DARRIN T. MISH: Welcome, welcome, welcome. This is the IRS solution attorney, Darrin T. Mish. I’m here today again with my lovely and talented cohost, Katrina Madewell. How are you doing today, Katrina?
KATRINA MADEWELL: That would be me, doing fabulous, how are you?
DARRIN T. MISH: I’m doing really really well today.
KATRINA MADEWELL: So what’s shaking up over there today in Mishland?
DARRIN T. MISH: Well, you know.
KATRINA MADEWELL: What do we have lined up for today?
DARRIN T. MISH: We’re going to talk today about the differences between tax evasion and tax avoidance because I get a lot of questions about this. Everybody knows that there’s a negative connotation to tax evasion, I think that’s pretty common knowledge. But I don’t think people really understand what that means so we’re going to talk about that a little bit today and we’re going to mix things up a little bit more than usual on the show here today.
KATRINA MADEWELL: Sounds like fun. I’m in it, let’s do it. So what is the difference between tax avoidance and tax evasion? How do you explain that?
DARRIN T. MISH: I’m really glad you asked that. Tax evasion is when you use illegal means to avoid the payment of taxes. The best example that I can think of…
KATRINA MADEWELL: Yeah, I was going to say, break it down, tell a story.
DARRIN T. MISH: The best example that I can think of is Al Capone. The FBI didn’t bring down Al Capone because based on his mob, alleged mob or mafia activities. They actually brought him down because he failed to report his illegal income on his income tax returns and that was tax evasion. He was evading, which means escaping, right.
KATRINA MADEWELL: Running away from your obligation.
DARRIN T. MISH: Your obligation to pay your income taxes. That’s probably the best example that I can think of is technically even drug dealers are supposed to.
KATRINA MADEWELL: So they’re tax evaders.
DARRIN T. MISH: Yeah, exactly.
KATRINA MADEWELL: So what about all of these things, we used to be able to see it a lot more in the 80’s and 90’s. Here I am dating myself. We’ve seen in the 2000’s, little bit less.
DARRIN T. MISH: Of course you were probably in Kindergarten in the 80’s.
KATRINA MADEWELL: Yes I was, good memory. They were like the infomercials that you would see all the time like don’t pay taxes, it’s not constitutional. You know what I’m talking about? I can’t even know some of the names.
DARRIN T. MISH: We’re about to blow up the phone lines at 727-441-3000.
KATRINA MADEWELL: Again 727-441-3000. You got those IRS tax questions, call us again.
DARRIN T. MISH: Go ahead and call us, even if you’re one of those constitutional free thinker folks. It would be nice to just chat briefly about your beliefs that the income tax is unconstitutional.
KATRINA MADEWELL: 727-441-3000
DARRIN T. MISH: Exactly 727-441-3000. It used to be really big around this area, the Tampa Bay area, actually. These folks that…and I actually can identify with them. I think we’re on the same side, we just go about it differently. There’s people out there that believe that they shouldn’t have to pay income taxes. I’m kind of with them. Philosophically, politically, I’m kind of with them.
KATRINA MADEWELL: Can’t we do this a different way?
DARRIN T. MISH: Right, or a little more fair way or more effective. More just. There’s folks that believe that the constitution or outlaws the payment of income tax. There’s some folks that believe the constitutional amendment that passed the income tax law was not properly ratified and they go down kind of that rabbit hole.
KATRINA MADEWELL: Those are the ones I’ve seen. The infomercials that say it’s not constitutional.
DARRIN T. MISH: There was a number of these guys in the Tampa Bay area, specifically down towards Sarasota that were promoting these schemes pretty heavily. That leads me to the second example that comes to mind about tax evasion and that’s Wesley Snipes. Wesley Snipes gets popped because he follows the philosophies and advice of a guy named Eddie Kahn. K-A-H-N, who was promoting these schemes. Eddie Kahn I believe is still in prison for the promotion of these tax evasion schemes, for lack of a better term. Wesley Snipes, I forget how long he did, but he did a fair amount of time. He’s out now I believe. I think he did…
KATRINA MADEWELL: People like me that don’t even watch the news that much. Yeah, Wesley Snipes, he’s an actor, he was in jail, tax evasion–oh yeah, I think I heard something about that on Twitter. By the way if you have tax questions, you can hit us up on Darrin’s Twitter feed @Darrin_Mish or you can call us at 727-441-3000, we’ll be happy to answer your questions.
DARRIN T. MISH: Snipes ended up doing three years in prison for willful failure to file income tax returns, which is a little bit different than tax evasion. Tax evasion carries a sentence that’s a little bit more stiff than that. Mr. Kahn, the promoter of this scheme ended up doing 10 years in prison, so he’s still there as far as I know. One of the things that’s really interesting about the Wesley Snipes case is that it was tried in Tampa because Mr. Kahn was roughly from this area, so the jurisdiction of the federal court that prosecuted Mr. Snipes was here in Tampa as well. We were able to watch that case very closely. The reason that the IRS actually prosecutes high visibility people is because our system is based on what’s called voluntary compliance. The tax protestors really seizure upon this phrase, voluntary compliance. Well, if it’s called voluntary compliance, doesn’t that mean that the payment and filing of tax returns is voluntary? Well, not exactly. What voluntary compliance means is that we voluntarily comply with the law, file tax returns, self-assess. We actually get to calculate what our tax is ourselves. There’s something of an honor system going on there.
KATRINA MADEWELL: Unless you get an audit, right?
DARRIN T. MISH: Right, and we’ll talk about that later. By and large you prepare or have somebody else prepare your tax return and you calculate the tax that’s appropriate and then you file it with the government. In lots of other countries, there isn’t self-assessment. The government calculates it, tells you what the bill is.
KATRINA MADEWELL: So they kind of look at your bank statements I imagine and assess what you owe? Factor it off your income?
DARRIN T. MISH: I think in these other countries, there’s probably more of an automatic kind of withholding from pay. I don’t know what they do honestly. A lot of countries…
KATRINA MADEWELL: That might be why we have more tax issues here. The free enterprise system.
DARRIN T. MISH: It could be, I mean we’re obviously one of the most capitalistic, enterprising, industrious sort of societies on earth, still. Despite all the changes that have gone about in the last decade or so.
KATRINA MADEWELL: Hey, Echo, welcome to the show.
ECHO: Hello, how are you?
KATRINA MADEWELL: Doing good, how are you?
ECHO: I’m doing good.
KATRINA MADEWELL: What can we answer for you today? I should say, what can Darrin answer for you today?
DARRIN T. MISH: How are you doing, Echo?
ECHO: I’m good, how are you?
DARRIN T. MISH: Good, good. What’s up?
ECHO: I wanted to see…I have been in business, a mortgage business for a long time, up until 2007 and then I had taken a break for a little bit. For about 3 or 4 years and started working back with Katrina the last couple of years. Between that time, I had some issues to where I wasn’t filing my returns. So I wanted to see if I could get some help from you on that. It’s about four years that I have to try to work on.
DARRIN T. MISH: Sure, let’s talk about just briefly for the benefit of our audience. So you stopped filing in maybe 2007 and maybe 2007, 8, 9, 10?
DARRIN T. MISH: So we’ve got good news for you. Are you ready for some good news?
ECHO: Yes, please.
KATRINA MADEWELL: Everybody will take good news.
DARRIN T. MISH: The good news is the statute of limitations for the crime of failure to pay a tax return. So when we were talking about Mr. Snipes going to jail for failing to file a tax return, that might have alarmed you a little bit, but don’t worry. Most people, by far, who fail to file are not criminal prosecuted because the government frankly doesn’t have the assets to prosecute us all. When Wesley snipes, or a judge or lawyer or doctor, or some other high profile person in the community doesn’t file, and they get a hold of that. They prosecute that person and make them an example then it ends up in the media, we all hear about it, we get scared. So the idea is that we will then file if we haven’t filed and we’ll do the right thing. So my good news for you, Echo, is that the statute of limitations for the crime of failure to file is only six years. So what that means in clear, simple terms is beyond six years, you actually don’t have to file that tax return. So instead of having to do 07, 08, 09, and 10, you’re only going to have to do 9 and 10. That might cut down on your burden quite a bit. And it might just frankly, honestly, cut down on how much you owe, too.
ECHO: Ok, great.
DARRIN T. MISH: There are some exceptions to these rules. I can’t say that categorically that’s the situation for you. But I can say that’s the situation 99.9 percent of the time. So I think that’s probably pretty good news for you. And Echo, if you want to contact the office, probably the best way to do that is to go to my website at getirshelp.com and the phone number’s there and you can call, I would love to talk to you.
ECHO: That would be great. I would love to make an appointment to see you soon.
DARRIN T. MISH: Fantastic. Is there anything else I can do for you?
ECHO: Nope, that would be it.
KATRINA MADEWELL: Where would someone like that start, Darrin? What would they need to bring to your office? Do they start with a consultation?
DARRIN T. MISH: What we do is we set up an appointment. We do a very short sort of intake process where we ask some questions to make sure it’s a good fit so we’re not wasting your time and you’re not wasting our time. But after that, we’ll set up an appointment, and typically if the person’s local, I really recommend they come in to the office because the dynamic of me sitting here with you in person is different than if we’re just talking over the phone. I can’t read Echo’s body language, I’m missing some information. She’s told me that verbally over the air here, but the relationship’s a little bit different.
KATRINA MADEWELL: Can’t see her eyes, her body gestures.
DARRIN T. MISH: Right, so I’d like to meet her so I can really understand what she needs so I can help her more adequately. Honestly more than half of my consultations are over the phone because I represent clients all over the country. If they can’t come in, we’re going to do it over the phone.
KATRINA MADEWELL: Perfect. Getirshelp.com, if you have any questions, if you have any questions, you can connect with Darrin’s team.
DARRIN T. MISH: Ok, Echo, is there anything else we can do for you?
ECHO: No, that would be it, thanks so much. You guys have a good show.
DARRIN T. MISH: I wanted to say one more thing on what we would do in a situation like that. Many people that haven’t filed tax returns are going to have a real problem with coming up with their w-2’s and 1099’s in that situation because let’s face it, she’s talking about filing 08, 09.
KATRINA MADEWELL: 7 or 8 years ago.
DARRIN T. MISH: Yeah, a ways back now. So what we do is get a power of attorney which allows us to communicate with the IRS on her behalf and represent her. Then we will very discreetly, I will request those missing wage and income statements. It’s essentially the w-2’s, 1099’s, and the 1098’s.
KATRINA MADEWELL: To see what was reported by the employer.
DARRIN T. MISH: Exactly, at least we’ll have the income information. In the case of the w-2 we’ll have the taxes withheld and prepare a return from there. That’s how we do it.
KATRINA MADEWELL: You make it so much less scary.
DARRIN T. MISH: That’s what I’m here for. It’s a scary topic. I actually like the fact that it’s a scary topic, it keeps lots of other attorneys and accountants out of the practice of helping people with tax problems. I believe firmly that every single problem in life has some sort of solution. Some solutions are really painful and hard, but every problem has a solution.
KATRINA MADEWELL: The faster you get through it, the faster you can move in another direction.
DARRIN T. MISH: Exactly. I’ve met people, and I think I’ve shared this with you on the air before. I have people that come in that haven’t filed since 1960 and they’re physically trembling. The fear of this problem has literally ruined the better part of their lives. My heart really goes out to those people. Life is hard enough without going to sleep every night, wondering if you’re going to get arrested for failure to file tax returns and when you’re really not a highway kind of person.
KATRINA MADEWELL: I can’t imagine the stress they must feel. I know for me, one of the biggest stresses I ever had is having debt, and that was enough. And compile IRS debt on top of that and I can see why some of these people wouldn’t sleep.
DARRIN T. MISH: I’ve owed the IRS money a couple of times in my life, in my career. It’s funny, I can open up an IRS letter for a client, no big deal, I’m totally objective. It doesn’t make my heart race or anything like that. When that letter is addressed to you with your name on it, it’s never a good thing.
KATRINA MADEWELL: Kind of like the lawsuits we talked about before the show.
DARRIN T. MISH: Never any fun.
KATRINA MADEWELL: Back on track with what we were talking about tax avoidance versus tax evasion. Tax avoidance, what are some examples…what could you talk about instead of just flat out evading, running from, not filing the taxes, how can some people actually legally avoid taxes. Do you get in to much of that or talk about that?
DARRIN T. MISH: Tax avoidance is completely legal. There’s a famous quote by Judge Learned Hand, I’m going to see if I can find it here. He says “anyone may arrange his affairs so his taxes shall be as low as possible. He is not bound to choose that pattern which best pays the treasury. There’s not even a patriotic duty to increase ones taxes”… I’m going to put in a parenthesis, despite what some people in politics think…
KATRINA MADEWELL: Adding value to the sentence?
DARRIN T. MISH: “Over and over again, the courts have said that there’s nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor like, and all do right, for nobody owes any public duty to pay more than the law demands.” So that’s a big, fancy, sort of antiquated way of saying, if you can arrange your affairs legally, appropriately such that you can pay less tax, they’re all for it. We have some really clear and obvious examples just in regular everyday life. Why do people buy houses, by and large?
KATRINA MADEWELL: For the most part, interest deduction, although the rates are so low right now, I think the home ownership is probably a bigger factor.
DARRIN T. MISH: I think maybe right now. but for years and years one of the reasons people bought a home instead of renting, they would get that home interest deduction, they would be able to write that off, and itemize it on schedule A and it would help shield some of their income.
KATRINA MADEWELL: When I started in this business, conventional money, if you have good credit, it’s the rates that those people get. 12%. The balloons were popping that were originated in the 80’s.
DARRIN T. MISH: I think that’s still part of the reason why, going to private money for jumbo loan might still make sense to some people because the interest in part is a write off and it’s kind of helping. I think with interest rates as low as they are too, I think it should be encouraging the purchase of bigger and bigger homes. Which is kind of funny because the government kind of talks out of both sites of its mouth, right? They don’t want you to buy more house than you can afford, but then the tax structure. Like many times, or sometimes, the tax structure encourages behavior that the government doesn’t necessarily want to encourage. It’s because politicians don’t always think through what they’re trying to accomplish when they pass legislation.
KATRINA MADEWELL: I think you have the HSA on your list, which is a hot topic to talk about too. For me, this was pretty new. Even for me, someone that I consider pretty educated with the last couple of years just started doing this.
DARRIN T. MISH: Yeah, Health savings accounts are really really cool. I have one and I’ve had one for years. Basically a health savings account is what needs to happen in our society. Not Obamacare, health savings accounts are really the answer to the problem that crisis – in air quotes – that we have right now.
KATRINA MADEWELL: That’s what Ben Carson is pushing.
DARRIN T. MISH: The reason I think it’s the answer is it’s just so elegant the way it works. What you do is buy a high deductible insurance policy. I think for my family of four, it’s about $400 a month, which is pretty affordable. I think the deductible…I can’t remember. I want to say it’s around $10,000 and I can put maybe $6,000 or $7,000. I think it’s $6250 right now. You can put $6250 a year into your health savings account, pretax.
KATRINA MADEWELL: It depends on the size of the family too, doesn’t it?
DARRIN T. MISH: It does. I’m just giving you an example in my situation. So I can spend that $6250 a year on any health related expenditure that I want. Even over the counter medication, prescription medication, dental, vision, wellness…wellness visits are free now. But doctors, copays, all that stuff.
KATRINA MADEWELL: We did that with Invisalign. We maxed that out when we knew our daughter was going to get braces.
DARRIN T. MISH: That money, if you go ahead and max that out every year, that money can roll over into that health savings account from year to year. If you still have it there at age 65, it turns into an IRA automatically. So this is really a cool and elegant solution.
KATRINA MADEWELL: I think the one we have is different, but that’s neat.
DARRIN T. MISH: Here’s one thing that really works that helps drive down healthcare costs. People don’t realize this, here’s some value on today’s show, people don’t realize this, but you can actually bargain with the doctor. The doctor has multiple price schedules. No one ever talks to the doctor really about prices and the doctor frankly doesn’t have any idea what he charges for anything.
KATRINA MADEWELL: No, and they don’t want to talk about it. Their negotiating skills are not their strong points.
DARRIN T. MISH: Right, so you go and talk to the office manager or whatever. If you go and say, can you tell me what the cash price is for this procedure or situation that I’m in? And they will normally knock sometimes as much as two-thirds off the HMO price.
KATRINA MADEWELL: Wow.
DARRIN T. MISH: For you to pay right then and there with your HSA debit card.
KATRINA MADEWELL: That’s how you know our healthcare system is just jacked up.
DARRIN T. MISH: The reason they have to charge so much is because they know their bill is going to get cut in half by the insurance company and then there’s all this complicated paperwork and what not. One of my kids obstetricians, it took her over a year to get paid after the birth of our child. Think about that, that’s crazy, right? I have a funny story, kind of a cool story.
KATRINA MADEWELL: Sounds like real estate, sometimes that’s how long we wait to get paid too.
DARRIN T. MISH: I’ve got a cool story about prepaying on the HSA. When one of my children was being born, we were in the delivery room and they had just told us that there was going to have to be a C-section so we were kind of stressed and upset and nervous about that. The phone rings. The phone rings, somebody else answers it and they say Mr. Mish the phone’s for you. I’m like…what??
KATRINA MADEWELL: I’m not having the baby here.
DARRIN T. MISH: So I pick up the phone and it’s the hospital’s business office. They basically said, Mr. Mish, we understand that your insurance doesn’t cover the pregnancy, delivery. But we want you to know that the normal price is $13,000. And I said, ok, alright. It seems like a lot, but someone I’ll swing that. They said, but if you full pay before you leave the hospital, we’ll knock it in half to 6500 bucks. That was one of the clues about, hey, this is all negotiable. And I did somehow come up with $6500 before we left the hospital because that’s 50% off. It seemed like a great deal to me.
KATRINA MADEWELL: When you think about it, their chances of collecting that money is much greater if they collect it before you actually get the services performed than after it’s done.
DARRIN T. MISH: Yeah, think about how much administrative cost they saved because they didn’t have to multiple bill for a year or more. The last sort of idea that…example…I can come up for a legal tax avoidance strategy. The second home deduction. I just bought an RV several months ago in part because it’s technically a second home. My understanding of the tax law for a second home is the vehicle has to have a galley and a head. So it has to have a kitchen and a bathroom. So it applies to boats, it applies to RV’s, it applies to houses obviously.
KATRINA MADEWELL: I so want the tax code, I’m giving that one to my accountant.
DARRIN T. MISH: In part, I purchased an RV because I knew that over half the payment I was going to be able to deduct. So that sounds a little bit sketchy. I don’t even mean sketchy.
KATRINA MADEWELL: Well, it’s a matter of, do you know the rules, really.
DARRIN T. MISH: Exactly, so we just go back to Learned Hand quote, he says, hey you have no obligation to pay more tax than you have to pay. If the laws are on the books, it’s up to you.
KATRINA MADEWELL: Use it to your advantage.
DARRIN T. MISH: It’s up to you to use it to your advantage. That’s the best example I can think of tax avoidance strategies.
KATRINA MADEWELL: We want you guys to know we’re live in the studios today so you can call in with your tax questions. Also you can hit us up on Twitter. So our studio call in lines are 727-441-3000. Again studio call in lines to ask Mr. Darrin Mish your IRS tax questions, is 727-441-3000. You can also hit us up on Twitter @Darrin_Mish. That’s D-A-R-R-I-N underscore Mish. M-I-S-H.
DARRIN T. MISH: I think it’s time for a break, Katrina.
KATRINA MADEWELL: I think we have a minute. Why don’t you go ahead and answer this Twitter question we have real quick.
DARRIN T. MISH: Oh, Fred asks what is tax evasion? Well, we kind of already covered that. It’s the using of illegal means to avoid the payment of tax. The best example you can think of if you’re just kind of thinking about it is drug dealers. Drug dealers have illegal income, they’re very hesitant to report that income to the government and they’re very very hesitant to go ahead and pay tax on it.
KATRINA MADEWELL: Rick in Titusville, he wants to know what are the penalties for cheating on your taxes.
DARRIN T. MISH: I think that’s a great teaser and I think we can talk about that after the break.
KATRINA MADEWELL: Sounds like a plan. You’re listening to the IRS Solution Attorney show. I’m your cohost Katrina Madewell.
DARRIN T. MISH: And I’m your IRS solution attorney Darrin Mish.
KATRINA MADEWELL: We’re going to be back in a minute. In the meantime, stick around, we’re going to answer some more of your questions on Twitter. Feel free to call in. 727-441-3000. 727-441-3000.
DARRIN T. MISH: Welcome back. I’m the IRS Solution attorney, Darrin T. Mish with my lovely and talented assistant, Katrina Madewell.
KATRINA MADEWELL: Welcome back to the show, if you missed any part of this show, we’re going to put it together for you on a podcast on getirshelp.com and we’ll be here to also answer questions. We’re live in the studio. 727-441-3000, again 727-441-3000.
DARRIN T. MISH: We left off talking about a question that we got from Rick in Titusville. He wanted to know what the penalties for cheating on your taxes are. Pretty interesting question I think. I looked up some statistics over the break just because they’re amazing. The estimated number of people who cheat on their taxes each year, do you want to take a guess?
KATRINA MADEWELL: Oh my gosh, the estimated number? Can I give you a percentage? I would say 75% of the people that file.
DARRIN T. MISH: Ok, wow, you have a lot bigger guestimate than I did. It’s 1.624 million people, though. So over a million 625 thousand people a year are estimated to cheat on their taxes.
KATRINA MADEWELL: When you think about cheating, what does that mean to you? That can be a pretty vague question, that’s why I said 75%.
DARRIN T. MISH: I think that’s sort of interesting that you said that because there’s degrees of cheating, right?
KATRINA MADEWELL: Right, what’s your definition of cheating? That’s what it is.
DARRIN T. MISH: It used to be…this hasn’t been that long ago, perhaps ten years ago. You didn’t have to have receipts for your charitable donations, remember that? So it was just like whatever you self-reported.
KATRINA MADEWELL: It’s not like they fill them out anyway.
DARRIN T. MISH: Yeah, I think now churches and stuff are taking…you write a check to your church now in part so they can give you the statement at the end of the year to tell you how much you contributed.
KATRINA MADEWELL: But like other donations, if you donate stuff, outside of tithes.
DARRIN T. MISH: Yeah, it’s really kind of an interesting point. Goodwill or Salvation Army or those kinds of places will give you receipts now, but it’s really important that you get an itemized receipt. So instead of having a receipt that says “clothes”, that’s not going to work in an audit at all. The IRS is going to be like, ok, what does clothes mean? Ehhhh, you lose, we’re going to disallow that deduction. What you really need to have on there is one lady’s jacket in fair condition…dash dash dash…some fair price. There’s places you can look up the value of those kinds of things online. Back in the old days…
KATRINA MADEWELL: So you should really be that detailed?
DARRIN T. MISH: Yeah, if you’re going to take that charitable donation for old clothes or a boat or anything that you donate like that, you need some valuation, you need a pretty detailed receipt. But that doesn’t really answer ol’ Rick’s question about what the penalties are. The penalties for tax evasion are up to five years in federal prison and a $500,000 fine.
KATRINA MADEWELL: But that’s evasion.
DARRIN T. MISH: That’s for evasion.
KATRINA MADEWELL: Like escaping, running from.
DARRIN T. MISH: Right, he didn’t ask what the penalties for tax evasion were, he asked what the penalties were for cheating on your taxes.
KATRINA MADEWELL: Yes.
DARRIN T. MISH: Alright, let me circle back and think about this here.
KATRINA MADEWELL: Yes, get the question straight here.
DARRIN T. MISH: Alright. I guess if you cheat, and again we come back to degrees of cheating, right?
KATRINA MADEWELL: Like is that taking the meals and entertainment when it wasn’t a meal and entertainment? Or what is cheating, you know?
DARRIN T. MISH: I represent a lot of people who are going through audits. That’s really the penalty for cheating. There’s that old saying, pigs get fat and hogs get slaughtered. So a minor amount of cheating, quite frankly, many people get away with. But it’s the hogs, the people who just go crazy on their tax return and they’re obviously…what do we call that? Puffing up their deductions or diminishing their income.
KATRINA MADEWELL: Those are blowing it up. So that gets back to my percentages being real. So really the numbers are probably technically higher.
DARRIN T. MISH: OH, I think they are higher. But it depends on the degree of cheating on what we’re trying to measure here.
KATRINA MADEWELL: I love your analogy. Pigs get fat, hogs get slaughtered.
DARRIN T. MISH: I’ve seen everything. I’ve seen people write off virtually their entire lives. Their gross income from their business is 100,000 and they wrote off 91,000.
KATRINA MADEWELL: And even though it keeps going up, it’s all a tax write off.
DARRIN T. MISH: Yeah, like their entire life is a tax write off? I don’t think that that’s…
KATRINA MADEWELL: Is there a general percentage that triggers an audit? I know it’s different lines.
DARRIN T. MISH: There’s something called a Dif score. So the IRS assigns a dif score to pretty much every line on the tax return. So they have parameters and between these two parameters, that’s sort of typical and acceptable. But if you get outside of those parameters on the dif score, and they don’t publish what they are for obvious reasons.
KATRINA MADEWELL: It’s too bad someone doesn’t have that algorithm. They’d be like running their tax returns through that before they file it.
DARRIN T. MISH: Yeah, that’d be kind of like learning how to game Google or something.
KATRINA MADEWELL: So anyway, the dif score?
DARRIN T. MISH: If you fall outside of that dif score, you’re going to get an audit. Really the audit is the penalty for cheating on your taxes. The rough rules are they can audit up to three years in a normal situation. They can audit, they can go back up to six years if it’s what’s called a substantial understatement of income of 25% or more.
KATRINA MADEWELL: So what does that mean? They’re writing off way to much that’s not real? Or not reporting stuff?
DARRIN T. MISH: Not reporting income. Not overstating deductions, but not reporting income. Which is pretty common. You might not think about these examples but…
KATRINA MADEWELL: So cash, if you got cash and report a part of your income that was reported by someone else, but the rest was cash.
DARRIN T. MISH: Let’s say you ran a convenient store and 80% of all transactions today are using credit or debit. Using plastic. Say 20% are in cash. Sometimes these business owners don’t realize that the cash actually needs to get reported and they have to pay taxes on that. I’m being pretty nice here when I say they don’t realize that. So when the IRS sees the difference, there’s essentially no cash coming in to this cash business.
KATRINA MADEWELL: They know better, it doesn’t make sense.
DARRIN T. MISH: They have audit guides for virtually every kind of business out there. What’s kind of cool about the audit guides is they are open to the public. In a Google search, you can type in IRS audit guide then put in your profession or business. Odds are it’s going to come up. I have used the IRS audit guide for attorneys quite a bit. Not because I’m worried about being audited, but because I give it to other attorneys so they know how to arrange their affairs so that they’re not going to get audited.
KATRINA MADEWELL: Do you represent tax payers that have had an audit triggered and now they’re going to be audited by the IRS? Is that something you do?
DARRIN T. MISH: I do handle some audits. I’ll be honest, audit representation’s not my favorite thing in the world and I’ll tell you why, I’ll be very frank about this. The reason that audits aren’t usually my favorite thing is because most people who get audited are a mess. I mean, that’s why they got audited. Everything’s a mess.
KATRINA MADEWELL: They have a shoebox full of receipts.
DARRIN T. MISH: If we’re lucky they have some receipts. Something bad is going to happen. There is going to be a significant, in most audits, there’s going to be a significant addition assessment of tax and they’re going to be unhappy with whoever handles the audit. They’re not going to be happy because most people are probably not completely realistic about what’s going to happen after the audit. I will handle some audits but only if I think the paperwork and our chances of prevailing are really strong. I primarily handle people, or represent people who are after the audit. So there’s a big tax assessment. Instead of trying to protect the math on the front end to argue that they owe less tax, we handle it as a collection case basically typically asserting that they just can’t afford to pay.
KATRINA MADEWELL: Walk me through an example of that. Something happened, they got triggered an audit, the auditor came in there and they said no way, no how, this is jacked up. You didn’t report income, you didn’t file, you didn’t whatever. Let’s say hypothetically speaking they reported 50,000 but they made 150,000.
DARRIN T. MISH: In that, in your scenario, that person might be assessed 50 or 100,000 dollars in extra tax penalties and interest. Typically you don’t get audited for one year, you get audited for three years typically. So they’re going to take whatever you would have owed, based on how they’re finding stuff, and then tack on extra stuff?
DARRIN T. MISH: Their philosophy is if they run an audit in that one tax year, then the odds are pretty good that there’s going to be problems in other years. If they expand it out to three years many times they disallow virtually all of the deductions. Then they assess the tax. And of course now there’s penalties for filing an inaccurate return, and there’s interest and so on and so on and it balloons out of control.
KATRINA MADEWELL: At what point does that become like…I imagine if they didn’t have receipts and stuff and they didn’t file, that probably easily goes in to a collection.
DARRIN T. MISH: Let’s say it’s a six figure liability now and they don’t have the money. I represent a lot of people who, frankly, I’ll talk to them before the audit and I’ll find out, do you actually have a strong income and assets? I they answer is no, well then don’t bother spending your money finding the audit because you’re not going to win there. It’s not a good place to waste your money and resources fighting there. Let’s think about at least, letting the big taxes and the audit be assessed and we’ll try and do an offer in compromise on the back end. Remember an offer and compromise is where you make a deal to settle for less. It’s based on what your technical ability or hypothetical ability is to pay. We prevail on a lot of cases post-audit with offers and compromise. I’ve actually successfully talked the IRS out of an audit one time, right in the middle of an offer and compromise. My guy, he’s broke. He had nothing. We were just about to get the offer settled and an audit pops up. I called the auditor and I said, what are you doing, wasting the resources of the government on a guy…just so you’re going to assess a hundred grand and I’m going to wipe it out again? What’s the point?
KATRINA MADEWELL: Getting blood from a turnip here.
DARRIN T. MISH: I didn’t think it was going to be successful, but I got a letter a few years later, you’re right.
KATRINA MADEWELL: It depends on who you get, right? If you can talk some common sense into those IRS heads.
DARRIN T. MISH: So seldom can I just tell a story and make tax go away. That doesn’t just happen. I usually have to demonstrate things through documentation and paperwork and what not. In that case, common sense prevailed. That’s a very uncommon situation with the government.
KATRINA MADEWELL: I don’t know, maybe you could just get better at telling your stories.
DARRIN T. MISH: Maybe I should.
KATRINA MADEWELL: So what’s this craziness we’re hearing in the news about IRS dropping these bombshells on these small employers. With Obamacare, there’s so much stuff that I don’t even know abou tit.
DARRIN T. MISH: Yeah, I’m not going to be shy about this. I’m not a big fan of Obamacare. I don’t think it makes sense.
KATRINA MADEWELL: I’m not either. I don’t like to share my political opinion, but I wouldn’t have picked it.
DARRIN T. MISH: It’s not my idea of a good idea. There’s a regulation that the IRS has propagated. This is pretty interesting because it’s not a statute, it’s not in the Obamacare statute, this is a purely made up regulation that the IRS has decided to pass. Basically what the situation is, if a small employer of less than 50 employees, helps their employees in any way with health insurance. So contributes to their healthcare. If they basically have healthcare outside of the Obamacare exchange, the fine is $100 a day per employee.
KATRINA MADEWELL: They can’t even offer…?
DARRIN T. MISH: They can’t help, they can’t pay a percentage, they can’t increase the employee’s salary to help compensate or pay for the health insurance. The IRS’ position on this is that the penalty should be $100 a day per employee. Let’s think about this for a minute. You have one employee, the penalty technically for a year would be $36,500 in penalty if you pay $300 a month out of somebody’s $400…
KATRINA MADEWELL: So how is that any different from something like for example, my husband is government, he works for the city. So the city obviously offers paid health insurance, then you have the family and they pay their portion. Is it because of the size of the employees?
DARRIN T. MISH: Yeah, it’s the size of the company.
KATRINA MADEWELL: So the same type of thing at a small business, they’re saying no.
DARRIN T. MISH: Because the goal, I think, of the government is to get more and more people in these exchanges and gain more and more control over healthcare.
KATRINA MADEWELL: Makes me sick.
DARRIN T. MISH: This situation is really a travesty. I don’t see how things…
KATRINA MADEWELL: How can that even stand up? How could that honestly…it doesn’t even have any merit. It’s like saying I can’t help one of my employees buy a car. I mean, you might as well, what’s the difference?
DARRIN T. MISH: Right. Or anything, really. It’s really popular…
KATRINA MADEWELL: Actually as a matter of fact, there’s something called coercion when it comes to insurance and stuff. Like the homeowners insurance is on the real estate side, so how is this any different?
DARRIN T. MISH: Well, government coercion is legal, it’s been happening since the beginning of time.
KATRINA MADEWELL: Well, that explains a lot.
DARRIN T. MISH: It’s really popular in our culture for people to say they hate lawyers or dislike lawyers. I’ll tell you how this is going to change. Is some, not me, but some very brave, very smart lawyer is going to attack this regulation and is going to win and get it thrown out. Or it’s going to come to the attention of somebody in congress and they’re going to pass a law fixing this. Now, the challenge with congress is, they can’t seem to get anything done. So it’s probably going to come about through a lawsuit. That’s my best guess is it’s going to get fixed that way. Some lawyer will take a case and will get it fixed.
KATRINA MADEWELL: Probably someone fresh out of law school ready to jump in.
DARRIN T. MISH: I wouldn’t want to take that case fresh out of law school.
KATRINA MADEWELL: There was another little story we saw about a tax scam losing in excess of 20 million. But I don’t hardly watch the news so I don’t even know much about that.
DARRIN T. MISH: What’s going on in this story is that there are scammers, for lack of a better term, overseas, who are calling taxpayers all over America at their home number and leaving a message, something to the effective of…in my case, they actually called my house, which was pretty funny. Scared the bejeebers out of my wife. He leaves a message, “Hi, this is Steve Martin.” I’m not kidding. He said, “My name is Steve Martin and I’m from the IRS.” And something like “And you must call me back at such and such number immediately. We have filed a lawsuit against you, but you can settle the lawsuit if you call back today.” Something along those lines. I get clients pretty regularly that get these crazy voicemails. If you call back the number, I presume that they then get as much personal information out of you as they can.
KATRINA MADEWELL: Name, address, social. Everything they need to steal your identity.
DARRIN T. MISH: Then they get a bank account number and/or debit card number. Something along those lines, and they clean you out. I actually was home one day and I got one of those calls, and let me tell you, I had a good time. I called them back over and over and over again. I felt like it was pretty neat because I couldn’t get in trouble for harassing the guy who was trying to do the Phishing scheme on me.
KATRINA MADEWELL: That’s fabulous, I love it. I love it. You are listening to the IRS Solution Attorney Show. When we come back after the break, we’re going to do the Train Wreck of the Week. Right?
DARRIN T. MISH: Absolutely. Pretty good one today.
KATRINA MADEWELL: Stick around, we’ll be back in a minute.
DARRIN T. MISH: Welcome back to the IRS Solution Attorney Show. I’m Darrin Mish. I’m here with Katrina Madewell as the cohost.
KATRINA MADEWELL: Welcome back. Welcome, welcome. We’ll be here the same time, same place every week.
DARRIN T. MISH: Hopefully.
KATRINA MADEWELL: Answering those IRS questions that you get. We had a lot of really good Twitter questions today.
DARRIN T. MISH: Yeah, don’t be shy about asking these questions. There’s a lot of shame and anxiety sometimes wrapped up around this stuff. You can always give us a call at 727-441-3000 if you have an IRS problem, question. I don’t really want to be asking tax planning questions, not really my thing. But if you haven’t filed or you owe more money to the IRS than you can afford to pay. Then by all means, call in. You don’t have to give us your real name. We can have a whole bunch of Fred’s. That’s ok with me.
KATRINA MADEWELL: Yeah, you can be Suzy or Joe or Sam or whoever you want to be.
DARRIN T. MISH: Absolutely. I like questions.
(Train Wreck Sound Effect)
DARRIN T. MISH: Alright, that’s the IRS Train Wreck of the Week. This is a great story, guys. And it’s a little bit different than I’ve been talking about lately. This particular gentleman, I had represented over the years and I helped him resolve a very large payroll tax problem and that went away. That’s not what we’re talking about here. He had a very good year and he earned about five or six hundred thousand dollars, he paid the tax, couple hundred thousand dollars and there was about sixty thousand dollars in penalties associated with his account.
KATRINA MADEWELL: Ouch. That’s a nice car.
DARRIN T. MISH: Yeah, pretty nice car, right? He called me and asked if there was anything I could do about it. There are a couple ways to abate penalties. Abate means to eliminate. There are a couple ways to deal with penalties, but there’s a really cool thing called first time penalty abatement. And first time penalty abatement’s almost automatic and here’s how it works. If in the prior three years you had paid substantially no penalties…so if you didn’t’ have any substantial penalty in the prior three years, you pretty much get a freebie. So he told me about this situation. I thought he had been a pretty compliant taxpayer over the years. The payroll thing was a different issue altogether. I told him I thought I could do something for him. I did the research, I checked the prior three years. There was no penalties sure as day. I contacted the IRS, I asked them to eliminate the penalties and they didn’t even put up a fight. It was $60,179. So that was one very happy client that day. They got over sixty grand written off.
KATRINA MADEWELL: That’s so cool that they really wipe out that a freebie. Sixty grand, that’s a lot of money for a tax penalty. Anybody out there, now that you know that this first time penalty abatement exists, you need to save up. What I’m saying here is don’t get these ticky tacky penalties. Don’t file one day late. Try and be compliant so if you need this, then you need to take advantage of it.
KATRINA MADEWELL: That’s me. The ticky tacky penalties. Totally non-intentional.
DARRIN T. MISH: I see $200 penalties on people year after year and it’s like come on. If you’re going to do it wrong, do it way wrong. No, I didn’t say that.
KATRINA MADEWELL: So we’ve got some cool stuff happening in and around Tampa in our neck of the woods.
DARRIN T. MISH: I realize that this has nothing to do with IRS problems or taxes.
KATRINA MADEWELL: It’s all hyper-local, right? Just like radio.
DARRIN T. MISH: Yeah, I just wanted to talk about some cool stuff that’s going on this weekend or this week coming up. I came across this news story and you know 9/11 is coming up again and hopefully there’s no terrorists attacks or anything like that on 9/11. It seems like it’s an anniversary for that nowadays. And it’s really up to us as American citizens, make it not be a negative holiday. Let’s commemorate and remember, but let’s not be afraid. There’s something really cool happening at NASA in Titusville, and I realize that’s not in Tampa. It’s a couple hour drive. They’re bringing down a couple of steel beams from the terrorist attack from the World Trade Center and they’re going to be putting those on display and they’ll have a nice ceremony. They brought them all the way down from New York City. There’s going to be a very nice ceremony unveiling those.
KATRINA MADEWELL: Little piece of history getting moved around there.
DARRIN T. MISH: Have you been to the site in New York?
KATRINA MADEWELL: I’ve not.
DARRIN T. MISH: I had not been there before they fell, but I’ve been there since with the fountain and it gives you goosebumps.
KATRINA MADEWELL: I’m sure. I had some clients here that worked for local law enforcement and they were retired NYPD and it was crazy because right before he moved here, he had pictures of him with the twin towers in the background and they actually asked him to stay a little bit longer when that happened. Then he came down here. It was just surreal.
DARRIN T. MISH: I was born and raised in southern California and I was living in Tampa at the time. I was shocked at how many people that I knew were actually in Manhattan or New Jersey on that day. We talked about it later and they said yeah I was there, I saw them fall.
KATRINA MADEWELL: That’s scary. I remember watching it on the news still. My oldest daughter Madeline was a baby. She was little. I had the news ticker, stock ticker in the morning. I was watching it and they didn’t even know what happened. The building was smoking.
DARRIN T. MISH: My little story about that was I used to have a practice where I went to court once or twice a day. I was driving to the courthouse from a 9 o’clock hearing or something. I was parking and I heard the news story that there had been a plane crash in to the tower. I knew it was a big deal, but the courthouse was open and I had an obligation to go make an appearance and so I did. I went and I took care of whatever that was. I didn’t say anything about it to anybody because everybody was working and they didn’t know about it.
KATRINA MADEWELL: I don’t think people realized at that time that a lot of things would shut down.
DARRIN T. MISH: I think the courthouse did close that day.
KATRINA MADEWELL: After 4 different sites. I mean…the Pentagon…it was crazy.
DARRIN T. MISH: Yeah, really tragic. Hopefully never repeated.
KATRINA MADEWELL: Thank goodness for the country we are because I think we have put a lot of measurements in place so we don’t experience that again. When you fly, it kind of sucks to get half naked and take off your shoes and all that jazz. You know what, it’s gonna get you from where you are now to where you’re trying to go safe, I’m all about it.
DARRIN T. MISH: What do they call that…there’s that free check…or TSA pre-check. That’s fantastic.
KATRINA MADEWELL: I’ve been looking at that. I fly all the time. Tell me what is it?
DARRIN T. MISH: If you can qualify for pre-check, you need to do it.
KATRINA MADEWELL: How do you qualify for that? I think there’s a website you can go to and ask. But if you fly enough, then your airline just sort of sends you an email and says, hey, you can get on the list. There was a time there while I was flying quite a bit and the pre-check is really neat. You don’t have to take your shoes off, you don’t have to take your coat off, you don’t have to take the computer out of the bag, you just throw everything on belt like we used to do in the old days and you just fly right on through. It’s totally stress-less. It’s fantastic. And the people are actually a little bit nicer too. I don’t understand what’s going on there.
KATRINA MADEWELL: Well, I guess they figure, they pretty much know enough about you. They don’t tell us that, but I’m sure the government knows sort of what we’re doing or where we’re going.
DARRIN T. MISH: Hopefully the NSA or somebody does some kind of background check to make sure that you’re not a threat.
KATRINA MADEWELL: I think I fly enough. Hopefully I qualify. I’m going to have to check that out.
DARRIN T. MISH: I think you can apply for pre-check.
KATRINA MADEWELL: We’re here with wrapping up the show here, with Darrin Mish IRS Solution Attorney show. His website is getirshelp.com.
DARRIN T. MISH: We have another one called the irssolutionattorney.com. If you all have an event that your non-profit is sponsoring or just something cool to do in the Tampa Bay area, then by all means get in touch with me and we can promote it on the show.
KATRINA MADEWELL: Sounds great.
DARRIN T. MISH: We’re going to end this segment every week with something neat that you can go and experience. Sometimes for free, sometimes it might be low costs.
KATRINA MADEWELL: Sounds like a plan. Any other questions there on Twitter before we wrap up? We’ve got a couple minutes left. Let’s see if we have any more.
DARRIN T. MISH: The call in number for next week is 727-441-3000, 727-441-3000. I think the real takeaway from today’s story is listen, tax evasion, bad. Five years, half a million dollar fine. Tax avoidance, good. Tax avoidance is something that Judge Lerner Hand is almost your obligation. That’s how I take that quote. It’s not just ok, it’s really sort of your obligation. If you think about this, it’s your obligation to yourself and to your family to structure your affairs so you pay as little tax as possible. I don’t think any reasonable person would disagree with that statement.
KATRINA MADEWELL: I took away from the show today, your DIF score. I never heard that. That’s my learner of the day.
DARRIN T. MISH: I wish I knew the formula to the DIF score.
KATRINA MADEWELL: I think it’s awesome, I didn’t even know that. But it wouldn’t make sense. It’s pretty cool. Little things like home office deductions, those kind of stuff, I’m sure are right there.
DARRIN T. MISH: Not a big fan of the home office deduction. Let me tell you, I’ve seen it create more audits than you can believe. Well, looks like we’re wrapping up for this week. I’m Darrin T. Mish.
KATRINA MADEWELL: I’m your cohost Katrina Madewell. We’ll be back here next Thursday at 1 p.m.
DARRIN T. MISH: Take care everyone.
KATRINA MADEWELL: Bye!