audit for next year?
DARRIN T. MISH: Probably, well I don’t know it depends on how sort of outside of the norm you are going. I’ve seen lots of positions, well actually I have a client right now who you know he’s, I won’t even say what he does but he’s trying to maintain the position that he is living on less than $10,000 a year. I think I have told him this I think on his face that this is kind of a silly position I mean be prepared to explain, how do you do that.
KATRINA MADEWELL: Yeah I’m a farmer.
DARRIN T. MISH: Well that could be the answer. If you are out there raising your own livestock and growing crops and stuff I guess that could work.
KATRINA MADEWELL: I’m pretty sure you were not expecting me to say yeah I’m going to amend my return to pay more money to show more revenue.
DARRIN T. MISH: Yeah I hadn’t really thought of that but in your profession it certainly makes sense that people would probably do that, they’re like oh yeah oops I forgot about that extra income because there are people who get 1099’s right but then they get some cash or checks or things on the, not on the side that sounds illegal…
KATRINA MADEWELL: That sounds shady right out of the gate.
DARRIN T. MISH: I don’t mean that but let’s say they have one, they get a 1099 from like there main customer and the rest of their income is from smaller people that just don’t know to issue 1099’s or just don’t bother or maybe they pay them less than $600 a year which is the threshold and a lot of tax payers will be really tempted to only report the amount that is on the 1099. Ok, that kind of makes sense.
KATRINA MADEWELL: Yeah.
DARRIN T. MISH: But remember the IRS has special audit guides for dozens of different professions, I read the audit guide for how to audit attorneys and incidentally if you are listening you can just contact the office and we will send you a copy of that out. They actually really understand how law firms work and where lawyers are tempted to skim cash and stuff. One of the examples is this criminal defense attorneys get paid in cash quite frequently.
KATRINA MADEWELL: Because you know the clientele they represent.
DARRIN T. MISH: Which makes…
KATRINA MADEWELL: Might not have a bank account.
DARRIN T. MISH: Which I know from experience was pretty darn common when I was doing that kind of work 20 years ago that a lot of people would pay you in cash, big rolls of cash and a lot of guys, a lot of lawyers are just tempted not to let that end up in the bank account. So but the IRS is wise to that, they know that and so they have some other techniques to find the money or find the evidence that the money existed.
KATRINA MADEWELL: We should do some future shows on like the audit guide for different professions that would be really cool.
DARRIN T. MISH: Yeah that could be kind of neat.
KATRINA MADEWELL: So if you’re, if you’re listening and you want to chime in and you want to know a little bit more or you want us to put together a show, an Audit Guide for your profession, just call us up at 888-404-1010 and Pat George back there will take your information and let us know 888-404-1010.
DARRIN T. MISH: You know I would say a lot of occupations that travel a lot get audited a lot, real estate agents get audited a lot because you guys do drive quite frequently.
KATRINA MADEWELL: 3000 miles a month easy.
DARRIN T. MISH: And I would say the single most common issue that is audited is car and truck expenses which really is mileage.
KATRINA MADEWELL: But you can’t really do expenses if you take mileage right?
DARRIN T. MISH: Well there is 2 ways to take car and truck expense, you could take actual expenses or you could take mileage which is at a standard rate and it ovaries by year and I used to always kind of scratch my head and wonder well who would take actual expenses over mileage because mileage is going to win like 90% of the time and I’ve seen something recently where actual expenses were kind of higher and guess what they did?
KATRINA MADEWELL: Inaudible
DARRIN T. MISH: They were truck drivers.
KATRINA MADEWELL: Oh truck drivers.
DARRIN T. MISH: Makes sense.
KATRINA MADEWELL: Well I was thinking like the car payments and like expenses and maintenance which….
DARRIN T. MISH: Yeah the car payments are never deductible unless it is a business expense but I’m talking just like repairs, fuel you know maintenance, that kind of thing. In truck drivers that makes a lot of sense….
KATRINA MADEWELL: But if you have a Tesla can you replace the maintenance cost for the car payment? Just curious.
DARRIN T. MISH: Well I suppose if you use the Tesla 100% for business and you can prove that then you probably could, I don’t know what, what does it cost to like what if you put a new battery in it? No there is no battery in a Tesla right what do you put a whole new electric motor in there?
KATRINA MADEWELL: Tesla is like I don’t know there is like a waiting list for the next ones that are like 40,000.
DARRIN T. MISH: So yeah there is somebody here in the studio that is not talking that wants to tell me the answer but he won’t go on the Mic.
KATRINA MADEWELL: Speak up and talk about the Tesla we would love to hear about it.
DARRIN T. MISH: He’s going to pass on that. So anyway there’s some things like that that could cause you to be audited, you just have to take reasonable positions and you just have to, if you’re, if you’re, if you feel like your tax return is complicated at all you should get a professional to help with preparing it.
KATRINA MADEWELL: Which is going to be most self-employed people for sure.
DARRIN T. MISH: Almost every self-employed person. The other people that their tax returns get kind of complicated are people with lots of rentals. I had a case recently they were audited and…..
KATRINA MADEWELL: Wait what’s lots of rentals like how many properties?
DARRIN T. MISH: This particular couple had 6 or 8 rental properties and they were split between Oklahoma and Texas and they live in Florida and so they had a lot of deductions cause they were self-managing, so they had a lot of travel expense cause they were going to Texas and Oklahoma like quarterly and what ended up biting them is they didn’t make an election to group all of those properties to be treated as one sort of enterprise and so they had losses. They actually had true legitimate losses well because they failed to make that grouping election…
KATRINA MADEWELL: So you are just talking about personal returns versus….
DARRIN T. MISH: Well in this case, they weren’t incorporated so all these rentals were going on a Schedule E which is like the, sort of like the investment….
KATRINA MADEWELL: So they look at an LLC with a management type thing that would kind of….
DARRIN T. MISH: Yeah that is what we are ultimately going to do to prevent audits for them in the future because this is an issue that they are going to get audited every, not every year but frequently.
KATRINA MADEWELL: Which you would think that they would want that anyway like a separate bank account separate everything just for that.
DARRIN T. MISH: Yeah so we are ultimately going to put them in an S corporation and….
KATRINA MADEWELL: Is that for all the properties or individual?
DARRIN T. MISH: I’m not actually doing that work I referred them to you know a sort of a more tax planning guy but they could do it one of 2 ways they could put the better like sort of asset protection vehicle would be to put each one its own entity like in an LLC or a land trust which could technically work but that’s a lot of administrative overhead, a lot of hassle there, it might make sense for them to just throw it all in one entity. I don’t think there was a lot of equity in those properties so that is another consideration too. I don’t think there is so much asset protection but the way…
KATRINA MADEWELL: Like in Oklahoma.
DARRIN T. MISH: Well the way that they are set up now, I was telling the tax payer this you know if you end up running over a bus full of school kids you are going to get sued and everything is gone, they are going to get everything because it is all in one basket.
KATRINA MADEWELL: Yep makes sense.
DARRIN T. MISH: Really bad idea.
KATRINA MADEWELL: So another one on our list is file on time. How the heck is that going to keep you from getting audited?
DARRIN T. MISH: There are some people that think if you file on time it keeps you from being audited, I’m not necessarily of that opinion. We’ve filed lots of, as you know, very late tax returns and I have seen very few really late tax returns being audited. I have a theory in that you know it takes a little bit more resources to audit a 2010 tax return then it does you know the ones that are more frequent or more timely like 13,14,15 are the years right now here in 2016 that are being audited super frequently so. So I had a friend that was an IRS auditor, I knew her before I started doing this work and I asked her that and I told her that theory and she just scoffed and she said that’s not true at all, it made me believe it was true actually.
KATRINA MADEWELL: Wonder if we could get somebody from the IRS on the show? Probably not.
DARRIN T. MISH: Well maybe you never know. One never knows.
KATRINA MADEWELL: So be exact and be neat.
DARRIN T. MISH: Yeah you know if you are using a, some people still fill out their taxes with like a pencil or pen and if you can’t read the numbers there is a good chance you are going to get audited because you know this is one of the few times in life when neatness counts.
KATRINA MADEWELL: You got to be kidding me right?
DARRIN T. MISH: You know when I was in school, I was in grammar school and even high school I used to get really poor grades in penmanship and I think that just meant that I was going to be a lawyer and I was going to have to sign my name 50 times a day because you can’t read my signature either but in this case you have to be exact and neat. Your tax return is one of those things where you are attempting to an exact answer.
KATRINA MADEWELL: So if your deductions for mileage is you know…
DARRIN T. MISH: Indecipherable yeah you are probably going to at least get a letter. Now we didn’t talk about this there are different types of audits. You could have a correspondence audit, you can get, you can have an in person audit, there’s all kinds of different audits.
KATRINA MADEWELL: And so, also never leave blanks that was on the list too.
DARRIN T. MISH: Well never leave blanks on a line that has to have a number…
KATRINA MADEWELL: Got you.
DARRIN T. MISH: I mean there is going to be lots of blanks on your tax return because there is just things that don’t apply but, give you an example from page 1 of the 1040 to page 2 at the bottom there is a number at the bottom of page 1 and that number has to be the first number on page 2 because it is all just a giant math equation, really simple arithmetic for the most part, so you want to make sure those types of lines actually has numbers on them otherwise theoretically the computer could kick out an audit notice because there’s a line that needed to have a number that doesn’t have a number.
KATRINA MADEWELL: And so what are the different types of audits?
DARRIN T. MISH: So you could have an in-person audit which is the scary kind where they say bring all of your stuff. You could have a correspondence audit where a correspondence is just say the IRS sends you a letter saying hey we’ve got a question about the following positions that you have on your tax return. These are the most common. It often comes out on a letter called a CP2000. I’ve had these and a lot of times it’s like the social security number for one of your dependents is wrong, that’s a big example of a correspondence audit or….
KATRINA MADEWELL: That’s a simple fix.
DARRIN T. MISH: Yeah it could be like math errors is another type of audit, not really an audit like sometimes there’s arithmetic errors literally where people are doing returns by hand and they just add up wrong, that’s going to trigger you know and out of those sorts. And you know another audit that we haven’t talked about is a substitute for return, you know where the IRS prepares a return for you is an audit of sorts.
KATRINA MADEWELL: And that is a complex topic that we are going to talk about after the break and if there’s any other types of audits that we missed. You are listening to the IRS Solution Attorney show, we’ve had a great show lined up for you today on how to avoid an audit and the whole show is available via the app at The IRS Problem Solver we are also on ITunes and across the web just look for IRS Solution Attorney show, the IRS Problem Solver. Back in a minute.
DARRIN T. MISH: Welcome back to the IRS Solution Attorney show I am the host THE IRS Solution Attorney show.
KATRINA MADEWELL: And I am your co-host Katrina Madewell thanks for sticking with us through the break.
DARRIN T. MISH: That was kind of robotic, my names Darrin T. Mish I’m the IRS Solution Attorney.
KATRINA MADEWELL: Just in case he forgets you know I will remind you guys but today’s show is all about how to avoid an audit and we talked about a lot of really awesome things in court especially about understanding the selection process like how you are picked, how likely are you to be a target, incorporating yourself if you are not, include explanations, avoid filing amendments and all kinds of other things and where we left off was talking about the different types of audits that there are.
DARRIN T. MISH: Yeah basically there’s a correspondence audit where the IRS just writes you a letter and they say hey we have a question about this and if you don’t answer you know within a time frame and we don’t like your answer we’re going to issue some additional tax. There’s also an in-person audit, the in-person audit is the letter that says ok you are being audited bring all of your stuff and then there’s technically when the IRS prepares a return for you because you won’t or didn’t file a return that’s called a substitute for return and that’s technically an audit too. Now it’s interesting to know that all audits, you can apply for something called audit reconsideration, so if you, if you are audited and the audit goes poorly, if you then find the box of records that was in the attic or whatever later you can go back to them with the new information that was not previously looked at during the audit and you can apply for something called audit reconsideration and sometimes that works, it works almost a 100% of the time in the context of the substitute for return because by definition they haven’t looked at hardly anything to prepare that return and that number is always inflated.
KATRINA MADEWELL: So I have a question we talked about a substitute for return before but if the IRS has filed the substitute return can you then file an amendment to that return and then with your amended tax return does that get audited?
DARRIN T. MISH: That’s a really good question because there was no original return prepared you don’t file an amended return you file an original return and that original return technically is your…
KATRINA MADEWELL: It just bumps the substitute for return out of the way?
DARRIN T. MISH: Yeah it does I mean if that original return is just silly then they are going to just reject it they’re not going to they won’t process it but I would say 99 times out of 100 they are going to accept that original return at face value and then if they want to audit that they still have 3-6 years to audit that so usually they accept them unless again it’s just kind of a silly kind of thing and I’ve seen some that are just silly but most of them aren’t.
KATRINA MADEWELL: Well you are listening to the IRS Solution Attorney show if you’ve missed any part of today’s show I would highly encourage you to check out in its entirety, it was all about how to avoid an audit and so you guys have a new app over there?
DARRIN T. MISH: Called The IRS Problem Solver it’s available right now on Android and Apple store and it’s coming soon to the Windows phone store, I don’t know what it’s called.
KATRINA MADEWELL: Which is funny but it’s coming so that’s nice to know. We do have some questions from some listeners let’s get to that really quick before we have to talk about the train wreck of the week.
DARRIN T. MISH: That’s great.
KATRINA MADEWELL: Ravi wants to know will calling the IRS help me get an amended return processed any faster?
DARRIN T. MISH: You know probably not because amended returns sometimes, well depends on the issue on the amended return if it’s a simple issue it’s going to take anywhere from 30-90 days if it’s a more complex issue it could take a year you know for the amended return to be fully processed. I don’t think calling them would probably help but you could actually file what’s called a form 911 with the office of the tax payer advocacy, just Google tax payer Advocate service with the IRS and you will find form 911 and when you fill out this form 911 in this context what I would complain about is you now hey I filed my amended return on January 1 it’s now October 1 it’s taking too long and nobody will give me any answers please expedite the handling of the amended return. What will happen is the IRS will actually assign someone called a tax payer advocate who is supposed to be, in my experience, is a sort of a separate neutral person, they are to help you and what’s great about that is the IRS, when you deal with the IRS you don’t usually get a single person like a single point of contact and that is what the tax payer advocate does in that situation.
KATRINA MADEWELL: So one more quick question from Janice she wants to know what should I do if I answered incorrect routing number or account number on my direct deposit on my refund?
DARRIN T. MISH: Call the IRS.
KATRINA MADEWELL: Ok.
DARRIN T. MISH: Call the IRS and give them the right routing information it will probably still get stayed screwed up and it’s just is what it is.
KATRINA MADEWELL: So we have a headline story that we have to talk about just because we have to talk about it. Charlie Sheen got a nightmare he is under audit.
DARRIN T. MISH: Ok so my opinion of Charlie Sheen is just basically the guys a train wreck and he’s a train wreck because he’s got some other stuff that is going on in his life.
KATRINA MADEWELL: He’s always been a train wreck.
DARRIN T. MISH: Higher priorities, the guy makes tons of money and I guess he is being audited by the IRS and it is what it is and he probably doesn’t care.
KATRINA MADEWELL: So did it say why he is under audit? Just curious.
DARRIN T. MISH: No I’m not really sure but he probably filed tax returns that just maintained you know ridiculous positions; my best guess is he’s writing off stuff that’s kind of wacky.
KATRINA MADEWELL: He’s probably writing off a prostitute.
DARRIN T. MISH: Well I didn’t say that but…
KATRINA MADEWELL: I did.
DARRIN T. MISH: You did.
KATRINA MADEWELL: Leave it up to me.
DARRIN T. MISH: Yeah Charlie don’t sue me, sue her.
KATRINA MADEWELL: Sorry I did it yes you know. But you know he’s got that wild like even in 2 and a half men he’s got that wild what’s a good word for it, personality like how do you the male…
DARRIN T. MISH: He’s got a crazy persona going on I don’t know if it’s real or not but his rep is pretty interesting.
KATRINA MADEWELL: Alright it’s about that time.
DARRIN T. MISH: It’s about that time for the IRS train wreck of the week this is the segment of the show where we talk about somebody who came into the office and they are a train wreck and they had a huge IRS problem and the great thing about the segment is they always leave with a happy ending.
(Train Wreck Noise)
DARRIN T. MISH: So in this particular case I was representing a dentist and he was a non-filer for many years and what we did we got him, the first thing we did is we prepared all of his tax returns and we prepared all of his tax returns and he ended up owing about a half- million dollars, I don’t have the exact amount here but he owed about a half million bucks and so what we did is we filed anOffer in Compromise, an Offer in Compromise is where you make a deal to settle for less with the IRS and it’s based upon a relatively simple math equation and in that case is we offered about $12,000 because we try to always low ball the IRS because we know that during the negotiation we are going to go up a little bit. So the IRS rejected that offer and they came back and they said really he can afford to full pay which was really crazy situation because he wasn’t making that much money and he was making about $80,000 a year and he had a wife and kids and stuff like that so he, he decided, we decided jointly that we are really going to go ahead and file an appeal of that Offer in Compromise. We waited for a very long time before we got to discuss that with a settlement officer and what happened is we ended up threatening bankruptcy to the IRS because this particular guy, all of his stuff lined up perfectly so if he had filed a chapter 7 bankruptcy he would get a discharge and he would owe the IRS absolutely nothing.
KATRINA MADEWELL: So how do you threaten do you actually have to file that number, file and get a case number or no?
DARRIN T. MISH: What I did was I went ahead and I put it in writing and the IRS appeals officer had to consider it at that point cause the Internal Revenue manual says that he has to and he says well Darrin do you really think he is going to file bankruptcy and I said…
KATRINA MADEWELL: Have the paperwork ready.
DARRIN T. MISH: I said if you owed half a million dollars and you could push a button and make it go away would you file bankruptcy and there was this long pregnant pause and I said…
KATRINA MADEWELL: How fast can we settle.
DARRIN T. MISH: And I said you know I’m not going to make you answer that question, I can tell you I would in this context, I would have filed bankruptcy in a second. Long story short we ended up increasing the offer to $25,000 the settlement officer thought about it for like 6 months…
KATRINA MADEWELL: 6 months?
DARRIN T. MISH: He came back accepted so it was $25 grand on about a half million bucks and the tax payer ended up paying 5 pennies on the dollar.
KATRINA MADEWELL: How long was this whole process?
DARRIN T. MISH: Probably took about 2 years for that particular case but that was a big case and he was a non-filer for over 10 years so a lot of work had to be done on the front end to get him in position to get that done.
KATRINA MADEWELL: Well that’s all we have for this week you are listening to the IRS Solution Attorney show we really enjoyed having you this week, we hope you enjoyed our show on how to avoid an audit and if you haven’t already checked it out the whole thing is available on a podcast and get the app The IRS Problem Solver. For this week.
DARRIN T. MISH: For this week I’m out.