IRS Penalties and What Can Be Done About Them

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DARRIN T. MISH: Hello, hello, hello. This is the IRS Solution Attorney, Darrin T. Mish, and I’m here again today this week with my lovely and talented cohost, Katrina Madewell.  Click here to watch or read more information on IRS Back Taxes.

KATRINA MADEWELL: That’s me, doing good. Welcome back everyone.

DARRIN T. MISH: Today we’re going to be talking about something that is near and dear to most taxpayer’s hearts and that is why in the world are there so many IRS penalties? Why are they so high? Why do I get whacked with them every year or ever so often? What, if anything, can be done about them? So that’s going to be the topic today.

KATRINA MADEWELL: I think this week’s show, most people can relate to. Filing late. I don’t know anybody that hasn’t filed a tax return late at least once. Especially if you’re self-employed. You might file late every year.

DARRIN T. MISH: You probably have the opposite issue where you once filed on time, you know.

KATRINA MADEWELL: I can’t relate to that one at all, not me.

DARRIN T. MISH: Before I started doing IRS problem resolution work, I used to file late more often than I’d like to admit. There’s a bunch of filing deadlines and we kind of forget about them. So let’s go over this real quick.

KATRINA MADEWELL: It’s in your face, so hopefully you don’t forget because you see it every day.

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DARRIN T. MISH: Yeah, for sure. Just the other day was the extended deadline. There’s a March 15th deadline for corporations to file their returns. Before I started doing this work, I used to kind of forget that one quite a bit because it’s a month earlier. The reason the March 15th deadline exists is so that you can get the K-1’s and stuff out to the people who have to file by April 15th. So you need to either file your corporate return by March 15th or request an extension by then. If you do get an extension, then those returns are actually due September 15th, which is what I was referring to just this past week.

KATRINA MADEWELL: There’s another extension you can get for that right? Like October?

DARRIN T. MISH: No, you’re done. You’re done on the extensions. It used to be for your personal tax return, your 1040, it was due on April 15th and you could get an extension and I think it got you to August 15th and then you can request another one if you could demonstrate a need and that got you to October 15th. Over the last several years, I want to say the last decade, they just skip the August 15th extension and if you file a personal extension by April 15th, then you get an automatic extension to October 15th.

KATRINA MADEWELL: I find for me, it’s better to just turn that stuff over. I’ve got to a place where I’m like, yeah, I’m not the right person to do this. Especially with different personality styles. Hire a bookkeeper for 10 bucks an hour. Let them do it. Let your accountant be, you know, remind you of those deadlines.

DARRIN T. MISH: You know, I didn’t prompt you to say get a bookkeeper. We just added bookkeeping and monthly accounting to the practice. It’s something that I’ve wanted to add for many years. I just hired a new accountant in my office who’s very very exceptionally qualified. Masters in taxation and an MBA in accounting. We were discussing it and we’re going to be offering monthly accounting and bookkeeping. It’s something that small business owners, they can’t get it done.

KATRINA MADEWELL: It’s the C personality on the discs, so most of us are not that. I know I’m not. I’m like all DI. I would rather (pfffft) than to go through numbers.

DARRIN T. MISH: (inaudible) I’m not that personality.

KATRINA MADEWELL: There’s so many better things I can do with my time than look at numbers. And there’s bean counters that love it.

DARRIN T. MISH: It’s funny, you’d think well, Darrin’s a tax attorney and he deals with the IRS all the time, he must be really number-centric. That’s actually not true about my personality. I’m very solution-centric. I want to solve problems, I want to help people. The way I’m good at this is because I know the rules, the administrative rules that the IRS has to follow better than they do. So I use my old criminal defense background and go ahead and out-manipulate them. In a non-adversarial kind of way. We actually leave the bookkeeping, accounting, and tax return preparation to people in my business that are actually better qualified and better suited personality-wise than I am.

KATRINA MADEWELL: That’s what they’re good at. If you like to do that, you’re going to be good at it. With any career. What are you guys charging for bookkeeping and account services? Did you figure that out yet?

DARRIN T. MISH: I think we should just have people call the office. It’s really affordable. It’s going to kind of vary, depending on the size of the business.

KATRINA MADEWELL: Yeah, 1 or 2 employees versus 200. That’s obviously going to be a lot more transactions.

DARRIN T. MISH: Right, 200 employee business, that’s a full time job for somebody. We can handle it, but it’s not going to be a few hundred bucks.

KATRINA MADEWELL: Go ahead and give out your office call in numbers and your website so people know how to get that info.

DARRIN T. MISH: Sure, the website is getirshelp.com. Our office number is 888-GET-MISH. That’s 888-438-6474. Actually, we’d really appreciate some questions today here at the station live. We’re doing this live today. That’s 727-441-3000. 727-441-3000. If you have questions about IRS problems. Not so much tax preparation kind of questions, but if you have IRS problem kind of questions, then by all means, give us a call. 727-441-3000. You don’t even have to give us your real name. We can just talk about it.

KATRINA MADEWELL: The scenario. In general.

DARRIN T. MISH: Hypothetical, I have a friend who owes the IRS money kind of thing.

KATRINA MADEWELL: You guys outlined some pretty cool eight points on different penalties that people can face if they file late.

DARRIN T. MISH: If you don’t file by your filing deadline that we just talked about, you may face a failure to file penalty. If you don’t pay by the due date, you could face a failure to pay penalty.

KATRINA MADEWELL: So that’s two different penalties.

DARRIN T. MISH: There’s actually over 150 different penalties that the IRS can impose against taxpayers. Let that sink in. 150 different penalties? There’s actually software out there where you can compute the penalty with 100% accuracy. There’s actually a little known provision in the code that says if the IRS uses an inappropriate penalty, the taxpayer can basically calculate the correct penalty and you can ask them to abate the wrong penalty and impose the correct penalty. Abate means, eliminate or get rid of. If you don’t file by the deadline, you could be facing a couple different penalties. The failure to file penalty is generally more common than the failure to pay penalty. If you can’t pay all the taxes that you owe, you should still file your tax return on time and pay as much as you can. Then you can explore other payment options. It’s really important to note, we’re responsible for the payment of our taxes by April 15th of the due date year. 16th or 17th, whatever it happens to be that year. We’re responsible for the full payment of taxes on that date. It’s not like a lot of people think, well, I’ll just pay my taxes by the extension deadline, October 15th. It doesn’t really work like that. You’re supposed to have it all paid by April.

KATRINA MADEWELL: If you have to file an extension for your regular tax return, you’re actually going to pay a penalty because you owed money?

DARRIN T. MISH: There’s actually a safe harbor provision and that says if you pay 90% of the tax you owe for that year, then you’re not going to have a late payment penalty.

KATRINA MADEWELL: That’s a neat little tidbit.

DARRIN T. MISH: Let’s just use round numbers because I can get my head wrapped around round numbers. If you owed 10,000 dollars and you paid $9,000 by April 15, you wouldn’t have a late payment penalty on that remaining balance of $1,000.

KATRINA MADEWELL: As long as they have most of it, they’re ok.

DARRIN T. MISH: So if you think you’re going to owe a substantial amount of money, you just don’t know what that is, then you should send a big check to the IRS to try to cover at least 90% of it if you can. If you can’t, well then there’s nothing you can do about it any way. You’re going to have penalties to deal with.

KATRINA MADEWELL: How does that work if you don’t actually have a return that’s accompanying the check that you’re trying to send for the money you owe?

DARRIN T. MISH: Good question.

KATRINA MADEWELL: I think about all these random things because I don’t have the IRS head.

DARRIN T. MISH: That’s why you’re here because I don’t know what’s interesting because I deal with this all the time. If you filed the extension, that form 4868, which is the extension for the 1040, there’s a place on there that asks you, how much tax do you think you’re going to owe? There’s also, conveniently, very nicely, there’s a line on there where you can put down how much you’re paying with the extension. It’s very uncommon, I’ve seen that very few times where people actually sent a lot of money without their return, but some people do and I think that’s a good thing.

KATRINA MADEWELL: No problems ever getting that money back if it’s too much? That would be a fight, wouldn’t it?

DARRIN T. MISH: No, because it’s just a standard refund, just like any other tax refund.

KATRINA MADEWELL: Well, the government’s broke you know.

DARRIN T. MISH: The problem with getting it back could be if you owed significant taxes for other years, older years then they’re going to take that refund and capture it to help you pay off your old tax.

KATRINA MADEWELL: With any creditor, if you owe somebody money and you have a bank account in their bank, they’re going to swoop it to take the money you owe them.

DARRIN T. MISH: Let’s talk about the late filing penalty. It’s typically 5% of the unpaid taxes for each month, or part of a month that the return is late. It can not exceed 25% of your unpaid taxes. Let’s think about this for a second. You file, you don’t get an extension and you file and pay on April 16th. One day late, which is a portion of a month. You’re going to be paying 5% of the unpaid taxes for that month. If your unpaid taxes were a thousand dollars total, then you’re going to be paying 50 bucks for that one day.

KATRINA MADEWELL: Ouch. That hurts! That’s like dinner for two.

DARRIN T. MISH: Well, depends on where you eat, right? If you’re eating at McDonald’s it could be dinner for six.

KATRINA MADEWELL: I don’t know McDonald’s gotten expenses these days.

DARRIN T. MISH: Maybe with a couple apple pies and ice cream cones at the end. But, yeah, it’s a significant number. When you get in to these relaly big numbers where you owe $100,000 and you file one day late, it can be pretty significant. That penalty caps out at 25%. But still, 25% penalty is pretty extortionate, don’t you think?

KATRINA MADEWELL: I think it’s huge. They’re already taxing us at a really high rate.

DARRIN T. MISH: It gets worse. If you owed 100 grand it capped out at 25%, that’s 25 grand, so now instead of 100, you owe 125 grand. But keep in mind that interest is accruing daily. Not monthly. Daily. It’s accruing on itself.

KATRINA MADEWELL: At what percent again?

DARRIN T. MISH: Well, right now it seems very low. It’s 3%, but it’s compounding daily. So it’s effectively much higher than 3%. So by the time you add in the 3% plus the 5% plus interest on yesterday’s interest and penalties, it’s pretty significant.

KATRINA MADEWELL: Compound interest can either make you rich or make you broke. It’s not a whole lot of in between.

DARRIN T. MISH: When I typically see taxpayers…let’s say they hadn’t filed in six years, the tax would be maybe 50 grand and the interest and penalties would be another 50 grand.

KATRINA MADEWELL: In five years?

DARRIN T. MISH: Yeah, it typically doubles, it depends. Typically when we look at the penalties and the interest, it would be doubled over the life of the problem.

KATRINA MADEWELL: So if you had to put a note on here, if it’s more than 60 days after the due date?

DARRIN T. MISH: The minimum penalty is the smaller of $135 or 100% of the unpaid tax. It’s kind of a funny one. I don’t know exactly who thought these up.

KATRINA MADEWELL: The penalty is equal to the tax? Did I hear that right?

DARRIN T. MISH: Right. The minimum penalty is either $135 or 100% of the unpaid tax. If the unpaid tax was $60, it could be effectively $60. Does that make sense? The system is designed to…I don’t think the system was ever intended for penalties to generate revenue for the treasury. Penalties are not supposed to be there as revenue generators.

KATRINA MADEWELL: They just need it to run divisions of the country. I don’t know why they need it, but they need it.

DARRIN T. MISH: It’s just like anything else. Any other money that goes in to the general fund of the treasury, it just gets used and spent. We spend more money every year than we take in. Unfortunately these punitive penalties that the IRS imposes on tax payers has become expected.

KATRINA MADEWELL: That’s like with the banks, it’s a revenue stream with the penalties. 150 penalties is crazy.

DARRIN T. MISH: I can’t name all 150.

KATRINA MADEWELL: I don’t even know where you would begin with that.

DARRIN T. MISH: Let’s talk about filing extensions real quick. It’s really important that you file an extension if you think there’s any chance at all that you’re going to be late. There’s no penalty for filing an extension. Let’s say you file your extension and you get your return in by April 15, there’s no penalty. There’s no problem with that, it’s absolutely fine. I think it would be a really good practice if you think you might possibly need extra time to go ahead and file an extension automatically. Most tax preparers can file those by eFile for you. I would recommend that you not assume that your tax preparer’s going to file an extension for you. Most don’t automatically file an extension for you. So you’re going to want to check with them to make sure they do it. I have a short funny story about me and an extension. I actually filed the extension by mail. It was kind of back before efiling. You don’t want to just mail that extension in, with, what’s a stamp cost? 49 cents. You don’t want to send it in with just a regular stamp. You want to send it in certified mail, it’s going to cost about $6. And you want to retain the green slip that shows the proof of the date of mailing. One year I filed an extension on the 15th and I sent it certified mail. I don’t know, maybe 30-40 days later I get a letter back from the IRS saying the extension was late and the penalty was $500. $500 is a lot of money for something that’s so innocent. So I made kind of a funny mistake. I called the IRS, which I knew that this was not going to be resolved with a phone call. But I called the IRS and the lady informed me that it wasn’t filed on time, blah blah blah. She said, very nastily, she says…I said well, ma’am I mailed it and I have proof of mailing, I can prove that I mailed it on time. And she said well, if you don’t have the certified receipt, then we’re nog going to accept. Then I said well, ma’am, that’s great. I do have the certified receipt. Where do you want me to send it? Ultimately I did send it. It saved me the $500. Think about that, it cost me $5 to mail it, so that’s 100 years of extension requests via mail that I saved myself with that one preemptive step. If you’re going to file your own extension, you want to go ahead and send it certified mail. I would recommend that you not wait until April 15th because every year we see these new stories, there’s lines coming out of the Tampa Airport at 11:30 at night. There’s 50 cars in line. Don’t do that. Go ahead and just file it earlier in the cycle.

KATRINA MADEWELL: What if you have a metered and you took a picture of the stamp, does that suffice? Or it has to be certified?

DARRIN T. MISH: You have to have proof of mailing. There’s a couple different ways to prove mailing. There’s actually a certificate of mailing you can get from the post office. I want to say it cost under a dollar. That probably wouldn’t work. You can also do the certified mail. You don’t hav3e to do the return receipt, by the way. Which adds another 3 or 4 bucks. USPS tracking is pretty good nowadays and you can send it registered, which costs even more than certified. That’s pretty much the only thing they’re going to accept. The metered stamp, it’s easy to change the date, so they’re not going to be down with that.

KATRINA MADEWELL: Yeah, even though they get those machines like re-inspected and stuff. I have a question, what if you have a person that’s paying their taxes on time and they usually get a refund, but for whatever reason, they don’t file the return on time?

DARRIN T. MISH: That’s why you’re here, to ask these really insightful questions.

KATRINA MADEWELL: It happens, you know it does.

DARRIN T. MISH: It makes sense that if the penalty is calculated upon tax owed, then what’s the penalty if you’ve got money coming back? Well, the good news is if you have a refund coming back, there ain’t no penalty. But there is a trap. There is a trap that we’re going to talk about here in a little bit.

KATRINA MADEWELL: So they just penalized you on failure to file on time? They have to have some kind of penalty, don’t they?

DARRIN T. MISH: So the penalty of failure to file or failure to pay is based on tax owed. So, and this happens all the time, if you get a $1 refund if you filed late but didn’t file an extension there is no penalty because it’s incalculable. What happens is there is sort of a penalty for the filing of a late refund return and that would be if you don’t file that return within three years, then you forfeit the refund.

KATRINA MADEWELL: Ouch.

DARRIN T. MISH: It doesn’t go to back taxes that you might owe, it doesn’t go…

KATRINA MADEWELL: They just keep it. They’re like, that’s our little bonus.

DARRIN T. MISH: Yeah, it just literally, we get a letter that says your claim for a refund has been denied because it’s more than 3 years old. Here on the show we talk about statute of limitations quite a bit and that is actually called the refund statute of limitations. You only have three years. You want to file those refund returns within three years for sure. You’re going to want to get proof, certified is a great way to file those late returns now, if you’re getting close. You want to be ab le to prove you filed it on time.

KATRINA MADEWELL: So that would be April 15th from the preceding year. So we’re in 2015, so it would be safe to say the deadline is April 15th of 2016 for 2013?

DARRIN T. MISH: You’re confusing me now. The deadline for 2012, it was supposed to be filed on April 15, 2013 plus 3 years would be April 15, 2016.

KATRINA MADEWELL: Ok, so even though you’re filing the returns for that year, you still have that 3 1/2  months wiggle room because the date’s April 15th.

DARRIN T. MISH: So our taxes aren’t due on January 1 of the following year, they’re due on April 15th of the following year. I’ve seen a lot of cases like that. In fact I’m handling a tax court case right now where it’s for a laywer, she’s a very high income individual. But she’s a litigator, she’s always in trial or in depositions, flying all over the country and stuff. What happened to her was life just got ahead of her. She just kind of lost track and she didn’t file for many years. Well, we got her caught up to date on her filings, but she had some refunds that were $19,000, $20,000.

KATRINA MADEWELL: You could seriously buy a car with that.

DARRIN T. MISH: Really significant money. She was a real sport about it, though. When I kind of broke the bad news, she was like, ok, my bad. My fault for not taking care of this. That kind of hurts. As an attorney…

KATRINA MADEWELL: Bookkeeper, I’m just going to loop back around to bookkeeper and accounting.

DARRIN T. MISH: Yeah, she didn’t even need a bookkeeper really because she was a wage earner. She was getting a w-2 having all that tax withheld from her check.

KATRINA MADEWELL: A personal assistant.

DARRIN T. MISH: All she needed was a relationship with the tax preparer to like bug her a couple times every year. Hey, got to get your return done, you don’t want to lose your big refund. So she actually owes some significant money on some later years where she…I forget what the issue was, but she generated maybe a 20 or 40 thousand dollar bill and it really stinks that those refunds don’t even offset that.

KATRINA MADEWELL: They could have wiped it out.

DARRIN T. MISH: Absolutely. It was about enough to zero it out.

KATRINA MADEWELL: That has got to be painful.

DARRIN T. MISH: It’s even painful as the lawyer to tell people that. It’s not fun to give people bad news.

KATRINA MADEWELL: For me, we’ve seen some crazy stuff in the market, so we definitely have those cases where maybe people were waiting to sell because they couldn’t see because they didn’t have enough equity and then when we do the numbers, we have to tell them, look you have to write a check to sell your house. That happens. That’s painful. We don’t like to deliver bad news either.

DARRIN T. MISH: No, that would be really bad. Let’s talk about real quick about how do you get rid of these penalties? We’ve talked about on the show before, and incidentally, you can find our older episodes on our podcast. The podcast is available on iTunes at IRS problem solvers is the name of the podcast there. Or the episodes are here on the WTAN website as well. One of the things you can do is if you’re going to automatically qualify for what we call first time penalty abatement if you’ve not paid significant penalties in the prior three years. So let’s say this year you filed late but the prior three years you were totally clean, literally you are eligible. You just have to contact the IRs, ask them for the first time penalty abatement, they’ll find out if you’re eligible or not, they’ll go ahead and wipe out that penalty. Most people, that doesn’t apply to. The other way to eliminate penalties, or abate penalties, which means eliminate. We’re going to go ahead and ask for the abatement based on a concept called reasonable cause.

KATRINA MADEWELL: So what is reasonable cause? You know I’m going to ask that question.

DARRIN T. MISH: I’m so glad you asked. Reasonable cause means a darn good reason why you couldn’t file or pay on time.

KATRINA MADEWELL: So what’s a darn good reason? I’m going to throw myself under the bus. I told you my crazy story about my QuickBooks crashing, try to reinvent that.

DARRIN T. MISH: Probably not good enough. Might be. Usually you’ve got to think death, divorce, illness, substance abuse, chronic illness, gambling addiction that you were treated for, psychological issues that you were treated for. Not the normal psychological issues that we all have where you freak out and break down. You’ve got to be able to demonstrate that you’ve proved it. Another thing that’s challenging about reasonable cause penalty abatement requests is that it’s really hard to demonstrate reasonable cause over years and years. So if you’re a non-filer for six years or something, or ten years, or twenty years, you’re not going to be able to prove reasonable cause.

KATRINA MADEWELL: They see the pattern.

DARRIN T. MISH: Yeah, there’s just not a good enough reason that lapses for a decade. If you do request reasonable cause in those circumstances, you’re sometimes going to get it for a year or two. And that’s about it. I think we’re reaching the bottom of the hour.

KATRINA MADEWELL: We’re at the bottom of the hour, we’re going to take that hard break in like ten seconds. What’s next after the break?

DARRIN T. MISH: We’re going to talk about some scary things that are going on in the news.

KATRINA MADEWELL: Back in a minute.

 

(Commercial break)

 

KATRINA MADEWELL: You’re listening to the IRS Solution Attorney show and I’m your cohost, Katrina Madewell.

DARRIN T. MISH: And I’m the IRS Solution attorney, Darrin T. Mish.

KATRINA MADEWELL: We are in the studio today, live. If you have some questions, we’re at 727-441-3000. Again the studio call in lines if you have that IRS hiccup dinging you in the side or you haven’t filed your taxes and you have a general question, studio call in line 727-441-3000. Again 727-441-3000. I want to make sure you’re safe.

DARRIN T. MISH: I was going to ask you to say it again, just for fun. Let’s talk about what happens if you just never get around to filing that return. Do you just get away with it? Or does the IRS do something about it or whatnot? I wish the answer was, you just got away with it and there was no consequences, but not, that’s not the answer. What happens is if you don’t file a very high percentage of the time the IRS will go ahead and file for you and when they file a tax return for you, that’s called a substitute for return. In the business that I’m in, we call that an SFR. We have lots of acronyms like that.

KATRINA MADEWELL: Of course.

DARRIN T. MISH: So they’ll file a substitute for return. What’s wrong with that? Some people might think hey that’s kind of cool, that’s pretty convenient. They’ll file my return for me and I won’t have to pay H&R Block. I don’t have to pay Darrin, I don’t have to pay anybody. I don’t have to do this myself, the IRS will prepare a return. Well, it should not be a big surprise that when they prepare the return…

KATRINA MADEWELL: You’re not going to have any deductions, you’re not going to have nothing.

DARRIN T. MISH: Exactly. What they do is they take the 1099’s or the w-2’s, they multiply 100% of the income basically by the tax rate, generate a gigantic bill, they throw in the failure to file penalty for however many years and it’s a big fat ugly number.

KATRINA MADEWELL: They’re going to do something to get your attention, that’s for sure. I have a question, you’re talking about the substitute for return that the IRS files, but how does that fall in to the stuff we’ve talked about on prior shows where if I know you mentioned something about the ten year statute of limitations where if you haven’t filed, then it goes away and you don’t owe that money. Am I mixing those up? How does that work?

DARRIN T. MISH: A little bit, it’s a good question, though. I’ve been doing this long enough that it used to be the prevailing opinion of law that a substitute for return had no statute of limitations for the collections. So when I first got in to this business in the late 90’s, if you had a substitute for return, we didn’t tell you it ever expired because the IRS’s position even was that it didn’t have an assessment date so it didn’t have ten years, the clock never started to run. Fortunately, that’s wrong. In about the mid-2000’s, it came out, the IRS actually to their credit came out with the opinion that said, no, that’s wrong. What we’ve been saying has been wrong all along. There is an assessment date for a substitute for return. Which makes sense.

KATRINA MADEWELL: There has to be a date it went in.

DARRIN T. MISH: Tax has to be assessed. The IRS, contrary to public opinion, can’t just invent tax and start billing you. They have to go through a formal, what’s called an assessment process. I won’t belabor that point. Now there is clearly a ten year statute of limitations for the collection of a substitute for return, just like there is with any other tax. One of the challenges comes up that it can often take three, four, five years for the IRS to prepare a substitute of return for you if you don’t get around to filing your own.

KATRINA MADEWELL: So they’re pretty much always going to do it? But it may take a long time to get to it?

DARRIN T. MISH: It takes them a really long time. Something like ten percent of the population doesn’t file. So the IRS has to get around to filing. In fact, when we look at their transcripts what happens is we see a notation that a substitute for return is being generated. Sometimes it takes a year and a half from that notation that they’re working on it to it actually being done, which is kind of funny. It’s an illustration of the inefficiency of government. If I was running the IRS, there’d be a notation that substitute was being worked on and then the same day, it would be like, yep, big ol bill, here you go. How hard is it? It’s not that hard for them to do it.

KATRINA MADEWELL: They’re doing that based on the information they’re getting from employers. So when the employers file…

DARRIN T. MISH: We’ll use an example for you. So you’re broker gives you a 1099 at the end of the year. Let’s say that you…I don’t want to insult you. Let’s say you made 200 grand gross. What the IRS will do, they’ll just go ahead and multiply the tax rate on 200 grand. They won’t give you any of your business deductions. They’ll give you a standard deduction for you. None of your kids. None of your itemized deduction.

KATRINA MADEWELL: Mileage, all the real stuff we have.

DARRIN T. MISH: Right, none of those actual hard business expenses. So the tax on that 200 grand is probably going to be like 60 or 80 grand and then penalties on top of that.

KATRINA MADEWELL: What about if they pay a corporation to corporation or their corporation is paying the LLC. Any difference?

DARRIN T. MISH: Congress tried to have a 1099 a requirement on the payment of funds to corporations. That was I believe a 1099-K.

KATRINA MADEWELL: I’m asking you all these funky questions.

DARRIN T. MISH: That rolled out with Obamacare, actually. What happened was once they realized the billions upon billions or the hundreds of billions of payments that go back and forth between corporations, they actually realized they were not going to have the capacity to even process all these 1099’s. Businesses were up in arms anyway. Like literally, every time you pay somebody more than 600 bucks you got to generate a 1099? Think in just your little business, as a realtor, how many 1099k’s you would have to issue in a given year. The accounting burden was just crazy. The IRS is trying to get to that point where they know where every dollar in the economy goes.

KATRINA MADEWELL: It’s hard, though. There’s a lot of cash businesses that you’re just not going to file.

DARRIN T. MISH: Exactly. What the computing power that we have today, there’s no way for them to track, officially process 1099’s that went from business to business or consumer to business.

KATRINA MADEWELL: And they don’t have the man power to do it anyway.

DARRIN T. MISH: No. And our computers just aren’t up to snuff yet to be able to calculate that. I think that’s a good thing. It would be pretty scary if they actually knew where every dollar flew through the, flowed through the economy.

KATRINA MADEWELL: I’m kind of glad they don’t.

DARRIN T. MISH: Yeah, I agree. It’s not because we’re not doing anything wrong.

KATRINA MADEWELL: It’s just the Big Brother theory.

DARRIN T. MISH: It’s an invasion of privacy for sure. If you ever thought about this, and I’m not attacking the IRS here, but have you ever thought about the way to control the population is not through the Army or the police, it’s through the IRS. Let me explain myself. The IRS doesn’t need, or let’s say in this dystopian world that I’m describing right now, you know like 1984 stuff. If the wrong kind of government got a hold of the IRS and used it in this evil way, they wouldn’t need a gigantic police force of people to drag people to jail. All they’d do is they just cut off the money. So if they levied, if they were just trying to…and they’re not doing this folks. I’m not saying they’re doing this, at all. But if an evil administration wanted to persecute its political enemies, all they would do is just levy the wages and bank accounts of all of their enemies and they don’t have to put you in jail. If they put you in jail they have to feed you. If they just take all your money, they don’t have to feed you and they’ll bring you to your knees immediately. We all have families and bills and obligations like that.

KATRINA MADEWELL: Nobody wants to not be able to go to the grocery store or the gas pump, like we talked about.

DARRIN T. MISH: Exactly, so it’s kind of a scary thought and I try not to dwell on it too much, but that would be the way for an evil empire to take over the population of the…or to control the population of the United States…is just to cut off the money.

KATRINA MADEWELL: So, while you’re talking about that, let’s hop in to arrests. Can the IRS actually arrest you for not filing taxes or not paying penalties? Do they have that kind of governing over tax payers?

DARRIN T. MISH: That’s a really common concern. I have non-filers come in to my office every week whose biggest concern is, am I going to go to jail? To my detriment, I’m criticizing myself a little bit here, I often sometimes forget to address that concern, even though it’s their over-arching concern. It’s so silly in most people’s case. It is a crime to fail to file.

KATRINA MADEWELL: But it’s legitimate. I’m sure a lot of people think that.

DARRIN T. MISH: Yeah, most people do. It is a crime to fail to file, it is not necessarily a crime to file late.

KATRINA MADEWELL: So what kind of crime is it if you don’t file?

DARRIN T. MISH: It’s a federal misdemeanor to fail to file a tax return. It’s a federal crime to file a false tax return. This just makes sense. If you file a false tax return it’s against the law. If you file a return, and let’s just say it’s accurate, and you file a return and just don’t or can’t pay, that’s not necessarily a crime. If you cannot pay, that is certainly, most certainly not a crime. If you can pay, but choose not to and you do shady evasive things like you owe 50 grand you push 100 grand over here to put a house in someone else’s names.

KATRINA MADEWELL: Or you just bought a yacht.

DARRIN T. MISH: Yeah, that’s tax evasion. That can be punishable by criminal charge. Generally speaking, the good, honest, normal people that I represent on a regular daily basis who just don’t have enough money to make ends meet, no, they’re not going to be charged with a crime. If you think about how our system is set up, it’s set up based on a concept called voluntary disclosure. We’ve talked about this before. Voluntary disclosure does not mean that the filing of a tax return is a voluntary situation. It means that we voluntarily file, we voluntarily disclose our tax information to the government and then the tax is assessed and we pay the tax. This voluntary disclosure sort of situation, or this system, is predicated upon trust to a certain degree. It’s predicated upon intimidation to a certain degree. So that’s why we hear about these stories about celebrities that we’re going to talk about a little later. These celebrities get prosecuted because the government simply does not have the resources to prosecute everybody who deserves it.

KATRINA MADEWELL: They really don’t want to prosecute the taxpayer anyway because it’s a revenue stream for them.

DARRIN T. MISH: Yeah, for sure. If you throw them in prison then it costs them money.

KATRINA MADEWELL: Exactly.

DARRIN T. MISH: Then they may assess a bunch of restitution or something in the back, but now you’re a federal felon or whatever and you’ve been to prison and you’re not going to have a large ability to pay. So you’re right, the system is not designed to put you in jail, incarcerate you, it’s designed to get you to file and pay your taxes. That brings up an interesting point and that is, let’s say you’re a non-filer and you haven’t filed in ten or fifteen years, what the IRS wants you to do is file the last six years returns. Let’s say you quality for an Offer in Compromise, which is where you can make a deal to settle for less. The IRS will often take a token small amount of money to settle that Offer in Compromise case and settle those missing returns because their prime motivation is not to collect that money. Everybody sort of knows that for a lot of people they’re not going to be able to pay that amount of money. The prime motivation for the IRS in that situation is they want to get the taxpayer back in the system so that they don’t lose all that tax revenue for the rest of your life.

KATRINA MADEWELL: For future. Because they’re afraid to file.

DARRIN T. MISH: Yeah, exactly.

KATRINA MADEWELL: We got a great question on Twitter. This is one that we get also. Mary was asking…my husband and I recently lost our house to foreclosure. How will that impact my taxes? We get this one a lot too. Even in a short sale where many times they may generate a 1099 as a loss and it shows up as income. Right, a 1099, but the bank is counting that as a loss. So if you owed $200,000 and you sell it for $100,000, theoretically it’s a $100,000 deficiency balance that maybe they didn’t pursue but they pop out this 1099.

DARRIN T. MISH: Right. It’s a 1099-C. It stands for cancellation of debt. Only our congress could admit a law that says that debt that you were forgiven you have to pay tax on. This makes no sense whatsoever.

KATRINA MADEWELL: But the bank’s writing it off as a loss.

DARRIN T. MISH: Right, the bank is writing it off as a loss so the government’s position is, well, if you were forgiven that 100 grand, it’s like somebody giving you a 100 grand and then you paying it off. So they want you to pay tax on that 100 grand. The good news is there are some exceptions for primary residences. Where there’s a cancellation of debt and there’s a huge exception in the law that we use on a regular basis and that is if…there’s a couple exceptions…but the one we like to use is if the taxpayer was insolvent at the time of the forgiveness of debt, then it’s not taxable.

KATRINA MADEWELL: That’s a 982-C, isn’t it?

DARRIN T. MISH: I think it’s a 982, I don’t know.

KATRINA MADEWELL: That was close for a non-IRS person.

DARRIN T. MISH: I don’t think I could have named the formed like that.

KATRINA MADEWELL: Insolvent. Break that down.

DARRIN T. MISH: Insolvent basically means that you owe, you have more obligations than you have assets.

KATRINA MADEWELL: You’re broke.

DARRIN T. MISH: Yeah, you’re broke. But think about who loses their house. There are investors and stuff, we make strategic decisions to walk away, ok. We’re not talking about those folks because they’re not insolvent usually. The people we’re talking about in this situation are…

KATRINA MADEWELL: A lot of people are. I’ve got a case right now that was referred to me by another attorney here in the area. The husband was the primary wage earner for many many years. She’s a teacher. Doesn’t make a lot. Her husband was a truck driver. He has Parkinson’s now and he obviously can no longer drive, it’s getting worse. He’s starting to shake. But that would be a good example, wouldn’t it?

DARRIN T. MISH: Well, depending. If his assets exceeded their liabilities then for sure.

KATRINA MADEWELL: Well, they don’t have anything.

DARRIN T. MISH: Yeah. They’ve got a $100,000 tax bill and they’ve got assets of 5 bucks, then they’re going to be insolvent and that exception is going to fix that. Remember, though…and you can amend a tax return and take care of this situation. But remember, we’re always talking about time limitations and whatnot on this show, there’s a three year statute of limitations for the filing of an amended return too. You want to get that amended return in on time so that you don’t lose those kinds of changes. We see a lot of returns where maybe the person forgets to put the 1099-C on the return and the IRS picks it up assesses a bunch of tax. Well, that’s not right. You have to be able to deal with it, but you only have a certain amount of time to deal with it.

KATRINA MADEWELL: What is that time frame? Do you know?

DARRIN T. MISH: It’s three years.

KATRINA MADEWELL: So Janice also had an email. She said if I carry inventory in my business, do I need to file an accrual taxpayer or can I do it on a cash basis business?

DARRIN T. MISH: This is a little bit of a head scratcher, but I thought about it and no. You can be a cash basis taxpayer for purposes of preparing a tax return, certainly, that’s not a problem. It’s just if you’re going to follow gap accounting standards, generally accepted accounting principles, then your business for purposes of your financial statements, you’re going to be an accrual taxpayer, but for purposes of your tax return you’re going to be a cash basis taxpayer. What does all that mean? Let me try to summarize that in just a few minutes here.

KATRINA MADEWELL: Really, this is applying to someone that has inventory in their business.

DARRIN T. MISH: What it means is…a cash basis taxpayer is you bring in cash, you put that on the books, you collect the cash, you put that on the books, you pay cash on that tax collected. An accrual basis taxpayer is a kind of person who invoices the person. So let’s say they invoice you for $100 and they put that invoice in almost like it’s collected and they have to pay tax on that. If they only collect $75 of that $100, then they’ll write off the $25 as bad debt and they’ll only pay tax on the $75. It’s kind of the same end result, it’s just a different way of getting to the same result. Most taxpayers by far are cash basis taxpayers. It’s much less paperwork and whatnot. That’s why you can’t…you always hear, especially from small business owners, hey can I write off my bad debt? Well, yeah, but you don’t get a tax deduction for that because you never collected the money.

KATRINA MADEWELL: Right. Don’t forget, you guys can tweet out your questions. Darrin D-A-R-R-I-N underscore Mish. M-I-S-H. Like the fish but with an “m”. Like Mary. Mish. Bach from Facebook had a question. He said our attorney and our accountant are both professional corporations, do we still have to send them 1099 forms?

DARRIN T. MISH: It’s almost like we talked about this before. No, you don’t have to send them a 1099, although some accountants will. But no, you don’t have to send them 1099’s because you’re doing business with a corporation. It would be the same analysis of do I have to send Wal-Mart a 1099 at the end of the year?

KATRINA MADEWELL: Oh, gosh, that’d be a big one.

DARRIN T. MISH: yeah, I just picked a store.

KATRINA MADEWELL: But that’s a big one. We host stuff in our office and we hear that all the time. Either Wal-Mart or Target. People have the $900 bill for one month.

DARRIN T. MISH: Because Wal-Mart is becoming kind of like Amazon. If you looked at my combination of Amazon and Walmart it’s like 80% of all my discretionary income, it seems like it goes to one of those two places. It’s either groceries or whatever. No, you don’t have to issue a 1099 in that scenario because it’s consumer to business.

KATRINA MADEWELL: Gotcha. Well, it’s about that time.

 

(Train wreck sound)

 

DARRIN T. MISH: I did not plan this, but it worked out pretty well. The IRS Train Wreck of the Week concerns a dentist that I represented a few years ago. I want to say it was maybe ten or fifteen years ago now. This gentleman received a very large 1099-C for the cancellation of debt. He didn’t know what to do. Frankly at that point in my career, I wasn’t really sure I knew what to do either, but I knew that it didn’t seem fair. After doing some research, I found the form 982 that you talked about. I think it’s 982.

KATRINA MADEWELL: I’m pretty sure it is.

DARRIN T. MISH: We realized that he had actually been, he had so much debt he was kicked out of a chapter 13 bankruptcy. Basically, this is a great story because…

KATRINA MADEWELL: So he was kicked out of 13 for what? To go to 7?

DARRIN T. MISH: No, he had over $400,000 in personal debt and there’s debt limits in Chapter 13. You can only owe up to, I think it’s around 380 now.

KATRINA MADEWELL: Oh my gosh, I had no idea.

DARRIN T. MISH: He owed so much money that they actually booted him out of the 13 as ineligible and…

KATRINA MADEWELL: So, boom, that protection’s gone?

DARRIN T. MISH: I wasn’t quite sure how to win the case with the IRS necessarily. I filled out the 982, I sent in a letter explaining that the guy was so broke they kicked him out of bankruptcy. It’s the only time in my career so far that I got an apology letter from the IRS. They wrote off all the money, it was over a 100 grand that he owed them. They actually sent a letter saying so sorry, we didn’t mean to do that, and it’s all fixed.

KATRINA MADEWELL: I would totally frame that. That’s awesome.

DARRIN T. MISH: I should have kept it. I don’t think I have it anymore, it’s been so long.

KATRINA MADEWELL: So we were talking a little bit before the show about David Allan Coe pleading guilty to income tax evasion.

DARRIN T. MISH: David Allan Coe is a country singer. He’s kind of like old-school, outlaw country. I’m actually a country fan. I listen to country music pretty much all the time. But Mr. Coe predates my involvement or enthusiasm for country music. I was trying to listen to some of his songs today so I could have a frame of reference and they’re all a little bit before my time. Mr. Coe ran in to some problems where he owes about a half a million dollars to the IRS, dating back to as far back as 1993 and just recently on September 14th, he plead guilty to one count of obstructing basically the do administration, the IRS, and he has not been sentenced yet in federal court, but he’s looking at between three years prison and up to $250,000 fine. Mr. Coe has some significant problems ahead of him I think. The reason the IRS prosecutes these celebrities, we’ve talked about Wesley Snipes in the past, and we’re going to talk about Plaxico Burress here in a minute.

KATRINA MADEWELL: They want to make an example out of these guys.

DARRIN T. MISH: They do it because, you know, they prosecute David Allan Coe and it ends up in the media, we’re talking about it. Listeners, viewers of all different types of media, including newspapers. They read it, they think, oh my goodness, if that guy got in trouble for that, maybe I ought to get straight, maybe I ought to file my missing returns, maybe I shouldn’t cheat on my taxes, that kind of thing. It’s actually fairly brilliant. They’re getting a lot of leverage out of a prosecution of a celebrity so that they keep us all in line.

KATRINA MADEWELL: I think the general public thinks well if so and so couldn’t pay their way out of it, then this must be real.

DARRIN T. MISH: Yeah, it’s sort of interesting, I don’t know that much about Mr. Coe, like I said. I guess he didn’t file from 2008-2013, which kind of fits in the time frame that I’m always referencing. Seven years. This is a high profile, a guy that has a lot of notoriety and so he got prosecuted. They also seem to go after doctors, lawyers, politicians, judges, things like that.

KATRINA MADEWELL: High profile people.

DARRIN T. MISH: Things that are going to make a splash in the newspaper. If they prosecute somebody that’s just a Joe Schmo…

KATRINA MADEWELL: People will think, oh, poor Joe.

DARRIN T. MISH: It doesn’t make it in to the newspaper, then they don’t have the same degree of leverage.

KATRINA MADEWELL: So Plaxico Burress. That’s right on time because of football season.

DARRIN T. MISH: Yeah, Plaxico, he doesn’t play football anymore, does he? He was the receiver for….?

KATRINA MADEWELL: I don’t think so. I didn’t see him on the fantasy draft list.

DARRIN T. MISH: I think he played for the Jets and the Giants. Our producer is shaking his head like “no”. This guy was also famous for, remember, he had a gun in a night club in New York City and shot himself in the leg.

KATRINA MADEWELL: Oh, that’s right.

DARRIN T. MISH: So, old Plaxico. It’s kind of funny. Incidentally, the reason he shot himself in the leg was because the weapon was not properly holstered. If it was properly holstered, then he could not have shot himself in the leg, he would not have been prosecuted for that. I don’t ever condone carrying a gun, even by a licensed individual, in to a bar.

KATRINA MADEWELL: Well, you know, you’re supposed to learn that in your class that you take if they service a number of alcohol, or percentage, you probably shouldn’t carry a handgun in there. And in New York, I don’t think it’s allowed any way.

DARRIN T. MISH: No, no, handguns are essentially illegal in New York City, which is contrary to the second amendment, but we won’t talk about that.

KATRINA MADEWELL: Exactly. That’s a whole other show for another day.

DARRIN T. MISH: Mr. Burress obviously has some life lessons that are still ahead of him. He’s still a young man. He’s being prosecuted for tax evasion.

KATRINA MADEWELL: He didn’t pay $48,000 in state income taxes. From ’03.

DARRIN T. MISH: That’s what it is. It’s actually a state case and it’s about 48 grand. Let’s think about it, 48 grand for a guy with that kind of profile. He obviously made…

KATRINA MADEWELL: Half a million bucks a year easy.

DARRIN T. MISH: Yeah, he obviously made something like a half million dollars that year. I agree that even if you make half a million dollars, 48 grand is still a lot of money but to be charged with a criminal offense and potentially go to prison. I don’t get some people’s judgement here.

KATRINA MADEWELL: I guess he’s not working now, but still. Why wouldn’t they just levy some of his assets and sell it? I guess they could, they would. Why would they not do that as opposed to throwing him in jail?

DARRIN T. MISH: Well, apparently he’s being charged under New Jersey law. I have no idea with the rationale of New Jersey is in trying to prosecute him instead of just getting the money, other than what we’ve been talking about. Big splash, want to make sure that everybody in New Jersey tows the line and pays their taxes. I guess he’s the first person charged under this 2014 law that makes a bad electronics fund transfer a criminal offense. I don’t even understand exactly what happened there.

KATRINA MADEWELL: I don’t either. I would much rather be following football.

DARRIN T. MISH: Yeah, exactly. Hey by the way, I went 10 and 4 last week.

KATRINA MADEWELL: Oooo

DARRIN T. MISH: Pretty happy with that.

KATRINA MADEWELL: What about the IRS offshore account stuff? They’re tightening up on that, right? Is that a change?

DARRIN T. MISH: It is a change. This is probably not going to apply to most people that hear this.

KATRINA MADEWELL: It’s always that thing that people wants to know about, whether they do it or not, I think.

DARRIN T. MISH: We used to watch James Bonds movies and stuff like that and hear about the rock solid privacy protection in Switzerland and stuff like that. You used to be able to open an account in Switzerland. If you just had the right number.

KATRINA MADEWELL: The Swiss bank account.

DARRIN T. MISH: Yeah, you could get all the money. Well, the IRS, after 9/11 actually, really clamped down on this. Americans who bank anywhere in the world basically have an obligation to report to the IRS the very existence of this offshore account. They have to file a form called an FBAR by June 30th of every year. If they don’t file the FBAR, then there’s criminal, potentially criminal sanctions and/or very onerous penalties that can be imposed.

KATRINA MADEWELL: So we have to let them know if we have a bank account outside of the U.S.?

DARRIN T. MISH: Think about how this comes up. You can always think about those people that are really shady and trying to hide money and stuff. But what if you’re an Ex-pat? You’re an ex-pat, you’re an ex patriot, you’re livng in Panama because it’s cheap. You’re going to have a Panamanium bank account because you need a debit card so you can buy a soda at 7-11 or whatever. So what happens is these relatively unsophisticated people that are American ex=patriots in other countries, they just don’t know that they have to file this FBAR form and the penalties can be really crazy. The penalties can be up to 50% of all the money in the account for any given year. This is nuts.

KATRINA MADEWELL: So that’s just because they’re American citizens and they’re not letting the IRS know they have this offshore account.

DARRIN T. MISH: Right, and this is what is leading to more and more people, usually wealthy people, who are renouncing their citizenship from the United States. Because America is one of the only countries in the entire world where we have an obligation to report and pay taxes on our worldwide income. That means, if you go to Saudi Arabia and you earn $100,000, you have to report and pay taxes on your income, even if you earned it in Saudi Arabia. Even if there’s no U.S. income source whatsoever.

KATRINA MADEWELL: That part’s kind of sad, but I guess those global boundaries are closing a little bit with the internet the way it is.

DARRIN T. MISH: Well, it’s the U.S. government wants their money.

KATRINA MADEWELL: You’re listening to the IRS Solution Attorney show. If you missed any part of the show this week, you can catch it on getirshelp.com. It’s also available over on a podcast. If you have any questions for Mr. Darrin Mish, you can call him at 888-GET-MISH. M.I.S.H. We’ll be here every week at 1p.m.

DARRIN T. MISH: Yep, that’s it, we’re gone.

KATRINA MADEWELL: Same time, same place next week. This week, we’re out.

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