Today’s Show Topic:
Tax Related Identity Theft
Click The Image Above (Or Here) To Download Episode
Transcript From Today’s Show
This is the TamTalk Radio Network.
The opinions, thoughts, and observations on the IRS Solution Attorney radio show are not legal advice. Facts and circumstances differ in every case. Do not take anything said on the show as legal or accounting advice. Always consult your lawyer or accountant before deciding how to handle any legal issue.
Intro: Welcome to the IRS Solution Attorney show. If you have problems with the IRS, don’t focus on the negative, focus on the solutions. With the IRS Solution Attorney, Darrin T. Mish. For over 15 years, he’s been helping taxpayers with IRS problems reclaim their lives and their financial stability. Now, here’s your host of the IRS Solution Attorney Show, Darrin T. Mish.
Darrin T. Mish: Welcome, welcome, welcome, this is the IRS Solution Attorney, Darrin T. Mish and I’m here with my co-host, Katrina Madewell.
Katrina Madewell: Doing great, ready for another several hours of radio this afternoon.
D: (laughs) It seems like we were here just yesterday, but again it has been a week. I’m pretty excited about today’s show. It’s going to be something that can really help some people. We’re going to talk about tax related identity theft and it seems like Florida and the Tampa Bay area in particular are the epicenter for this kind of thing across the United States, so we’re known for a lot of things but that’s not one that I think we should be that proud of.
K: But Darrin when I saw this come up, because sometimes I don’t see the outlines until sometimes the day of, I’m like “oh my gosh, this is so perfect”, I could talk about this for 15 minutes. Just things we’ve seen.
D: Right, exactly. You know, it’s becoming more and more common that people find out that they have IRS related identity theft problems unexpectedly.
K: I know one we’ve seen, and it’s kind of crazy, but Florida wasn’t always this way, but it is now. The IRS form 4506-T which allows, it used to be the lender to pull your tax return or verify your tax transcript was the same as you filed with the IRS as what you gave the lender. They used to only do that in the event of a random audit. Like if your file got pulled they pulled the tax transcript to make sure you didn’t add any zeros or change any numbers, or anything like that. Well, now, in Florida for every loan, if you’re getting a mortgage, they’re going to verify your tax transcript before you ever even get final approval. So this is where we see the bomb drop sometime because we’re like, “what, there was a tax return filed?” They had no idea. Like someone got a refund usually is what happens.
D: Yeah, you know it’s really common in our practice too. It’s even happened to employees of mine. Knock on wood, thank god, it hasn’t happened to me yet. I just learned something today.
K: Now that is crazy. Imagine that, someone that works for an IRS attorney, their IRS return gets hacked.
D: Yeah, it’s a real big headache in our practice because one of the things that we do when we get a power of attorney, which allows us to communicate with the IRS and represent tax payers, is we will pull their account transcripts. Much like you were talking about. But we use a special service that’s kind of like we’re part of the IRS computer system, so we can pull records and what-not and it’s really a thorn in my side because those transcripts really tell me a lot. They verify and corroborate the tax payer’s story. They tell me what returns need to be filed and so on and so forth. But when there’s an id theft hold on the account, guess who can’t get the transcripts. I can’t get them. So then it creates a big headache. Tax payers go down to the local IRS office and ask for the transcripts for me so that I can feel comfortable with whatever plan of action I decided to implement.
K: Because, they have to actually prove who they are at that point. Right?
D: Yeah, they have to show i.d. I think they might even have to show a couple forms of i.d. There’s another case that I have pending right now, that was sort of interesting. The tax payer was going to end up owing – or actually did already owe about $400,000.
K: Like from the real return?
D: Yeah, from their actual returns, from their actual high income. Owed about $400,000 and somebody stole his name, his identity, tried to file a refund return and guess what, that didn’t work out too well for the fraudster because any refund, artificial or not, that was generated was going back to apply to the big debts that the tax payer already had. That’s typically what I see. And so it doesn’t work out real well for the fraudsters because that refund that they’re trying to generate – that $9,000 or $12,000 refund or what have you – it doesn’t appear because it got applied to the past debt.
K: Now, where are you seeing these people are at? Because I know the ones – and you see this way more than me I’m sure – the ones that we’ve seen, several times they’ve been out of California. Are you seeing anything overseas?
D: You mean the people perpetrating the problem?
K: Yeah, the people trying to commit the fraudulent return.
D: That’s a good question. I never find out who it is.
K: Oh, you don’t know?
D: I don’t have any idea. I actually had my identity stolen, but not related to tax. I’ve had people go out and in the past they would open up credit accounts in my name, order the merchandise, have the merchandise delivered, and in my case, they had a bunch of merchandise – computers – about 8 or 10,000 dollars’ worth of computers delivered to the Bronx. At that point, I still had never even been to the Bronx. I found out about it and it was just a really big hassle to clean up and to prove that it wasn’t me that opened the account, it wasn’t me that got the merchandise. I was already an attorney at that time. I kind of knew what to do.
K: You were like “what the heck?”
D: Right, and I bet you it took 40 hours to straighten out.
K: I’m sure.
D: I ended up calling the Hillsboro County Sheriff’s office, Tampa Police Department, the FBI, the Secret Service and everybody just kind of shrugged and said “well, what do you want us…?” I even called NYPD and they just shrugged and said “well, what do you want us to do about it?”
K: Here’s the problem, here’s what we run into, even with these scams. You’re here, they’re there, so nobody wants to do it because “Not my jurisdiction” – you’re there. Well it wasn’t committed here, the people were in New York – “not my jurisdiction”. And they all kind of laugh you off, and you end up with the FBI, which that’s a back burner little needle in a haystack.
D: Yeah, that’s pretty much what the FBI and Secret Service told me was like, “ok”.
K: “Good luck”
D: Yeah, this isn’t an epidemic and there’s nothing we’re going to do about it.
K: We do notice when we pull credit reports to pre-approved people, one of the things we like to do is look over it with them because they’ll show other addresses sometimes they’ve never seen. And that’s usually an idea that they may have an account.
D: Yeah, I’ve seen a trend towards Hispanic surnames seem to be a little bit more popular. At least in my experience. And common names seem to be somewhat more common, in my experience.
K: And there could be mixed credit, where it’s just mixed. Especially junior/senior. That happens all the time.
D: So let’s talk about how you might find out that you’re the victim of possible identity theft with regard to the IRS. One of the things that you might get is, you might get an IRS notice or letter from the IRS saying that you filed more than one tax return. I’d say that’s a pretty clear indication that there might be a problem.
K: Is that usually the first sign? They’ll see something like that?
D: Yeah, a lot of times what will happen is somebody will be kind of late in that January to April filing tax season filing cycle, and they’ll file on say April 15th and they’ll get a letter back saying you filed duplicate tax returns.
K: Because of course the fraudster filed in February.
D: Yeah, or January. The system’s got some flaws in it and one of those flaws is that the first person to file kind of gets precedence because the IRS doesn’t have enough fraud prevention factors in place to really prevent this from happening. It’s interesting, I’m not really blaming the IRS, I mean this is a big problem and I’m not sure exactly what they should do about it. Good thing I’m not working for them because I would…you know.
K: Well I do know that when you trace it back to what’s the root, I’ve had a lot of clients over the years that work at a hospital in the area – I won’t even name them out – but what happens is their system ends up getting hacked into and then so the people that were trying to buy a house found out someone else filed a return. They either say oh no, this doesn’t match because there was already a return file. Other people at work will also have that and they’ll realize later that the employer’s system actually got hacked. So I know that there’s a lot of steps going on right now on a legislative level to change all those things. Our industry is being turned upside down in October and a lot of that is protection from identity.
D: Yeah, I think the HPPA laws, the healthcare, also allows protection in there.
K: It’s like coming down on every level, so hopefully it will slow down a little.
D: Hopefully. Another thing that you can be aware of if you get a letter saying you have additional tax or if they took your refund and applied it to somewhere else or if you have some kind of collection action that you’re not aware of that you should be aware of, that’s an indication there could be an i.d. theft problem. And another one could be if there’s IRS records indicating that you’ve received wages from some place that you never worked. That could be another big red flag. Obviously if there’s a W-2 out there floating around from a job that you never had, that’s probably a pretty clear indicator that somebody is trying to game the system and trying to generate a big refund.
K: So how and where would that even be? Like someone’s completing a completely bogus W-2, like the employer didn’t even file that, this was just a…I went to Office Depot and bought a W-2 and now I’m going to file a return?
D: Yeah, that’s what’s going on right now.
D: I forget how many tax payers there are in America. There’s about a hundred million I think, and so…I mean it’s a pretty big job.
K: You said even yourself as an attorney, it took you 40 hours at least to unwind identity theft. What would someone do if they are a victim of this tax fraud? And they get some of these notices.
D: Despite my story of complaining to every law enforcement agency I could think of, you really…Step number one is you really do need to file report with law enforcement, and the question becomes, which law enforcement agency is appropriate? And I would just that, it’s your local law enforcement. If you live in the county, it’s going to be the sheriff’s office, if you live in the city or municipality, it’s going to be the police department. They’re not probably going to want to take the report, but you need to go down and you need to call and make those reports. A lot of times I think those types of reports now are being taken over the phone, by non-sworn in officers, so it’s not really a huge burden to law enforcement.
K: It’s kind of just a matter of putting it on record, wouldn’t you say that’s about?
D: Yeah, you know, it’s funny, I actually have a friend who’s a TPD detective and he works in auto theft primarily and they’re even running across this, there’s a funny story going around. It’s kind of the prime story of Tampa being the epicenter for tax-related i.d. theft. There was a guy that was living in the ghetto and they kept noticing him because he was living a very flashy lifestyle he obviously had a lot of cash, and they couldn’t figure out what the deal was because they were…they had him under surveillance, they couldn’t find him doing anything illegal, but he just really seemed really out of place. One of the indicators was he had a car that he had actually chromed. He chromed the entire car. So that costs a lot of money. Ultimately what happened is they ended up doing a traffic stop on him and they found hundreds of social security cards. A high volume of refund checks and what not and that’s how they found out that, hey, this guy isn’t dealing drugs, he’s not dealing with stolen property or whatever. He’s actually doing this IRS stuff.
K: He’s dealing identity theft, that’s what he’s dealing.
D: They ultimately reported it to the IRS and the IRS was kind of like not too cooperative, the IRS just kind of didn’t know what to do with it. Ultimately I think he was prosecuted but I can remember law enforcement telling me – local law enforcement – they felt really frustrated about it because there was this theft going on at this really grand scale. Hundreds of millions of dollars and even they were having a hard time getting anybody to do anything about it.
K: It’s kind of like one of those “it’s out of my jurisdiction” not me…not me…everybody’s pointing and you’re like “ok, where does this go?” It’s like the homeless item in your house.
D: Yeah, so step number 2 is going to be, you’re going to need to report the identity theft at ftc.gov. That’s a website, that’s ftc.gov and you can also learn additional ways to deal with identity theft at identitytheft.gov. So you’re going to want to report it to ftc.gov, and that’s probably going to help in your individual case, but it’s going to help in the bigger scheme of things so the government can try to help deal with the situation. They can understand the scope and magnitude. So that’s a suggestion. The next suggestion would be you need to contact at least one of the major credit bureaus and put a fraud alert at the credit bureaus.
K: I would say all of them.
D: Yeah, I would too. But at least one would be a really good idea. And then you’re going to want to go ahead and contact your financial institutions. Your banks and whatnot. And close any accounts that were opened without your permission.
K: Now, the fraud alert, let’s talk about that too because that can kind of be a pain, especially, and we’ve seen this when people actually go to purchase a home or something and they have to – what they call – unfreeze their credit reports so we can actually pull it.
D: Yeah, for sure. I actually, as a result of my own identity theft problem, I started using a service. I’m not going to tout the name of the service, but it’s a service that costs about 25 or 30 dollars a month and what it allows me to do is, it allows me to get instant alerts anytime, any accounts are open anytime, there’s any kind of credit report is pulled and it also gives me free on-demand credit reports as often as I like without dinging my credit score. And so, that’s a pretty good solution. There’s one called Lifelock, I’ve not had any dealings with them, but they advertise on the radio a whole lot.
K: You just have the insurance type stuff where they’ll actually pay if you have identity theft, to unwind it. But annualcreditreport.com is free and you can get it from all 3 credit bureaus. Everyone is entitled to that at least once a year.
D: So that’s good.
K: It’s completely free.
D: Everyone should check their credit report at least on an annual basis even if you’re not a victim of identity theft, sometimes weird things just shows up by mistake on your credit report.
K: I check mine at least quarterly. It’s pretty easy for something like me to do, we just pull Tri Merge and see what’s on there.
D: I’m obsessive-compulsive about it. I pull it once a month, twice a month.
K: Thank god you’re not pulling a real report, you’d have like a million enquiries on there.
D: But I’m also experimenting with different ways to increase your credit score and things like that because I’m a geek like that in terms of systems. I like to see how things work.
K: We actually have a back-end system called a “What If Simulator” and that’s what we do – we play with that to see – like if we need a certain number of points on a score to get somebody a loan, we’ll play with it. Take the balances up, down, open credit, increase the lines, all that kind of stuff and it will tell us roughly how many possible points we can get and it’s pretty accurate.
D: I would think, in your business, as a real estate professional that that would be really helpful because I’m sure there’s people that don’t have the credit right now. Credit score.
K: We have one right now, the guy put a balance on a credit line and it dropped his score by one point to throw him out of the program and there’s just no exception on these things. Since the housing collapse and the meltdown, the loan’s not savable, it’s non-negotiable. It’s not like the good ol’ days where if you had a good rapport with the underwriter, you could get that one point exception. As soon as that new mortgage loan reports, you’re good to go. It’s just, we’re not in those days anymore unfortunately.
D: Yeah, that’s too bad. I’ve heard those things are starting to loosen up, maybe a little bit. But, yeah, definitely, I think there was a big pendulum swing after the real estate crash and underwritten perhaps, in my opinion, went a little bit too far in the strictest…
K: They did. They’re still too tight. We’ve seen it loosen some and it probably will continue to loosen a little more, it will never ever be a loose as it was, which it shouldn’t be. It was way too loose.
K: But on the same token, I think it’s always going to be a little tighter than it should be.
D: So, we talked about checking your credit report at least annually to try to prevent and reduce your risk. One of the other things, it’s pretty obvious, but most people don’t think about this, is don’t carry your social security card in your wallet. Or on your person regularly.
K: Such a good point. I can’t tell you the people that, literally we’ll have a new hire and they just pull their social security card out because they always carry it and you don’t need that ever. Unless you’re buying a house and they’re asking you for a second form of i.d. or getting a new job.
D: Yeah, I think, day one of your new job – I just hired somebody – and I told them on Monday, bring your identity documents because I’ll need it for the I-9, although I’m not sure that even matters anymore.
K: I can’t think of any other time you would need to carry it around with you.
D: Exactly. So, don’t carry it around with you because that’s real obvious. If you lose your wallet and your driver’s license and your social security card are in there, I think you might be in a little bit of trouble there.
K: That’s all they need. To pull a credit report and to do identity theft, you need name, address, date of birth (all on the license!), social security, Bam!
D: God forbid.
K: I can’t tell you how many accounts someone can open and pull credit with just that information.
D: God forbid they have your mother’s maiden name, then you’re really dead, don’t you think?
K: I mean, really we don’t even need that for date of birth, it’s address, name, social security number, date of birth, that’s it.
D: As a society we’re going to have to come up with some kind of safe guard maybe it’s biometrics, maybe it’s fingerprints, I don’t know. This is not working, clearly.
K: I think everything is moving that way and hopefully the IRS also has to take some precaution for this kind of stuff. I think they should be required to do it so when these refunds to in, like when your regular banking information has changed or it’s different, you should have to go through a little more red tape. I think that might avoid that, don’t you?
D: Yeah, but then the other concern would be it’s kind of big brother-ish…
K: They already it anyway. You know that.
D: Do they have your retina scan?
K: I think they got it.
D: Do they have your fingerprint?
K: I think they got it all.
D: They certainly have my fingerprints.
K: It’s not like they don’t know who you bank with. How many times are they used to going in and swoop or levy or all those fancy IRS attorney words, with the bank accounts, right? They just take what they want, they know where you bank. They got it.
D: So the next thing that you should do to reduce your risk is, you know, lots of times businesses that you’re doing business with will routinely ask you for your social security number and you know, you don’t need to give them to them. There’s very rare instances where a legitimate business needs your social security number, so try not to give out your social security number whenever possible.
K: Now, do you ever see this with EIN’s which is kind of like a business social security number? You ever see that?
D: You know, personally, I’m not as worried about the EIN, I do tend to protect it, but there’s not nearly as many things you can do with an EIN in the name of the business. I think ever for applying for business credit, you still need a social security number for the most part so I don’t worry about that too much, but I also don’t think I’d be bandying that about. I don’t think I’d put it on my website or anything.
K: I’ve seen people like just dish it out like candy. It’s like whoa, that’s like a social security number for your business.
D: The next thing on my list here is protect your personal financial information, at home even, and on your computer. So just make sure it’s secure. It’s common sense. Just don’t leave it lying around.
K: Oh my gosh, that’s a big one. I can’t tell you the times we’d go in to list a property and I’d have to say put all that mail away. Like seriously, you have all those credit cards and bank information because they still get mail. And you know, guns, jewelry, all that crazy stuff. Identity. Huge.
D: You know, there could be cleaning crews at your home or at your business. I’m not saying you should be distrustful.
K: It could be anybody. It could be somebody to do a repair on your house.
D: You just have to use common sense. The next on is, you know, you get a social security administration earning statement every year. A lot of us just look at it and we look at, well how much are we going to get when we retire, then you laugh because it’s such a small amount and you kind of toss it away. Make sure that earning statement looks to be accurate. If there’s extra earnings on there, you might think that’s cool and that’s going to help you in the long wrong, but I would suggest that’s probably not a good idea. If you noticed that the earnings statement is not accurate, you’re going to want to go ahead and get that fixed.
K: I never even thought about that one. Like now, I’m going to check it.
D: Yeah, see?
K: Because I look over it, I toss it in my magic blue envelope, and I’m done.
D: You learn things on this show. Every week.
K: I do, every week.
D: Protect your personal computers by using firewalls, anti-virus software, make sure you do those annoying windows security updates and patches. Make sure you do all that stuff because it’s going to keep your computer more secure. Nowadays, almost everything about our life, is on a computer someplace. So make sure that you protect that stuff because it’s very valuable and it’s a huge headache, as the story I told.
K: And your internet too. Your Wi-Fi. Even those super long obnoxious, annoying, two million letter long passwords are annoying…they’re safe.
D: That keeps you safe from the people just driving through your neighborhood.
D: What do they call that again, it’s got an interesting name.
K: It does have a real name and I can’t think what it is.
D: It’s like skyjacking or something like that.
K: Something, where they just literally drive through, look for open Wi-Fi signals or easy ones to hack and they basically just swoop in there and get access to any personal information.
D: I think I liked the old days better, you know, where you just had an open Wi-Fi account at your house and you just didn’t have to worry about it. But now, there’s just so much potential liability. I mean, can you imagine somebody, if you left your Wi-Fi open and then somebody driving by started doing inappropriate things through your Wi-Fi account.
K: Oh my gosh, I can’t even image.
D: And it gets traced back to you…
K: Stuff you don’t even think about, like what if they’re looking at porn or whatever and, like you say, it gets traced back to you, it’s insane.
D: Yeah, it could be devastating.
K: I mean, the good people never even think about that stuff. You know?
D: Yeah, and I think that we all as a society need to be just a little bit more careful and a little bit less trusting. You don’t have to be paranoid, but you just have to make sure that you protect yourself from these people. But there’s one last thing that I would like to talk about, actually there’s two things. One is, the IRS for the state of Florida, Georgia, and D.C. is offering something called an identity protection number. And so this is an additional number. Kind of like we were talking about, just now. We wish there was a way to protect yourself – and you can, this is a proactive step that you can take – you can go to their website at irs.gov/getanippin, getanippin, to register. After you verify your identity, they’ll give you an extra number that you can place on your tax returns, and you can use that and that will verify that that’s you. So from that point forward, no one would be able to file a return in your name with an ipin.
K: That is awesome. I didn’t know you could do that yet. One more thing learned. Ding, ding, ding.
D: Yeah, so I would suggest that everybody do that because it’s going to keep these identity theft problems from happening. But there’s one other thing that I wanted to mention, and this has actually happened to me and it’s happened to a number of my clients, and that is you’ll get this phone call, usually a voicemail at the house, and it’s from someone with an East Indian accent and they’ll start saying they’re from the IRS and there’s going to be a lawsuit unless you call them back, or if you give them money, then you can make the lawsuit go away. It actually happened to me, my wife called me, I was driving down to South Florida for business, and she was all shook up. And we’ve been doing this business for over 16 years. And she told me there’s somebody from the IRS and they’re threatening and making threats and I had her describe the call and I laughed and laughed and laughed. And then another day, I was at home alone on a Saturday morning, and I got the call and I had a great time talking to the guy about all the things he was going to do and he was from the IRS and it was just a lot of fun. But, those calls are fraudulent, they’re bogus, you don’t have to worry about them, you just need to hang up on them.
K: Anytime you don’t call them, don’t give them any info.
D: I think that that’s very good advice.
K: We’ll take a real quick break, we’re at the bottom of the hour, you’re listening to the IRS solution attorney show, we’ll be back in minute.
K: Welcome back, you’re listening to the IRS Solution Attorney show, I’m your cohost, Katrina Madewell.
D: And I’m the IRS Solution Attorney, Darrin Mish.
K: So, we can take some of your questions, we are live today as usual on Thursday afternoons at 1. Studio call-in line 727-441-3000. We can also take them via Twitter, call in number 727-441-3000. Twitter handle,
D:@Darrin_mish, that’s @Darrin_mish. Love Twitter questions for sure.
K: And again, that’s @darrin
D: underscore mish
K: Don’t forget, two i’s there, first name last name. Easy, right?
D: Yeah, exactly.
K: We did get a question from Lisa on Twitter, she wants to know, what are the chances of being audited by the IRS?
K: That’s a loaded question.
D: The very good news is, is not very high likelihood you’re going to be audited. So, if you’re an individual tax payer, I’m going to assume that you are, Lisa. Your chance of being audited if your income is under $100,000 is about .9 of 1 percent. So, less than one percent. It goes up to about one and a half percent if your income is under 200,000 and it goes up to maybe 2% if you’re earning between 200,000 and a million and if you’re over a million, it goes up again.
K: You’re just gonna get audited every year. I’m just kidding.
D: But it’s not that high, that’s the great thing. There are some schedules and types of tax forms that actually have a higher audit rate than others, and that’s kind of important to know. You know, if you just start doing business and you don’t incorporate and you don’t form a LLC, you’re actually known as a sole proprietorship, and if you’re a sole proprietorship, then you’re going to file a form called a schedule C where all your gross business income is reported and your business deductions are reported. It’s important to note that is one of the very highest schedules that’s audited. So if you have a schedule C, your audit rate goes up quite a bit. It goes up to maybe 3-5% and that’s because people that are doing business as a sole proprietor are by definition, unsophisticated and the IRS feels more likely to overstate their deductions or understate their income.
D: So those schedule C’s get audited more often.
K: Which kind of leads into another question that we had. Rick wanted to know if there’s certain activities that actually raise red flags to trigger an audit from the IRS.
D: You know, what we’re seeing right now, a lot, is people claiming unreimbursed employee business expenses. So let me explain what that is, that sounds like a complicated thing. It’s when an employee claims that their employer is not reimbursing them for business expenses like mileage for example. You know, you’re not an employee and you probably drive all over the place.
K: I get 3,000 miles a month times whatever that rate is.
D: Yeah, but you’re probably a schedule C or you might have a corporation and so you can deduct those miles. But if you had a job and you were getting a W-2, the odds are very overwhelming that your employer would be compensating you for that mileage in some way, so you can’t double dip, you can’t claim…
K: Two people can’t get it.
D: You can’t get reimbursed by your employer and then write it off and we see that an awful lot, unreimbursed expenses.
K: Their employer’s taking the deduction at that point because they’re paying for it.
D: Exactly, exactly. I don’t know exactly why, but in the last couple weeks, I’ve seen a half a dozen of these audits come through where you have unreimbursed employee business expenses and that’s just not something that I would recommend claiming. There’s another red flag that I see a lot and that is, not a real big fan of the home office deduction, either. I see an awful lot of home office deductions being audited.
K: I heard that too, a lot and I just never took it for that reason, even though I do have it.
D: I’m actually entitled to take it and I do not take it. It’s just not worth the potential hassle. There are some other things like failing, this is really obvious, but I see people violate it all the time, and that’s failing to report all of your taxable income. So, a lot of people, “forget” to put a 1099 on their tax return. Well, the 1099 exists so that the government knows about that income. If you forget to put it on your tax return, you’re going to have some kind of an audit. Because the computer at the IRS is going to match up the income to your tax return, it’s not going to match and there’s going to be a problem.
K: How do freelancers fit in that mix?
D: Well, you know freelancers tend to get 1099’s, right? And sometimes this is completely innocent. Maybe a freelancer does work for 9 different contractors.
K: There’s a lot of services too, that they connect freelancers and there’s not really anybody responsible because it’s going through a company.
D: Right, let’s just say in my example they work for 9 different companies and then they only get 8 of the 1099’s and they’re not terribly organized, so they literally forgot or didn’t get the 1099, they’re going to get audited. It might not be a real high level audit, but there’s going to be an adjustment at some point to take into account that extra income, for sure.
K: And after 9, I mean, it would be easy to miss.
K: You’re already counting 8 1099’s.
D: Yeah, and there’s lots of kinds of contractors that get that many 1099’s, you know a lot of times in the construction trades, they might work for more than one GC. If you’re a framer, you’re going to go and do all the framing work you can find.
K: What’s that number? Isn’t it like up to $500 they don’t get a 1099 or something.
D: Yeah, it’s $600 and that really hasn’t changed in three decades.
K: You’d think I might remember that, after now. Since it’s been 30 years. So what happens if you actually do get called for an IRS audit? I would be so scared. I’ve never been audited, but I know I’d call you first. I know I would do that just because I can reach you and I’d be like (yells) what do I do? But what happens if someone gets called for an audit, it’s going to be a letter, right? First thing’s first?
D: Yeah, you’re usually going to get a – we call them a love letter – you’re going to get a letter from the IRS and you’re going to see the return address on the envelope and then your heart’s going to skip a beat and then hopefully you open the letter and you’ll see that it’s an audit and that’s not a good thing, but I’d say the best thing to do is you need to read the letter, you need to understand what the scope of the audit is. I’ve actually been audited.
K: They’ll tell you why they’re auditing you?
D: yeah, they will, they’ll usually tell you what the problem is, and so, oftentimes those letters will be limited in scope. I’ve been audited a couple times, but it’s just been on very minor issues. I think one time we had the social security number wrong for one of my very young children, so that’s technically an audit. That’s one of those times where we actually got the social security card out of the safe and we copied it and we sent it back to the IRS and so we cleaned that up. But that’s called a correspondence audit. Correspondence audits are usually pretty limited in scope, really not that huge a deal. Probably a good idea to get some help from an attorney or an accountant or somebody.
K: So kind of verified piece of information.
D: Yeah, typically, and that will often come out on a letter called a CP2000. You get a CP2000 it’s technically an audit, it’s not the end of the world, it’s just some problem that needs to be fixed. Oftentimes it’s biographical kind of problem. Social security number, or potentially unreported income.
K: Now will they usually say I’m going to audit you for last year or they’ll like boom boom boom, pulling out all the stops, I’m auditing you for 3 years? Like, what do you usually see?
D: What usually happens is they’ll say, we want to do a face to face audit for tax year 2013 and then after they, you go and you deal with 2013 and if they see any problems, significant problems, then they’re going to say well, guess what, we’re going to open it to 14, we’re going to open it up to 12, we’re going to do all 3 of these years.
K: So do they just roll in unannounced, or do they have to make an appointment with you, or what?
D: No, they definitely make an appointment. What they do is they send you an audit letter and they say, you know, congratulations your audit is scheduled for such and such day and time.
K: Woo-hoo, you’ve won!
D: And typically if you get professional representation, and I do recommend that you get some professional representation, then that representative will call and typically rearrange the time and date and give you a little bit more time to be more ready. I do recommend having somebody go to the audit, instead of you, and here’s why, this is a very common sense…
K: So don’t go at all, you’re saying, send someone else?
D: I would say send someone else and this is very common sense and it will all sense to you, and that is you’re initial reaction as the tax payer – and it would be mine despite everything I know – is going to be that when they ask you a question, you want to show that you’re as compliant and as cooperative as you possibly can be and you’re going to be under stress and what you do when you’re under stress like that is that you blurt out things that are inaccurate, and that’s like bad. So you don’t want to be doing that. You want somebody to go down there that’s more objective, more disinterested, and quite frankly, at audits, I will often not know the answers to the questions that are being asked and I like it that way, because then I write down the questions and then I get about a week to answer them, then I call back my client and say, ok, here’s the questions that we need answers to. What are the answers? What are the correct answers? Not what are the emotional, on the spot, right there in the audit, when your blood pressure is 180/2000 and you’re freaking out, I would suggest that you would just bring, you know, hire somebody else to go handle the audit and take care of it that way.
K: Now, typically with your CPA, your accountant work collaboratively with you to do that audit? Since they filed the return.
D: It can often be a very bad idea to have to prepare, handle the audit, and here’s why. The return preparer is often more concerned that they made a mistake then they are for keeping, you know, preventing you from owing more money. And so, they end up having split loyalties, their loyalty – they can’t help it – their loyalty is to save their own skin and you’re secondary as the client. And that might sound harsh, what I’m saying right here, but it’s just human nature, you know.
K: And they’re very detail-oriented people typically in the accountant field. I mean, they have certain personality style to crunch numbers all day long, they do I’m just saying, and you know.
D: (laughs) Not to stereotype anybody.
K: I mean, I’m not stereotyping, I’ve met some that have amazing personalities, but for the most part, if you’re familiar with the DiSC Personality profile, your accounts are going to be your C’s, they’re number crunchers, they’re bean counters, they have that personality.
D: Yeah, they’re not going to be real effective communicators typically. And so, I just don’t recommend usually having the preparer handle the audit. Unless it’s something very routine like we just discussed, a missing social security number.
K: And that makes sense, too. You have people like me, like my returns might be jacked up compared to some people because my business plan, the way I do things is different, but I can explain that and why I think those are tax deductible items. I mean, if I’m spending money to make money to make money, that’s a tax deduction, right?
D: Yeah, and as long as it’s ordinary and necessary and reasonable, you’re not going to have a problem. But you’re right, for sure everybody’s returns are different and there was a study out, one time where the IRS actually gave the same fact pattern to 50 different tax preparers and they got 50 different answers on the returns. So this is more like an art instead of a science.
K: So, what do you mean exactly, like explain that a little more because that went whoosh, so I’m sure for the people listening, they’re going “what the heck did he just say?”
D: We like to think of accounting and tax preparation as something that’s just real black and white and accountants tend to think of it that way, but in this study that the IRS gave the same fact pattern, 50 different tax preparers and they got 50 different tax returns back.
K: And a fact pattern is?
D: I don’t remember, it was of moderate complexity, it was a business owner with this much gross income, this much expenses, that kind of thing.
K: Ok, so this scenario…
D: And they got back 50 different answers. And not all 50 of those were wrong, which was interesting. I forget the exact stat, but more than half of them were correct – air quotes – correct, but different answers.
K: That falls into the reasonable ordinary necessary, whatever.
D: Yeah, so I don’t know that taking your tax preparer and having them defend the audit is necessarily the best thing. At the very least, you should get a second opinion on that. There is no privilege between a tax preparer, even an attorney tax preparer, and their client. So there is no privilege there, and so that tax preparer could technically be considered a witness against you. I don’t think that’s the right person to have you representing you in the audit. I’m sure there’s reasonable people that could disagree with me on that point, but…
K: It just seems like some separation in that area in the middle of something like an audit, would be a good thing.
D: And I’m often asked, what’s the difference between having my accountant handle my tax problem versus an attorney handling my tax problem? And my standard answer is this: Accountants and attorneys are trained dramatically differently. Accountants are taught that everything is black and white, 5 plus 5 equals 10, 100 percent of the time and although I tend to agree with that, if you ask a good attorney what 5 plus 5 is, the answer is going to be “well, what do you need it to be?”
K: You can argue that point.
D: Exactly, and so we’re trained as attorneys to be advocates, we’re trained to be zealous advocates. That’s why sometimes people call us hired guns is… it’s in our oath of attorney that we have to be a zealous advocate for our client, and so we tend to think in shades of gray. Me in particular I tend to think in shades of gray. I want to identify what a win is for a client and then I want to do everything in my power to get that win for the client, of course, lawfully, ethically, morally, all of those things.
K: Right. But that, for the matter, I’ve also seen, hey what’s my point of view? And why did I have this and why would you argue that point to be correct? Because that’s the way I filed my return.
D: And you know, lawyers, good lawyers, experienced lawyers, we’ve been in the trenches. In my case for over 20 years versus accountants tend to be less adversarial and they don’t fight for a living, so it’s a different sort of mindset. I’m not saying anything bad about accountants, I love accountants.
K: But it’s a compliant type of personality, and their job, when they get up to go to work, I almost see like this automated clock, next day clock…and somebody like you or I, Monday is going to be totally different than Friday. It’s just not going to be the same day.
D: That’s true, and they often seem to be really concerned about offending somebody at the IRS or making enemies at the IRS, or things like that. And I think that makes sense. If you’re not trained in this, if you’re not experienced in this, if you don’t know how to conduct a civil dispute administratively at the IRS, I think that could be a real concern. I don’t think it’s necessary, but I think they’re worried about it. Since I’ve been fighting the IRS, in a semi-nice way, for 16 years, I’m not that worried about it.
K: One of your headlines you have on here, which I think is so interesting, we probably should make sure we touch on. It says IRS fails to protect tax payers, privacy from hacker thieves and property seizures.
D: It’s kind of an interesting story, it comes out of the Washington Times on September 6, and what it is, when the IRS can’t collect from a tax payer, sometimes they’re reduced to conducting seizures of personal property, sometimes real property. Real property meaning real estate. In this case, what was happening is the IRS, there was an internal inspector general probe at the IRS where they determined that quite often as much as 30 percent of the time, when the IRS seizes a vehicle they don’t actually wipe the GPS data out of the navigation system and/or they leave the garage door opener in the vehicle. So let’s think about this, you’re already having a really bad day because they seized your vehicle to sell at auction, and then the person who bought the vehicle, potentially, could drive right to your house…
K: They punched in home on the GPS.
D: They punch in home on the GPS, and then the garage door opener is still in the car. So now they have access to at least the garage of your house. So, that’s kind of a problem, and the IRS says they’re trying to work on it. I thought it was an interesting story from the standpoint of they manage to wipe some servers at the IRS to protect their own security, but somehow they can’t remember to take and wipe the GPS data out of the nav systems from cars that they’ve seized.
K: I have a home button plugged into my GPS, and I can tell you, I don’t know what address is in there, but it’s not mine. So, good luck, you can go there, but it’s not going to be my house.
D: Interesting. You know, there was another interesting point in this story, and that was that in fiscal year 2014, they only collected 22 million dollars in the seizure of personal property. I think that’s a remarkably low number.
K: It sounds low.
D: It just doesn’t seem that high of a number for as much trouble as it is. I think it’s because they do these auctions that really aren’t all that well publicized and then they sell the property at auction to a limited audience and I think they don’t really get market value for it, or anything close to market value.
K: It’s probably like their cousin.
D: I don’t think that’s the case, I think they are publicly noticed.
K: I’m just being funny.
D: Actually, if you’re interested in buying property from IRS auctions, you can google it, there’s a mailing list that you can get on and you can apparently get some pretty good deals.
K: Wow, what about this Bend plumber that had 1.6 million tax evasion?
D: This is kind of interesting, this is guy out of Bend, Oregon, he was running a plumbing business. I’m not sure how big, must have been pretty big because over 4 years he managed to rack up 1.6 million dollars in taxes, or income that he evaded, or taxes that he didn’t pay, and he’s in big trouble. He’s going to be looking at a maximum fine of 3 years in prison and 100,000 fine, plus the restitution of the tax that he didn’t pay. So, his life probably isn’t looking too great for the next 3 years.
K: We covered a lot of awesome stuff here today, if you missed any part of the show, you can catch it in its entirety on the podcast and you guys are posting all of your stuff at getirshelp.com, right?
D: The irssolutionattorney.com is another place where can get the recordings of these shows.
K: That’s really good to have that information because sometimes we touch on them, but we don’t get a chance to share everything, so I’m glad you’re posting it over there at getirshelp.com.
K: It’s time for the Train Wreck of the Week.
D: Yeah, the train wreck this week is kind of an interesting story. A gentleman came into my office and he was a truck driver. Truck drivers, independent owner operators have interesting lives. They bring in a lot of money because they get paid on the gross, right, they get paid x amount to haul freight from point A to point B, but then they have to take out all of their expenses. Their fuel, their insurance, the truck payments, the tolls, the fines, all that stuff they have to take out. And it was interesting in this case, when this gentleman first came to me, he came because he had a payer that, or issued him duplicate 1099’s so instead of, they were like $75 apart. So one was like for $100,000 and one was for like $100,075. So he came to me and he said here’s the problem, these are obviously duplicates. And I looked at them and I said, yeah, obviously what happened is they issued the first one, the lower amount, and then they found $75 more and they issued the second one and they didn’t cancel the first one. We tried to get the payer to cancel it, but they wouldn’t. They said they had done everything they could do, and so what we did, is we ended up filing a tax court petition.
K: What is that called again?
D: It’s a tax court petition. What happens is when the IRS…the public thinks that the IRS can just assess, invent tax, and assess it against you at any point in time, but they really can’t. They have to follow what we call due process because of this thing we call the Constitution, they have to follow due process. So they have to follow certain rules. so what happened in this case, ,when the duplicate 1099 was issued, they issued him what is called a noticed of deficiency, it comes in the mail and when you get a notice of deficiency, you have 90 days to file a tax court petition. Now, you only have 90 days, you don’t have 92 days, you don’t have 91 days, you have 90 days. If you file this thing, this tax court petition late, you lose. It’s untimely. No person on earth has the jurisdiction to extend this 90 day deadline so it’s really important if you get a notice of deficiency and you want to file a tax court petition, you got to do it on time. It’s got to be mailed within the 90 days. The deadline will be on the sheet in big red letters, typically, to tell you what your deadline is. So we filed a tax court petition and this case was awesome. I’d never had this happen. I filed the petition and, I didn’t even have to have a conversation with the IRS, or the counsel, they just saw it my way and fairly immediately for this kind of process, they just fixed it and we were back on our way. Now, that’s not the cool part of the case, I mean that was cool, I liked that part of the case, but my client still owed about $50,000 and it just went under recommendation this week from the IRS, it looks like they’re going to accept about $1400, a little under $1500 on that case. So, it went from potentially owing well over $100,000 to $1500.
K: So is that money he actually owed, or…?
D: He actually owed about $50,000 separate and independent of my story, with the duplicate 1099, so we got him up to date with his filing requirements, we got him up to date to making his estimated tax payments like he’s supposed to do and then we demonstrated successfully to the IRS that he really could not afford to pay any more than about $1500, so very happy client. I know that he’s very much looking forward to putting this behind him. You know, one of the things that happens with these independent self-employed kind of people is they don’t understand the concept of how they’re supposed to stay out of tax problems and the way you do that is by making estimated tax payments. Estimated tax payments are supposed to be made at a minimum quarterly, but I typically advise my clients either to pay them weekly or monthly so you just can’t fall behind.
K: Whenever you pay yourself or write that check, go ahead and make that tax payment.
D: Yeah, if you’re a real estate…
K: Best way to stay out of the hot seat.
D: If you’re a realtor, I suggest that you pay your estimated tax payments at the closing table, essentially. Take your percentage out right then and there and send it to the IRS and that way you can’t “borrow” it for some emergency that comes up. Everybody has financial emergencies and just don’t borrow the money from the IRS for goodness sakes, borrow it from somewhere else or go without.
K: Yeah, not them. But don’t let the IRS bully you either.
K: When you get these letters, don’t be afraid, you can call Darrin, you can reach out to him at www.getirshelp.com.
D: Or our phone number is 813-229-7100. Our toll free number is 888-GET-MISH, that’s 888-GET-MISH, 888-438-6474. Love to talk to you, love to help you if you have tax problems.
K: A little one or a big one.
D: Say, if you owe $20,000 or more, then certainly it’s going to make sense to have a conversation with me. If you owe $7,000, probably not so much.
K: So what’s the best thing for someone that owes $7,000? Call the IRS, try and work something out?
D: Yeah, if you’re going to owe $7,000, this is in our hypothetical example, you’re probably going to qualify for a very low installment agreement. You don’t need an attorney for that, you’re going to basically take your $7,000, divide it by 60 months and that’s pretty much the installment payment they’re going to accept.
K: That’s the payment plan? Usually over 5 years?
D: Between 60 and 72 months is usually how it’s going to work out. So if you have those low dollar amounts, there’s oftentimes not much I can do. If you owe $7,000 and you make $100,000 a year, I’m not going to be able to do an offer in compromise and demonstrate you can’t pay back $7,000 over 10 years, that’s just not going to work out.
K: What’s the wipe out period you talk about, there’s an actual name for that. Where it goes away.
D: There’s a collection statute of limitations, and we talk about that on the show sometimes. That is, the IRS has 10 years from the date the tax is assessed to collect the tax. If they don’t collect that money within 10 years, then tax payer wins, IRS loses.
K: Too bad, so sad.
D: Yeah, there are exceptions, of course, but for the most part that’s the rule. If you get by with 10 years, you win.
K: Haha, I love it. Might work out nicely for someone.
D: It does it works out. We have clients every year that end up having the statute blow, that’s what we call it and they walk away from a lot of money. In fact, I just worked out an installment agreement. The paperwork went through today. He owes only about $28,000, put him on a $500 a month installment agreement but more than half of that money is going to expire in like 18 months. So, in 18 months, he’s going to, half of that is going to be gone, and he’ll be a lot better off.
K: And you guys have a ton of resources on your website, just for someone to tool around.
D: Absolutely, I think there’s a couple hundred videos on there. If you have any particular questions about IRS problems or how to handle them, then you’re going to want to visit the website at getirshelp.com.
K: And you guys are posting the podcasts over there as well?
D: The podcasts are there. They’re on the irssolutionattorney.com website and they’re also on iTunes.
K: If you’re just catching us for the first time this week, we’ll be back here the same time, same place, every week. This is the IRS Solution Attorney Show, the whole show’s on a podcast, and today’s episode was “What is Tax-Related Identity Theft…and More”.
D: Thanks for visiting, I’m Darrin Mish with Katrina Madewell.
K: Thanks for joining us this week, we’ll be back. Same time, same place next week.