DARRIN T. MISH: I’m Darrin Mish and I’m here today with my cohost Katrina Madewell. It’s our inaugural show and she’s here helping me out so we can pass along some really good information to you folks who are in need of IRS solutions.
KATRINA MADEWELL: I’m very excited to help you cohost your show, which is brand new, the IRS Solution Attorney. I can definitely vouch for you on that. Been friends for a long time, met you a long time originally as a guest on my show. A rock star in what you do.
DARRIN T. MISH: It is so cool to be here and to share some of this information with the public.
KATRINA MADEWELL: Darrin, you do so many cool things. I know you do on a daily, weekly, monthly basis that you’re going to share these stories and the person listening is totally going to relate to many of the things you’re going to say.
DARRIN T. MISH: Absolutely. I represent just regular people who just find themselves in unfortunate circumstances. It’s not like they’ve done anything wrong or intended to do anything wrong and end up owing the IRS tens of thousands or hundreds of thousands or even millions of dollars. They just find themselves in circumstances they just don’t know how to deal with.
KATRINA MADEWELL: In your history, your background is interesting, so let’s talk about that for a minute. Just like me, I had a hiccup with the IRS once. I shared this on a show, I did with you a long long time ago. I was seven, eight months pregnant with my oldest daughter, I had an IRS lady literally come knocking at my door and it was the worst possible time financially. That’s the way it goes probably for most of your clients.
DARRIN T. MISH: Exactly. I don’t know many people middle aged or older who don’t have an IRS story. I’m not ashamed of this, I actually had an IRS problem. I had just gotten out of law school. I awes actually a public defender for a couple of years and then I went into criminal defense. In law school they don’t teach you anything at all about how to run a business, how to pay your taxes. They don’t even tell you what payroll taxes even are for goodness sake.
KATRINA MADEWELL: Or even in college, right? It’s crazy.
DARRIN T. MISH: Anywhere. I’m not sure they teach you that on CPA exam. I don’t know, I didn’t take that. So I found myself with a tax problem. I actually found myself with two tax problems. I wasn’t being terribly responsible in paying my own taxes because of something called estimated tax payments we’ll probably talk about quite a bit on the show. Also, I wasn’t even aware of how payroll taxes for employees ever ended up at the federal government. I had really no clue. So I ended up with two tax problems, went looking for help. They weren’t enormous problems. I would say sum total of both problems combined was probably under ten or fifteen thousand dollars. But when you have that and it’s kind of bearing down on you, it can be a pretty intimidating, pretty scary situation.
KATRINA MADEWELL: And you were a young guy, right? At the time this happened.
DARRIN T. MISH: Yeah, I was probably, I don’t know. 26 or something like that and I was more interested in having fun and having a good time.
KATRINA MADEWELL: Like most 25 year olds.
DARRIN T. MISH: Yeah, exactly. So I went looking for help to find somebody to help me with my problem and really couldn’t find anyone. So after I got done being kind of freaked out, I realized, well you know, buddy you have a law degree and a license to practice law, maybe you should just read some stuff and figured this out.
KATRINA MADEWELL: Maybe I shouldn’t be representing these people as a public defender anymore.
DARRIN T. MISH: Actually, I was in private practice by now. But that’s how it started. I had to figure out how to solve my own problem. I eventually did and then I went out looking for someone to learn from. I found a mentor and I learned and then within about three years of having that first problem, I was on stage teaching lawyers, enrolled agents, and CPA’s around the country how to handle tax problems.
KATRINA MADEWELL: It’s such a specialized niche. Your area of law is not something that probably even the average attorney can tell you anything about.
DARRIN T. MISH: No, actually, it’s kind of fun, at any given moment in time I represent several attorneys because they have a tendency to kind of get themselves in trouble and then they think they can figure it out. But it’s really a specialized kind of thing. My political bend is I’m a conservative/libertarian and I don’t necessary agree with the way the government spends our money. So I sleep like a baby every night as I help regular folks help solve their poems with the IRS.
KATRINA MADEWELL: When you get to beat up the IRS bullies.
DARRIN T. MISH: I don’t choose to characterize it as beating them up. I choose to…
KATRINA MADEWELL: No, those are my words, I’ll totally take the credit for that one.
DARRIN T. MISH: I tend to look at it as I persuade them to come along to my way of thinking.
KATRINA MADEWELL: You know, you should. That’s what you do. So the people, and I would imagine, I don’t know, you can clarify it, but a lot of the people you represent are everyday people. They’re entrepreneurs, probably a lot of self-employed, maybe someone that just got caught in some type of rut and either didn’t file taxes or had some kind of issue, right?
DARRIN T. MISH: There’s probably three principle kinds of folks that come to see me. Some of them are colorful and some are just really normal. Some of them are really afraid. Very scared. Some are physically trembling when they come into the office. It kind of makes me sad when I see that person in the lobby, in the waiting room. I can tell, I’ve been doing this for a long time. I always go out and greet the people myself. I can tell when the strain, the anxiety and the stress has really gotten to those people. One of the things that I really try to do, and I think it’s important to know, is that any problem in our lives can be solved. There are solutions, so that’s why we decided to name the show the IRS Solution Attorney because every problem has a solution.
KATRINA MADEWELL: I love it. And the stories. I’ve been following you Facebook for a while and some of the stories which I know you’re going to share a little bit later in the show and the different times, they’re pretty profound. I see crazy stuff like hundreds of thousands of dollars being settled for like nothing.
DARRIN T. MISH: We have to make sure that people, or stay tuned in for the IRS Train Wreck of the Week. That’s going to be something we visit every week and we’ll tell an interesting true life story about how someone came in as a train wreck and I promise they never leave that way.
KATRINA MADEWELL: I love it. So the three different types of tax things. So the first one was…?
DARRIN T. MISH: So the first one would be a typical self-employed person. He’s an independent contractor, he gets a 1099, not a W-2 so there’s no taxes being withheld from his pay. Let’s say he makes $4,000 a month and he puts $4,000 a month into the bank account. What he’s not realizing is he really needs to take care of what are called his estimated taxes, or his estimated tax payments on his own. It’s his obligation, the government has made it that hard working entrepreneur’s obligation to go ahead and figure out how to withhold their tax on their own and pay those payments quarterly. Whoever set this system up in congress or at the IRS that said to have hard working people that are independent contractors to pay their taxes quarterly are really either never have been in business or are not that bright? Let’s say your estimated tax payment obligation is $1500 a quarter or $500 a month. Is that hard working guy going to have $1500 left over in his checking account on day 90 when the tax payments are due? Very unlikely. I don’t think I’ve ever seen it actually.
KATRINA MADEWELL: That’s the thing, though. When you think about who that person is and it might even be someone listening. You’re talking about someone who was probably in corporate America, they broke off and they decided to…I had a prime example. I had someone on my show last week who was done with the whole corporate America, just I’m finished. We did a show on tiny homes. It was just interesting to see that, but then you imagine taking that person and then you go into a self-employed position, you don’t know that you have to withhold money to pay the IRS quarterly, like you were saying.
DARRIN T. MISH: Right, back to my law school story, they never told us anything about how to run a law practice, let alone there was something called estimated tax payments that we had to deal with. I’m going to reveal a pretty big secret here, and something that you’re CPA should tell you, but doesn’t tell you. Your CPA typically says, congratulations, Katrina, you made a lot of money last year, you have to make estimated tax payments every quarter or some big number and that’s going to be it. He’s going to give you the four coupons and he’s going to slap you on your back and send you on your way. But the big secret is, try to break those payments down from quarterly into smaller chunks. Make them monthly, make them weekly, make them daily if you have to. The IRS doesn’t care how often you make those payments. They just want you to make some payments. It’s a lot easier, in my example, if you had a $1500 quarter obligation, pay it $500 a month. Or pay it $125 a week.
Whatever it takes because, one of my favorite little sayings is if you put that money aside into a checking or special segregated account and wait to pay it quarterly, like I’ve done in the past, it seems like there’s always some reason why you have to – air quotes – borrow the money.
KATRINA MADEWELL: Murphy’s going to sneak up in your bank account and take it.
DARRIN T. MISH: The baby’s going to need diapers or something’s going to happen and you’re going to borrow the money from yourself/the government and it’s just not going to work out. You’re going to find yourself high on the eight ball.
KATRINA MADEWELL: Am I correct in remembering that’s the worst kind of tax you can owe, is payroll taxes?
DARRIN T. MISH: Well, we’re not talking about payroll taxes here, but yeah, generally speaking. Payroll taxes are the ones that employers are supposed to take care of.
KATRINA MADEWELL: That’s the one that happened to me. 23 years old starting my business, I had a bad CPA, I got really bad tax advice. Didn’t realize that was the start of a train wreck and essentially it went from bad to ugly. We had a bookkeeper that I thought was handling all that stuff and doing it and the next thing you know my partner ran off the bookkeeper and here I am really pregnant and in comes the IRS lady.
DARRIN T. MISH: Yeah, it can be really scary and people don’t realize this, but a significant portion of the payroll tax can actually be attributable to the responsible human being. A responsible person. Which it sounds like it was you in your case and it was certainly me in my case. I don’t think either one of our cases got that far, but it can get pretty far down the road. Half a million dollar payroll cases is really not unusual at all. Can you imagine knowing…I mean we were talking about how scared we were when we owed $10,000?
KATRINA MADEWELL: Yeah, it was somewhere…I think it was 20 in my case, which was a lot of money at that time.
DARRIN T. MISH: Can you imagine owing a half million?
KATRINA MADEWELL: No.
DARRIN T. MISH: Those are the type of people I represent on a daily basis. Somehow it typically seems to work out. So let me tell you the other two big types of people. Very short. The second person would be the person who made an early withdraw from a retirement account. Like a 401k or an IRA. They were thinking the 10% is what I have to have withheld and what they’re not thinking about is the early withdraw penalty is 10%, but then you have to pay the tax on top of that. So we see that a lot.
KATRINA MADEWELL: Oh, so there’s a separate penalty that just your retirement or IRA or whatever is charging you and your government.
DARRIN T. MISH: Well, it’s like a 10% early withdraw penalty if you’re under 59 and a half and then there’s whatever tax bracket that money happens to kick you in to. Sometimes people think well I made $75,000 a year I’m in such and such bracket and then they take $150,000 out of their IRA, well that kicks them in to a different tax bracket that they’re not even thinking about.
KATRINA MADEWELL: Or they’re thinking that whoever had my IRA withheld this, I’m good.
DARRIN T. MISH: Right. Then the third kind of person is the wage earner who just decides to write exempt on their w4 or put 99 exemptions or whatnot. Sometimes people do that because they want to borrow that money for a short period of time and it gets really tempting to just keep that money coming in to your paycheck instead of giving it to the government.
KATRINA MADEWELL: So take different withholdings. We’re going to have to jump back on number three in a minute. We’re going to take a real quick break. We’re here with Darrin T. Mish, he is the IRS solution attorney. I’m your cohost Katrina Madewell. We’ll be back in a minute.
DARRIN T. MISH: I’m Darrin Mish, back in with my cohost Katrina Madewell.
KATRINA MADEWELL: Thank you for rejoining us today for the IRS Solution Attorney show. If you missed any part of the show today, you can recatch it on Darrin’s website, irssolutionattorney.com. We’re brand new but we’re going to put a tab under there called radio where you’ll be able to catch all the shows in their entirety. They’ll also be available on a podcast, so hop on over to iTunes and we’ll get it for you up there and you can catch the whole thing in its entirety.
DARRIN T. MISH: So to recap we’re talking about the three different types of people who end up with IRS challenges, problems, whatever you want to call them. The first one was the self-employed guy, typically the independent contractor or the very small business person who…
KATRINA MADEWELL: Basically didn’t submit their taxes.
DARRIN T. MISH: Not a corporation, just that file what’s called a schedule C. That’s probably the least sophisticated kind of business that we have. The second would be the person who made an early withdraw from a retirement account and didn’t figure out there was taxes that needed to be paid at that time. The third would be the employee who from some reason didn’t fill out their w4 correctly or claimed an inappropriate amount of exemptions. Sometimes people will just write exempt on a w4 so they can get 100% of all the income tax that should have been going into being withheld so they get in their paycheck.
KATRINA MADEWELL: So break down the w4. What is that again for the person listening?
DARRIN T. MISH: Good point. A w4 is the form you fill out when you first get hired. You know there’s that flurry of forms when you first get hired.
KATRINA MADEWELL: Right and people are like I don’t know w-2, 1040, they’re all numbers.
DARRIN T. MISH: So the w4 is the form that you fill out that you’re telling your employer how much tax you want to have withheld.
KATRINA MADEWELL: All the ones people might only see once.
DARRIN T. MISH: Exactly, you’ll probably only see this one time. It’s going to ask you what your filing status is. So is it single, is it married filing jointly? Which would be typical for married couples. Is it married filing separately? Which is another option that married couples have. Is it head of household? Is it…
KATRINA MADEWELL: Which can be confusing to the person listening. It’s certainly a CPA question, but to touch on what a w4 is.
DARRIN T. MISH: I would say for your average single person the appropriate status is going to be single. For your average married person it’s going to likely be married filing jointly. Although there are reasons why you might want to file married filing separately. But this is really interesting. People always think that head of household, which is a filing status means whoever wears the pants in the family. And I’m here to tell you that’s not what it means. It would be kind of cool if that’s what it did mean because I think my wife would be filing head of household.
KATRINA MADEWELL: She’s like, it’s me buddy.
DARRIN T. MISH: Head of household means basically single parent raising a dependent usually a child. That’s the single mom with a kid or three kids or whatever. She’s going to get to file head of household because it’s going to give her some tax breaks that she wouldn’t get if she were to file single.
KATRINA MADEWELL: So single single is like just one person. Solo. Head of household meaning I gotta pay the bills for somebody.
DARRIN T. MISH: I think that’s a pretty good laymen’s definition.
KATRINA MADEWELL: Yeah, just trying to break it down.
DARRIN T. MISH: So that w4 is something you fill out with your employer. And you can fill these out more often than once. It’s just typically people fill it out one time, it’s kind of out of sight, out of mind. So your filing status single, married, whatever. Then you put a number down for your number of exemptions. The form itself is like 7 or 9 pages long with all the instructions and whatnot, but typically if there’s one of you you’re going to claim one. Or zero. If you claim zero, you’re going to have the maximum amount of tax withheld.
KATRINA MADEWELL: So the lower the number, the higher the withholding, is that right?
DARRIN T. MISH: Yes, exactly. So the people who claim zero typically are the people that are going to end up with the big tax refund at the end of the year. The people who have higher numbers mean they either have more children so they’re going to have less tax withheld from their check for whatever reason.
KATRINA MADEWELL: So if you had someone once put literally 99 on that form?
DARRIN T. MISH: Yeah, it’s kind of a common tactic, I don’t recommend it. I strongly advise against this.
KATRINA MADEWELL: That’s to me, I don’t even know anything about your world, but I would think like audit. Like 99, no way.
DARRIN T. MISH: Well, they can’t really audit the w4, but…
KATRINA MADEWELL: It’s a red flag, right?
DARRIN T. MISH: Yeah and there’s something called backup withholding. If the IRS figures out that you’re playing games on your w4, they can basically force withholding on your employer and it’s usually not a happy situation. So that’s the third kind of person is the person who basically in a nutshell plays some shenanigans on their withholding so they get more money back. And there’s some people out there…
KATRINA MADEWELL: So do you think that’s intentional or accidental? What do you think the story is behind that if you had to guess? I mean it’s different for everybody.
DARRIN T. MISH: I’ve met a bunch of accidentals and I’ve met more intentionals. There are people out there who feel legitimately and sincerely that taxes are unconstitutional or illegal and the IRS is a foreign corporation and things like that.
KATRINA MADEWELL: Oh, yeah, we’ve seen those. The ones that say never pay taxes again kind of thing.
DARRIN T. MISH: Yeah, I actually enjoy talking with those folks. Not professionally necessarily. I don’t like to represent those folks because it’s really really really challenging. Unless they’re reformed. Unless they come around and see things my way. We’re going to go ahead and challenge the government through their own manual, through their own codes and citations. I’ve reformed a lot of tax protestors and boy do they hate the phrase tax protestor. If there’s anybody out there offended, I’m not using that as a pejorative, I’m not trying to insult anyone. I have to call them something.
KATRINA MADEWELL: I want to be a tax protestor sort of I think.
DARRIN T. MISH: No, no, no, you don’t.
KATRINA MADEWELL: It sounds good in theory.
DARRIN T. MISH: Yeah, it does, but it doesn’t usually work out well.
KATRINA MADEWELL: So how do these things usually unwind? So we’ll start with the first person. The self-employed person, they worked in corporate America, they ditched it and now decide to start their own business. When is this usually rolling around? The end of the year they filed their tax return?
DARRIN T. MISH: We’re kind of back to our point, the person who left corporate America. They were good at the thing they did in corporate America, right? They’re probably not just not naturally born a good administrator or a good business owner. I always joke that even though my practice is basically exclusively limited to the resolutions of tax problems, I spend about 80% of my time being an administrator and about 20% of my time being a lawyer. So these people are a good baker, a good plumber.
KATRINA MADEWELL: They’re good at what they do, whatever it is.
DARRIN T. MISH: So they haven’t really thought about the tax consequences. Sometimes people don’t even think they’re going to make any money really. So the money starts coming in and they’re just living hand to mouth and they’re just trying to get by and then maybe if we’re lucky, they give the shoebox of receipts to the accountant at the end of the year. April 15 comes and the accountant breaks the news, hey you owe $17,000 or whatever it is and oftentimes that number is a shock. It’s not coming out of their pay like it did when they were working at corporate America. The reason congress put forced withholding in to place years ago, I think it was around 1912 something like that, was because…before that what would happen is we would all just calculate our taxes at the end of the year and nobody ever had the money. So almost everybody in America had a tax bill and it was causing discontent and unrest. So congress was like, no no no, we can’t have any of this, we can’t have people unhappy and not paying their taxes. So they decided to go ahead and force withholding. So this person, it hasn’t been coming out in tiny bites, it’s a big giant bite at the end of the year and it’s just shocking.
KATRINA MADEWELL: Now they’re in IRS shock.
DARRIN T. MISH: Right, so what a lot of people do is they ignore it.
KATRINA MADEWELL: They bury their head in the sand thinking it’s going to go away.
DARRIN T. MISH: I’ll take care of it later. They sincerely want to take car of it later, but later never comes and another year goes by and so now they don’t even bother filing because nothing happened last time.
KATRINA MADEWELL: Now they’re scared, they’re like I still 17,000 from last year, so I don’t even want to do this again, maybe I’ll just not file.
DARRIN T. MISH: I don’t really know when the fear kicks in, but at some point the fear kicks in. My average client, or the average case that I see, 8 to 10 years of nonfiling has gone by and by the time we get everything caught up, they owe $100,000 and now we got a problem.
KATRINA MADEWELL: So is typically the IRS knocking at their door, are they getting letters?
DARRIN T. MISH: I get two types of clients. Sometimes the IRS is knocking on their door. Remember that government shutdown in fall of…
KATRINA MADEWELL: Yes, where they froze everything?
DARRIN T. MISH: It wasn’t last year or the year before, I can’t remember. That government shutdown just about put me out of business because I have a lot of clients come in because a revenue officer, which is a local person who is tasked with the job of collecting money. Revenue officers go out and knock on people’s doors and they shove a lot of clients in our door. Because it’s a scary situation. Even if a revenue officer just left a business card in your door, that’s a scary thing. So during the government shutdown, those guys weren’t working and they weren’t filing tax liens and they weren’t trying to collect tax. The entire country decided to take a chill pill and not worry about their taxes. At least during that time frame. So that’s what happens is nothing happened and it builds up to a big number and sometimes people just want to come in out of the cold because it’s really bothering them, affecting their quality of life.
KATRINA MADEWELL: So just know something’s going to loop around, it’s going to be an issue.
DARRIN T. MISH: Affecting their marriage, whatever it might be. So they want to take care of it. So they come in usually shaking, nervous and we sit them down, we figure out a solution.
KATRINA MADEWELL: And there’s one that’s even bigger, the one I remember oh so well. We’ll talk about that one in a minute when we come back. This is Katrina Madewell a cohost for Darrin Mish, the IRS Solution Attorney show. We’ll be back in a minute.
DARRIN T. MISH: I’m IRS solution attorney, Darrin Mish, back again with my cohost, Katrina Madewell.
KATRINA MADEWELL: Welcome back, thank you for listening to the show. If you missed the earlier part of the show, our rock star host here was talking all about IRS solution problems and the three different types of tax issues that you guys see regularly. Self-employed people that didn’t withhold any taxes, people that did an early withdraw on their retirement or IRA, and the one…what was number three? The one that filed wrong on their w4.
DARRIN T. MISH: The one that intentionally decided that withholding was not for him.
KATRINA MADEWELL: Gotcha. We were talking about how people walk in, what stage they were in. And I remember the very first time I had you in the studio, which has been a while ago now. You were talking about when the bank account gets frozen.
DARRIN T. MISH: These are probably my least favorite cases because they’re so sad. There are two types of IRS levy. Levy is a scary word, it just means seizure. So when you hear the levy, just think that’s an IRS seizure. Seizure is never a good thing. I can’t think of any kind of seizures…
KATRINA MADEWELL: In any respects.
DARRIN T. MISH: Exactly. So there’s two different kinds of IRS levies or seizures and one is when they take your bank account and one is when they levy your wages. Neither are very pleasant because they hit the taxpayer right in the wallet. Right where it hurts. Typically IRS levies are not intended necessarily to collect all of the money. It’s kind of a last resort with the IRS quite honestly. I’m going to give them credit for this. Typically most IRS employees don’t lead with a levy. I’ve seen it, but it’s not a common thing. It’s usually because the taxpayer has been unavailable or incommunicado. Won’t communicate with the IRS, won’t cooperate.
KATRINA MADEWELL: And have ignored them for years by this point.
DARRIN T. MISH: Exactly. It’s kind of like a shot across the bow. The revenue officer will go ahead and levy the bank account or all of the income sources and that has a tendency to…I always imagine it as the IRS grabbing the taxpayer, or the non-taxpayer in this case and just jolting them, shaking them by their shoulders and like tipping them upside down to see if any loose change comes out.
KATRINA MADEWELL: Helloooo, answer me, I’m here.
DARRIN T. MISH: That has a tendency to get people’s attention. I’m going to talk a little bit more about what happens in a wage garnishment and what happens in a bank levy because there’s some important distinctions.
KATRINA MADEWELL: So they typically find out initially because they can’t buy groceries, right? Or gas or whatever.
DARRIN T. MISH: Yeah, this is really really sad. What happens a lot of times when a bank levy is, they go to swipe the debit card because does really anybody carry large amounts of cash anymore? Not really. So you go to swipe the debit card at the grocery store and it gets declined. That leads to you getting on your smart phone or calling your bank and then you find out that there’s a federal IRS levy there and that’s never a happy thing. When the IRS levies a bank account, it’s a one-time thing. They’re not supposed to and I have never really seen continuous bank levies. So it’s a one shot deal. They’re entitled to the money in the bank account, that particular bank account only on the day that the bank processes the levy. So it can be like a golden BB. Do you know what a golden BB is?
KATRINA MADEWELL: I don’t. What is a golden BB?
DARRIN T. MISH: A golden BB is like during war, when the guy, the troops on the ground are shooting their AR-15’s or their AK-47’s at the fire jet and every once in a while there’s a golden BB. There’s one round that takes that fighter jet down. One 30 cent round takes down a 50 million dollar airplane. So I think of these bank levies sometimes as a golden BB. I’ve had clients where most of the time the client has $300 in the bank and it’s two days before pay day and the IRS gets $300 and it’s not a catastrophic situation. I’ve had had clients where they’ve had $45,000 in there or significant sums of money and it’s kind of a big deal.
KATRINA MADEWELL: So you’re saying whenever they freeze it and they levy the bank account, whatever is in there that moment, they can swoop or take? But then days after that they can’t? Is that what you’re saying?
DARRIN T. MISH: You used an interesting word. You used the word freeze. It is a freeze, but only for that day.
KATRINA MADEWELL: That’s interesting I didn’t know that.
DARRIN T. MISH: So they only get the money there in the account that day and there’s 21 days that the bank has to hold it to allow us to argue with the IRS to try to get the money back. So if we can demonstrate what’s called an economic hardship. A real hardship. You can’t afford to pay for food.
KATRINA MADEWELL: Which is likely because they probably don’t have cash.
DARRIN T. MISH: Right. Transportation, healthcare, that kind of thing. If we can demonstrate that…
KATRINA MADEWELL: We can’t go to work to pay you.
DARRIN T. MISH: Right, nine times out of ten the IRS will release the bank levy. You have to demonstrate that it’s a big deal. That it’s an economic hardship. If you got the $300 in pay days tomorrow, probably not going to be able to demonstrate the economic hardship. So the difference between the bank levy and the wage levy is that the wage levy is continuous. We just learned that the bank levy is a one time deal. The wage levy is an evil, demonic instrument is not a one time deal. It’s an ongoing deal until the debt is paid.
KATRINA MADEWELL: So they’re swooping money from like they’re contacting the employer saying give me the whole check, part of the check, whatever they want to take? Or how does that work?
DARRIN T. MISH: That’s exactly what happens. There’s a table that the IRS sends to the employer with the wage levy notice and you check the filing status, how many dependents and it’s kind of like a graph and then you just drag your finger over there and there’s a figure there and that’s how much money you get to keep in your bank account and it’s a low number. It’s a ridiculously low number.
KATRINA MADEWELL: So like 25% of whatever you might normally get to bring home?
DARRIN T. MISH: Yeah. That’s a pretty good…
KATRINA MADEWELL: So they’re taking 75% give or take whatever dependents income table.
DARRIN T. MISH: It’s an ugly situation. When a self-employed independent contractor has this kind of situation it’s even worse. So you’re a real estate agent, right? So I assume that you, the funds go to a broker and then kind of filter down to you?
KATRINA MADEWELL: Right?
DARRIN T. MISH: In the situation with a real estate agent, it’s even worse. What happens is they send the levy to the broker and that levy says pay us everything you owe, Katrina.
KATRINA MADEWELL: Wow.
DARRIN T. MISH: And it’s continuous. So what happens in that situation? Either we get the levy released or Katrina goes and finds a new broker.
KATRINA MADEWELL: Either way, can it follow you? Can they chase your new broker?
DARRIN T. MISH: They can and they’re certainly legally entitled to, but they typically don’t know where you just went to the new place for quite some time.
KATRINA MADEWELL: And that’s the point I want to make, why would you run from it? Eventually it’s going to come full circle?
DARRIN T. MISH: Totally agree. You don’t want to run from it, you want to figure out what the solution is and deal with it head on.
KATRINA MADEWELL: So eat the frog, grab the bull by the horns, just knock it out.
DARRIN T. MISH: Usually the solution, there’s some pain involved, but it’s not like hack your arm off pain. It’s like you get a sore arm kind of pain. I don’t know if that’s a good analogy or not.
KATRINA MADEWELL: You’re going to have some bruises, but you won’t lose your arm. Doesn’t the IRS have a certain amount of time to collect money that the taxpayer owes? How does that all work?
DARRIN T. MISH: Do you like secrets?
KATRINA MADEWELL: Yes, tell me a secret. I want to hear.
DARRIN T. MISH: I think everybody likes secrets and government secrets are even more interesting I think. Don’t you feel like the government is holding back information from you?
KATRINA MADEWELL: Big brother. Is that the right word? Big daddy? Big something.
DARRIN T. MISH: You always feel like the government is withholding information from you that could impact your life. I’m going to reveal a government secret here. That is that there is a statute of limitations for the collection of tax. So in English terms, what this means is the IRS only has ten years from the date that the tax is assessed to collect it.
KATRINA MADEWELL: So going back to your same scenario, you have a self-employed person. Didn’t set any money or pay any monthly or quarterly or any type of payroll or income taxes. CPA does their taxes and they owe $17,000 so you’re saying…?
DARRIN T. MISH: I use an interesting word that most people don’t know what it means. I use the word assessed. So they have ten years from the date that the tax is assessed to collect the tax. Tax is assessed when we file a tax return voluntarily or if there’s an audit and then there’s an additional assessment of tax where we owe more money. If there’s no assessment, the statute of limitations never starts to run. So the people that don’t file for ten years, they don’t get off scott free, there was never an assessment typically so the statute of limitations isn’t running.
KATRINA MADEWELL: So is that better or worse? Not filing versus owing not paying. Running.
DARRIN T. MISH: I think it’s easier to end up in more trouble not filing than just filing every year and at least having a handle on where you’re at. There’s something the IRS can and does do. When a tax payer doesn’t file, if they have sufficient information to prepare a return, they will eventually prepare something called a substitute for return. We call them SFR’s in our business. If you have a substitute for return filed for you by the IRS, there’s some good things and bad things. The good thing is the statute of limitations for collections starts to run. The ten years we were just discussing, that starts to run so that’s a good thing I suppose. A bad thing is that some kinds of taxes can be discharged in bankruptcy and that kind can never be discharged in bankruptcy so it’s not a good thing.
KATRINA MADEWELL: So if they file the return for you, you can’t discharge that?
DARRIN T. MISH: Well, it’s debatable. There’s some bad case law out there that seems to stand for the very strong proposition that taxes are substitute for returns are not returns. They are for cannot be discharged and bankruptcy. I’ve read the cases, they don’t make a lot of safe. But when you consider that federal court judges are paid by the U,.S. Treasury, it does make sense that they have a little bit of priority in making sure the tax debt gets collected. That’s not saying anything bad about you.
KATRINA MADEWELL: So you can actually include taxes that you owe to the IRS in a bankruptcy?
DARRIN T. MISH: There are certain circumstances where you can file a bankruptcy and discharge taxes. There’s two kinds of bankruptcies that we’re talking about here for just regular folks. A Chapter seven bankruptcy, and these terms get confusing. You hear chapter 7 and chapter 13 get thrown around all the time.
KATRINA MADEWELL: People think bankruptcy, they don’t know. They think maybe that’s something the court assigns.
DARRIN T. MISH: Yeah, they don’t really know what the difference is. The chapter 7 bankruptcy is the kind of bankruptcy that you can think of as a liquidation. It has a tendency to liquidate your debts. It has a tendency to liquidate any assets you have over certain amounts too.
KATRINA MADEWELL: So fire sale get rid of it be done.
DARRIN T. MISH: I think that’s a good laymen’s term, way of thinking about it. Chapter 13 is the kind of bankruptcy where you have some debt and what you do is you pay some portion of that debt over a period of time on a monthly basis. Usually a 60 month plan.
KATRINA MADEWELL: So repayment of the debt over five years, usually not the full amount. Some type of reduced settlement agreed upon.
DARRIN T. MISH: I’m going to talk about some timing rules and generically speaking there’s three timing rules. Returns have to have been due including extensions for at least three years. They have to been filed if they’re late for at least two years and the taxes need to have been assessed for at least 240 days. That’s really confusing. It took me years to understand what I just said. What you can think of is if you just needed one number to think about, you think about the returns have to have been due and filed for at least three years, that will get you in the ballpark that maybe a bankruptcy could be an option. We’ve done chapter 7 bankruptcies where we wipe out the debt into half a million dollar range.
KATRINA MADEWELL: That’s amazing. Imagine the people listening to this, I can file bankruptcy to include my taxes? That’s an option?
DARRIN T. MISH: There’s a really cool side effect too. If the taxpayer owed half a million dollars and they had 90,000 dollars in credit card debt, the credit card debt goes out the window too.
KATRINA MADEWELL: Talk about a clean slate. Starting over.
DARRIN T. MISH: That’s exactly the kind of person that the bankruptcy laws were intended for. Not the people who got the law changed in 2005 who are really abusing things. They were running up credit card debt and then just punching a button and you know.
KATRINA MADEWELL: Like swiping their debit card. Time to do it again, baby.
DARRIN T. MISH: Right, it’s not for the people who were just doing this intentionally. Some people really do deserve that fresh start.
KATRINA MADEWELL: I know that we talk all the time about settling pennies on the dollar. I’ve heard commercials and all this kind of stuff. So can we chat about all that when we come back after the break?
DARRIN T. MISH: Pennies on the dollar settlements are certainly possible, we’ll talk about all that when we come back.
KATRINA MADEWELL: You’re listening to the IRS Solution Attorney show. Back in a minute.
DARRIN T. MISH: This is attorney Darrin Mish with my cohost Katrina Madewell. We’re talking about solutions to IRS problems and what’s available for folks who get themselves into trouble with the IRS.
KATRINA MADEWELL: Thanks for sticking around, we’re glad you came back. If you missed the show, you can catch the whole thing in its entirety, we’re going to post it at irssolutionattorney.com under radio. We’ll get all the weekly shows there on a podcast so if you are catching something you’re into it in the car and you know you want to hear the whole thing, hop on over there to irssolutionattorney.com and catch the whole thing in its entirety.
DARRIN T. MISH: So let’s talk about settling cases for pennies on the dollar. That’s pretty interesting, right? That’s juicy stuff.
KATRINA MADEWELL: I see your stories and I’m like how can that be? Half a million dollars for what?
DARRIN T. MISH: The program is called an offer in compromise. Certainly an offer in compromise is not right for everyone. There’s a significant portion of people that I com in contact with that it is right for them. An offer in compromise is where you make a deal to settle for less with the IRS and the amount of the offer is calculated using a pretty simple formula. We’re talking about what’s called a cash offer here. A Cash offer is calculated using this formula. They take your monthly disposable income times 12 plus the value of your assets and that equals the amount of your offer. So that kind of sounds weird, right?
KATRINA MADEWELL: So what was that again? Kind of recap that and give me some real numbers to work with.
DARRIN T. MISH: Sure, I’m going to give you an example here. Let’s say your monthly disposable income, this is according to the IRS. The monthly disposable income was $100, you would take $100 times 12, which is $1200.
KATRINA MADEWELL: Disposable income meaning whatever you have left after your bills, right?
DARRIN T. MISH: Disposable income is the difference between your gross income and your allowable expenses so there’s kind of a tricky word in there. Allowable. Who is the IRS to decide if it’s allowable or not, right?
KATRINA MADEWELL: The IRS.
DARRIN T. MISH: Don’t we get to decide what we spend our money on? Well, yeah, if you pay your taxes you get 100% decision authority on how you spend your money. But if you owe $100,000 to the IRS then they get a say so in this matter. So allowable expenses are some things that are tables. For example there’s a table for a maximum housing allowance which is housing and utilities for every county in the country. So if memory serves Hillsborough County for a family of two, housing and utilities is about $1900. Pasco County is less, Penalas County is a tiny bit less, we’re almost the same. So generally speaking, the more rural the county, the lower the housing expenses and the lower allowable expenses.
KATRINA MADEWELL: So they don’t care about your car? They don’t care about any personal loans, right?
DARRIN T. MISH: There’s a max car allowance for both the ownership expense of the car payment, it’s in the 500’s somewhere and then there’s a max, this is my favorite allowable expense because it’s so ridiculous. Gas prices have gone down, but we’ve had years where they’re really high, right? Around 4 bucks a gallon. For years this number hasn’t changed. The operating expense or allowable expense for the Tampa Bay area is $244 a month. That’s gas, maintenance and insurance. For one car. I don’t know anybody that pays $244 a month for their operating expenses of a car.
KATRINA MADEWELL: Maybe in my Prius. Maybe.
DARRIN T. MISH: Do you have a Prius? Ok, I used to like you.
KATRINA MADEWELL: Until we go to the gas pump, then we’ll talk.
DARRIN T. MISH: Polar opposites here.
KATRINA MADEWELL: Trust me, I would rather be driving your big ol truck but you know 3,000 a month miles later 40 bucks, I can’t complain.
DARRIN T. MISH: Yeah, exactly. So we’re looking at monthly disposable income times 12 plus assets equals the amount of the offer. Sometimes those numbers come out kind of silly. What if the monthly disposable income is negative? Which is pretty common. If it’s negative 47 dollars, negative 47 dollars times 12 is a negative number. I’m not good enough to do an offer where I get my client paid.
KATRINA MADEWELL: Haha, that’s great.
DARRIN T. MISH: So what we do in those cases is we pick a number. We pick a number that we think the IRS is going to settle for and sometimes that number is $1,000, sometimes it’s $500 and sometimes if I get kind of ornery and feeling contrary, it’s $20. On occasion those things tend to go through. We’re going to talk about it on the train wreck of the week in a little bit.
KATRINA MADEWELL: I think it’s a good one. It’s right on time too as your realtor cohost here, we’re going to share a story about another realtor here soon.
DARRIN T. MISH: Realtors are some of my favorite people, I love realtors. I hope they all succeed. I think they’re really nice people. They have a high incidence of tax problems.
KATRINA MADEWELL: I’m so glad I’m not, hopefully I’m not ever in that position to have to call you, Darrin. We were talking about the payment plans. I’m sure that’s something you have to figure out and maybe next week a good topic would be to talk about how to prepare to come see you. Like what kind of stuff you ought to have because I imagine it’s a lot of stuff.
DARRIN T. MISH: It doesn’t have to be a lot of stuff. A lot of stuff we can go ahead and get from the government in terms of transcript information. We can get a lot of data from the government. But the more prepared people come in, the better off they’re going to be.
KATRINA MADEWELL: I’m thinking, even just to get a mortgage all the stuff you have to have, I’m thinking it’s probably similar stuff, but maybe not.
DARRIN T. MISH: Oh, jeez, after the new underwriting standards, coming to see me is nothing compared to getting a mortgage. That’s like bloodletting I think.
KATRINA MADEWELL: Yeah, it’s pretty brutal. We tell them by the time we get done we’re going to know everything about you and a little bit more. But the good news is people that look at that stuff all day, we don’t remember anything.
DARRIN T. MISH: I think they know the blood types of my two kids.
KATRINA MADEWELL: That would be ridiculous, really. So is it time for the IRS train wreck of the week? Are we almost there?
DARRIN T. MISH: Sure.
(Train wreck noise)
DARRIN T. MISH: This recently happened, I’ll never forget this, it was a surprising outcome. A gentleman comes in, he’s very nervous, he’s visibly shaking. He’s not sure if he wants to share this story with me or not, but it turns out he is a realtor and he’s had problems filing returns in the past.
KATRINA MADEWELL: So just hasn’t filed at all?
DARRIN T. MISH: There were some that were missing. For sure. There was at least one…
KATRINA MADEWELL: So like one, two, skip a few?
DARRIN T. MISH: Yeah, it was kind of like that. One of the things you have to do in order to get an offer and compromise through is you have to get your missing returns filed.
KATRINA MADEWELL: The few you skipped got to get in there.
DARRIN T. MISH: That makes sense, right? If you’re going to do a deal, a global settlement so to speak, with the IRS, don’t you want every dollar in there? You want to settle the whole thing. Fortunately that’s one of the requirements is you have to get all your missing returns done. It took him a long time. He had a lot of fear, anxiety, and emotion wrapped up in this problem. A lot of shame. It took me about a year to cajole and then ultimately bully him into getting the tax returns done. When we got them all prepared and filed, the total balance ended up being $216,310.
KATRINA MADEWELL: How many years was that for?
DARRIN T. MISH: I think it was about 6 or 8 years. He had some good years during the real estate boom. He had about $100,000 bill from one of those years so that was probably a really good year he had.
KATRINA MADEWELL: To owe almost a quarter million dollars to the IRS, I’d be scared too.
DARRIN T. MISH: He was pretty much paralyzed. This was the end of his world in his mind. Ultimately what happened is he ended up having a heart problem. He ended up in the hospital.
KATRINA MADEWELL: He drew himself to a heart attack?
DARRIN T. MISH: Part of it was the sheet, physical anxiety that he was imposing upon himself just freaking out about this. Just stressed about it. I have a special place in my heart for people that feel like that with that anxiety. I’ve been through it. I know how it feels and it’s just not a happy place to be. Ultimately what we did is when we calculated his monthly disposable income, it was negative. So we went ahead and filed an offer and compromise for $500. For those of you at home, this does not happen. This is a very unusual circumstance, what happened was ultimately that offer and compromise was settled, no questions asked, no more documentation, no further bank statements. Nothing. $500 to settle $216,310.
KATRINA MADEWELL: So someone for 7 or 8 years of not filing their returns. Not paying income taxes. Owed the government a quarter million bucks. You got it settled for 500 bucks.
DARRIN T. MISH: Yeah, this is not typical, but it does happen. I would encourage people to just know that the program exists. They don’t have to use me, they can use anybody they want. They can do it themselves. This program is out there, it does work under the right facts and circumstances. This is a guy that really needed a break. The government realized he needed a break. And he got it.
KATRINA MADEWELL: But you have to call Darrin because he’s awesome. Heart of gold. Knows his stuff. Any professional you’re going to hire, they need to know their stuff. That’s the biggest, number one thing.
DARRIN T. MISH: I like to think I know my stuff. I’ve been teaching this stuff for a really long time, about 12 years. I speak to attorneys and road agents and CPA’s all over the country. I really love it, I live and breathe this stuff. I love helping people and I love taking that anxiety and just turning a frown upside down.
KATRINA MADEWELL: Squashing it like a bug. Thanks for listening this week to the IRS Solution Attorney. I’m your cohost Katrina Madewell.
DARRIN T. MISH: I’m Darrin Mish. Thanks for tuning in.
KATRINA MADEWELL: This week, we’re out.