DARRIN T. MISH: Welcome that would be me, THE IRS Solution Attorney Darrin T. Mish. Click here to watch or read more information on IRS Back Taxes.
KATRINA MADEWELL: And I’m your co-host Katrina Madewell welcome to the show on this not so beautiful Thursday morning.
DARRIN T. MISH: If anyone has ever doubted our dedication to our craft here on Thursday mornings.
KATRINA MADEWELL: Today was a process.
DARRIN T. MISH: Today is an example of how dedicated we are to bring this amazing information about how to deal with IRS problems to you and the listening audience.
PAT GEORGE: And you are also the first two hosts that I have ever seen in that room in wetsuits.
KATRINA MADEWELL: Yes that is true. We almost missed the rain by like 5 minutes but today we did not. But it’s funny cause that day that I was late Darrin and we had guests in the studio that day and you were on time but I wasn’t, traffic was way worse for me that day than today.
DARRIN T. MISH: So for those of you who don’t know what we are talking about the, there’s terrible weather, it’s raining, it’s storming. There’s accidents all over the Tampa Bay area.
KATRINA MADEWELL: Every corner.
DARRIN T. MISH: It took me an hour and 45 minutes to go 40 miles and I listen to a lot of talk radio and never once before today have I ever thought about those people on the other end of the mic are real people that probably have to.
KATRINA MADEWELL: Have to drive to a studio somewhere.
DARRIN T. MISH: Have troubles getting to work from time to time and you can never tell because they don’t talk about it like we are right now.
KATRINA MADEWELL: We are live.
DARRIN T. MISH: And they just come across as perfect so I have a lot of admiration for them.
KATRINA MADEWELL: What’s, you know we have a lot of listeners and I had Land O’ Lakes Winery on my show last week and so we had some people join us in the winery which was really cool and they mentioned not only the show Darrin but they mentioned the show with you and they heard a lot of things including the first one where I was late and the one where I was late for you, the only 2 times I have ever been late by the way but they were doozies.
DARRIN T. MISH: Wow that’s really cool.
PAT GEORGE: Well, speaking of the winery how was it?
KATRINA MADEWELL: It was fabulous. I’m going back in 2 weeks and then again in 6 weeks. Well, we left before I wanted to but my team was ready to go so I left.
PAT GEORGE: I was going to go on Sunday and my wife said no, let’s just stay home.
KATRINA MADEWELL: I will have to take Darrin and Pat, you guys will hang out longer, I know you will.
DARRIN T. MISH: Sounds good.
PAT GEORGE: You will come from one end and I will come from the other then we can meet in the middle, right?
KATRINA MADEWELL: They said the bottling is the most fun process. That’s my cell phone by the way sorry about that.
PAT GEORGE: Phone calls already, you didn’t even talk about the subject and you are already getting calls.
KATRINA MADEWELL: Well I usually always get calls. I just normally mute my phone.
PAT GEORGE: Well, talking about that weather coming in this morning, I was on the Howard Franklin bridge at 5 am and I could see the Courtney Campbell causeway and all of a sudden it disappeared, all of the lights went out and everything went black and I said, “oh this is not good”, and when I got on top of the hump it started sprinkling and when I to the bottom of the hump you could only see one light standard in front of you and it was complete wash out.
KATRINA MADEWELL: Were there street lights?
PAT GEORGE: Yeah the street lights were gone because the weather was so heavy coming in at 5 o’clock this morning it was the first band that came off the coast area and then the rain really now is from Spring Hill to Sarasota and it just keeps coming in bands. I didn’t think we had Hurricane Earl anywhere close.
KATRINA MADEWELL: Is that from a storm that’s out in the Gulf?
PAT GEORGE: I don’t know.
KATRINA MADEWELL: I don’t watch the weather very much.
PAT GEORGE: I don’t know we have a high-pressure system over us so I guess…
KATRINA MADEWELL: We have something out this window I’m looking at it and I’m glad we are in here and not out there.
PAT GEORGE: Sorry we blew up there Darrin.
DARRIN T. MISH: That’s alright. You know the weather is important around here.
KATRINA MADEWELL: We know our outline is a little thin this morning so you know if you want to talk about something else just let us know 888-404-1010. Pat will keep you updated on the weather here during the breaks and today’s topic is What is the Difference between Tax Avoidance and Tax Evasion pretty good question.
DARRIN T. MISH: The reason I want to talk about this today is because people confuse these 2 terms all the time. So I just wanted to….
KATRINA MADEWELL: So let me take a stab at it. Tax Avoidance I would presume is like just failure to pay or file and Tax Evasion is like, I don’t know crooked stuff, that’s what I think.
DARRIN T. MISH: So you’ve learned a lot over the course of the last year doing the show…
KATRINA MADEWELL: Non-lawyer terms by the way.
DARRIN T. MISH: But you didn’t get that right so…
KATRINA MADEWELL: That is why you are here I totally would have jacked the show up today, you have a calling.
DARRIN T. MISH: According to the IRS’s official definition tax avoidance is an action taken to lesson tax liability and minimize after tax income. So tax avoidance is legal and tax evasion is not legal.
KATRINA MADEWELL: You just don’t pay at all?
DARRIN T. MISH: We know that tax evasion isn’t legal because you know Al Capone went to prison for tax evasion. The treasury agents are the ones that actually took him down because I guess the theory in that case was they were bootlegging and they weren’t paying taxes on the liquor I guess, I guess liquor was illegal back then but anyway it had something to do with tax evasion and not properly reporting his ill-gotten gains and paying the appropriate tax on those. But the IRS’s definition of tax evasion is the failure to pay or the deliberate underpayment of taxes so we could talk about some you know scenario’s….
KATRINA MADEWELL: Well that could be a pretty broad spectrum when you say a deliberate under payment of taxes like that could be anything.
DARRIN T. MISH: Yeah it’s usually in the reporting sort of a standard so it’s not my typical client who files a tax return that’s more or less basically accurate and then doesn’t pay, that is not necessarily tax evasion unless there is a long pattern I think of doing that. And even then such prosecutions would be really rare, you would typically have to, the tax evasion cases that I have seen kind of go along those lines are people who are really, really wealthy and then they also are funneling money off into different places, basically hiding the money and they had the ability to pay the taxes they just didn’t.
KATRINA MADEWELL: So they avoiding huge lump sums or are they just pretty much not filing?
DARRIN T. MISH: Well the failure, we’ve talked about this a lot and that is the failure to file is not tax evasion it’s just a separate offense, you know there is a separate Federal misdemeanor for Federal failure to file but tax evasion is more of the deliberate….
KATRINA MADEWELL: Big time.
DARRIN T. MISH: Act of failure to pay so…
KATRINA MADEWELL: Gotcha.
DARRIN T. MISH: So there’s some really good quotes from a judge named Learned Hand and he’s actually the judge who has the best name in history as far as I’m concerned. His name is Learned Hand I mean that’s amazing.
KATRINA MADEWELL: Learned Hand, H-A-N-D?
DARRIN T. MISH: Yeah.
KATRINA MADEWELL: That’s a different name.
DARRIN T. MISH: So he was really well known.
KATRINA MADEWELL: That is a good judge name actually.
DARRIN T. MISH: Exactly, exactly. I actually have a buddy who is a lawyer and his son is name Justice, his name is Justice Tillman and I’ve always wondered you know if Justice becomes a lawyer and then someday becomes a judge then his name would be Judge Justice Justice Tillman, ok that is kind of interesting but what if he becomes a Supreme court justice, Justice Tillman kind of interesting.
KATRINA MADEWELL: Oh my gosh. I don’t know I think I would change my name at that one I don’t know about you.
DARRIN T. MISH: So Learned Hand said in this really famous case called Gregory vs Helvering in 1934 he said anyone may so arrange his affairs that his taxes shall be as low as possible, he is not bound to choose that pattern which will best pay the treasury, there is not even a Patriotic duty to increase one’s taxes.
KATRINA MADEWELL: Wow. Ok say that again cause that was really a mouthful and that’s a lot to take in but that’s pretty good.
DARRIN T. MISH: Anyone may so arrange his affairs that his taxes shall be as low as possible, I like that, he is not bound to choose that pattern which will best pay the treasury and there is not even a patriotic duty to increase one’s taxes.
KATRINA MADEWELL: Ok so I’m hearing that in the way I’m hearing it, it says pay taxes as long as you are paying taxes…
DARRIN T. MISH: Well what he is saying is…
KATRINA MADEWELL: But you don’t have to pay the most taxes.
DARRIN T. MISH: Yeah, he is basically saying it’s perfectly legal, moral and acceptable to arrange your financial affairs such that you’d pay less tax legally ok so let’s think of some examples, you fund a real estate business right?
KATRINA MADEWELL: Ok.
DARRIN T. MISH: And don’t high income individuals sometimes come to you and say I need to buy a bigger house and you say well you only have, there is only a husband and wife why do you need a bigger house? I need the home mortgage interest deduction.
KATRINA MADEWELL: Actually we are not really allowed to ask that so I wouldn’t but we would ask a lot more in depth questions but yes we have gotten that, it seems like it’s a….
DARRIN T. MISH: I wish sometimes people would volunteer that kind of information.
KATRINA MADEWELL: Yes it’s a lot less of a reason now than it used to be because the interest rates are so low.
DARRIN T. MISH: Yeah and there is also the alternative minimum tax and there’s things like that but there, you know that’s one of the last sort of big tax deductions that just pretty much normal everyday people can get.
KATRINA MADEWELL: Which they have been talking for a long time now about doing away with it and NAR which is National Association of Realtors has actually been lobbying very heavily to make sure that homeowners continue to get that deduction.
DARRIN T. MISH: If they do away with that, that deduction there will be people in Washington with pitchforks.
KATRINA MADEWELL: Well there is a lot of stuff that goes on behind the scenes you know that and sometimes stuff passes before the lay person realized what happened.
DARRIN T. MISH: Yeah that is one of the biggest problems facing America today is the elite from both sides just kind of actually meet in back rooms and decides what’s best for them and the heck with the rest of us.
KATRINA MADEWELL: Right. The write up this 900-page bill that they hurry up and gets signed and the next thing you know somebody breaks that down in lay terms and goes yeah this is what it means to you.
DARRIN T. MISH: The very famous political politician here in the United States once said we have to pass it to find out what’s in it.
KATRINA MADEWELL: Isn’t that ridiculous.
DARRIN T. MISH: And that’s what’s happening over and over is that these politicians don’t read the bills that they are voting on and…
KATRINA MADEWELL: Some political nerd did and….
DARRIN T. MISH: And not only that the bill gets passed and then becomes the executive branch’s decision to write all those regulations to enforce the law and those regulations aren’t even really law but they are treated as law for all intent of purposes so that happens a lot in the tax realm.
KATRINA MADEWELL: I think before anything like that passes and goes through like Supreme Court justices and that kind of stuff, Congress, I think there should be somebody that their full job is to interpret what that says, read it and give not only people voting on the short and skinny but the public people those should be like public access views.
DARRIN T. MISH: I think every bill should have a one paragraph simple summary and we all ought to be able to look at it before they vote.
KATRINA MADEWELL: Absolutely. So this morning we are talking about the difference between tax avoidance, tax evasion and a whole bunch of other really cool things in between. We will share some stories with you, we’ve got some questions that people have left on Twitter @darrin_mish and you can call in if you have any kind of tax IRS sort of related question yes you can be Don, Joe, or Mary Sue, Joe Smith, whatever you want to be 888-404-1010, 888-404-1010 we’ll be back in a minute.
DARRIN T. MISH: Welcome back to the IRS Solution Attorney show I am your host THE IRS Solution Attorney Darrin T. Mish.
KATRINA MADEWELL: And I am your co-host Katrina Madewell thanks for sticking with us I hope you all are safe out there today cause the traffic is awful so be careful, pay attention, 2 hands on the wheel, don’t get on the phone, listen to the radio.
DARRIN T. MISH: Make sure to text as often as possible.
KATRINA MADEWELL: No, no, no.
DARRIN T. MISH: Facebook is good too.
KATRINA MADEWELL: If you are at a red light only you can call us 888-404-1010 we want you to be safe.
DARRIN T. MISH: Use all hands-free devices at all times, both eyes on the road.
KATRINA MADEWELL: Exactly.
DARRIN T. MISH: Not one eye looking at your phone, one eye looking out the window.
KATRINA MADEWELL: I have blue tooth.
DARRIN T. MISH: How many people do you see driving down the road and there totally on their cell phone, not talking on their phone that’s kind of acceptable but just tapping on the thing.
KATRINA MADEWELL: Oh yeah.
DARRIN T. MISH: I see it all the time.
KATRINA MADEWELL: Oh yeah. Well I was looking at my traffic map this morning because you know my blue tooth doesn’t show all that so I was looking at my traffic map.
PAT GEORGE: I think we’ve got Agatha on the phone.
DARRIN T. MISH: Ok great.
KATRINA MADEWELL: Hold on. Welcome to the IRS Solution Attorney show.
AGATHA: Hi, what happens if you don’t pay taxes?
KATRINA MADEWELL: Uh oh we have one out of school what was the question?
AGATHA: What happens if you don’t pay taxes?
DARRIN T. MISH: Well, Agatha that’s a really good question. If, sometimes if you don’t pay taxes if it’s not intentional I would say then there’s programs, various programs that you can work it out with the IRS where you can make a deal to settle for less for example if you owed $100,000 you might be able to settle it for $50,000 or something along those lines. But if you don’t pay taxes because you just don’t want to and you have the ability to and you just don’t want to then that is tax evasion and you could actually go to prison for that and you could be punished very severely so that’s the topic of the show so that was a really good question from Agatha and I’m surprised that a youngster you know that apparent age is listening to us, that’s great.
KATRINA MADEWELL: Me too and they caught the phone number. I’m surprised we are not Pokemon-ing I guess the rain may be scaring the Pokemon away.
DARRIN T. MISH: Yeah we are stuck indoors today perhaps. So anyway tax evasion is a Federal Felony, it’s punishable by imprisonment of up to 5 years and an up to a $100,000 fine, it’s $500,000 if it’s a corporation and I want to talk about the elements, there are 3 elements of tax evasion I want to talk about them really quick because I think there is a lot more tax evasion going on in our society then we really think about or we care to admit and then I will give you an example ok.
KATRINA MADEWELL: Ok good. Examples and stories are good.
DARRIN T. MISH: So the first element in all, most all statutes are comprised or at least crimes are comprised of elements so you have to meet all of the elements of the crime before that crime is actually been committed. If one of the elements is missing it is not a crime. So in this case there’s 3 elements and the first is the unpaid tax liability does exist, so all that means is you owe the money.
KATRINA MADEWELL: Mmm hmm.
DARRIN T. MISH: It does exist ok. Number 2 the defendant took specific actions to evade or in an attempt to evade paying a tax so they will try to evade, not avoid, evade paying the tax.
KATRINA MADEWELL: Ok
DARRIN T. MISH: And then number 3 the defendant had a specific intent to evade his legal duty to pay a tax so here’s, we got into some legalize their specific intent means something on the law special and we went to law school and we argued about it for a semester but specific intent essentially means you did, in fact, intend to commit the offense ok.
KATRINA MADEWELL: Intentionally meant to not pay your taxes.
DARRIN T. MISH: Mm hmm so you can’t accidentally evade tax you know commit tax evasion; it can’t be done.
KATRINA MADEWELL: Ok.
DARRIN T. MISH: So let me give you an example. You are a server at a, at a popular restaurant and you are earning on average $200 a night in tips and the employer either doesn’t keep track of server’s tips or just takes I think right now there saying 8% and I think that is the standard in the industry and the server doesn’t report the actual tip amount. That is actually tax evasion.
KATRINA MADEWELL: Ok.
DARRIN T. MISH: And that happens across our society in what we call the underground economy right so…
KATRINA MADEWELL: Any cash business.
DARRIN T. MISH: No, I wouldn’t say any cash business…
KATRINA MADEWELL: Most cash businesses are probably more susceptible to that.
DARRIN T. MISH: I would say they are more susceptible for sures. Examples that come to mind are let’s say you need some minor handyman work done at your house and you call a guy off of Craigslist and the guy just kind of shows up and he has a pickup truck and he has some hand tools but he doesn’t have the uniform, there is nothing, you know there is no name of the business on the truck and he does the work and it’s 200 bucks and he and you ask him well how can I pay you and he says cash and he takes the 200 bucks and he puts it in his pocket and you get no receipt, that’s probably pretty clearly somebody who’s not going to report that income you think?
KATRINA MADEWELL: I don’t know, I mean that could be construed many ways don’t you think? Like…
DARRIN T. MISH: I think the odds in my little example there are pretty high that he is not going to be paying taxes on that.
KATRINA MADEWELL: I mean definitely, definitely but theoretically speaking how do you know yeah that’s not a friend and he gave him some money for helping out right is that still tax evasion?
DARRIN T. MISH: I’m not actually commenting on the person who paid the person I’m commenting on the person receiving the money so that goes on in the construction trade a lot…
KATRINA MADEWELL: Can you imagine if they had to start issuing W-9’s for every single 40 bucks.
DARRIN T. MISH: Oh the government would love that…
KATRINA MADEWELL: Nightmare…
DARRIN T. MISH: I mean that is what they are wanting us to do and the state of Florida is even worse on sales tax. You can commit sales tax evasion as well, if you think about it that happens a lot to where in fact I have a lawyer friend of mine who specializes in nothing but sales tax you know cases and there are some businesses, particularly where you are not, they are not using a cash register, like a flea market business comes to mind right you are at the flea market and you decide to buy something and it’s not a food item it’s definitely a taxable item, you say how much is that they say 7 bucks you hand them 7 bucks, there is no receipt….
KATRINA MADEWELL: Right.
DARRIN T. MISH: You walk away I mean that is probably somebody who’s probably not paying for sales tax it’s the same sort of concept.
KATRINA MADEWELL: So you know what else I think about to and this may or may not be built into it but I’m just curious what it might look like from the back side of the corporation but what about the vending machines and that kind of stuff where they put it in cause technically they would need to pay taxes on that right and it’s you putting a dollar in to get a snack like what are they paying taxes on that, how does that all get calculated?
DARRIN T. MISH: Well I think in our state in Florida food items are not subject to sales tax so I don’t think that would apply. But let’s imagine a vending machine, back in the day when there were cigarette machines…
KATRINA MADEWELL: Cigarettes yeah.
DARRIN T. MISH: You know those would clearly be taxable and some sort, at some point in the stream, I’m not sure if tobacco taxes are paid with that little seal that goes over the top.
KATRINA MADEWELL: But at this, at this point and date even if you go to like the airport you will have all kinds of stuff in vending machines.
DARRIN T. MISH: Yeah I think that most vending machines nowadays are you know they are basically computers and so they are probably calculated the sales tax. Sometimes what happens is the actual price of the item is lower, is 7% lower and so basically the seller is just incorporating that all into the price and taking care of their sales tax like that. But one of the big concepts that I want to stress today is that tax evasion is different than making a mistake, I mean mistakes are made on tax returns every day of the week, you know every day of the year…
KATRINA MADEWELL: Yes….
DARRIN T. MISH: Here in the United States so there is a difference if you’ve, I don’t want people listening to think that I’m saying they are all committing tax evasion because it’s certainly not. If there’s an honest mistake on your tax return then it’s going to be considered that, it’s you know you are probably going to be subject to a probably what’s called a negligence penalty which is only 25% I mean it is still high and significant but it’s a lot different than tax evasion which could send you to prison so.
KATRINA MADEWELL: Which is your client’s number one fear most of the time.
DARRIN T. MISH: Yeah I think that most of my non-filer clients are afraid that their non-filing sort of behavior is you know evidence of tax evasion.
KATRINA MADEWELL: So that’s not tax evasion just because they didn’t file?
DARRIN T. MISH: I think…
KATRINA MADEWELL: It has to be more intentional like I filed and left a whole bunch of stuff off that’s more tax evasion?
DARRIN T. MISH: Well I think; I think a non-filer technically could be prosecuted in certain circumstances under the tax evasion statute I think it could happen. But there are so many non-filers in the United States we could go bankrupt housing all those people in prison.
KATRINA MADEWELL: So like one, I forget the guy’s name he, he advertised and promoted the late night infomercial like taxes are unconstitutional you are talking about a guy I think he ended up going to jail, he sold a whole bunch of CD kits, you know who I’m talking about?
DARRIN T. MISH: I do Irwin Schiff was his name and Irwin Schiff is in prison actually.
KATRINA MADEWELL: I was thinking like Carlton something but whatever.
DARRIN T. MISH: Carleton Sheets was not the tax guy. No.
KATRINA MADEWELL: He was what anyway you know what I’m talking about the guy that was like oh it’s Unconstitutional, you don’t pay taxes, we can show you how, there is loop holes.
DARRIN T. MISH: Yeah and there are…
KATRINA MADEWELL: That’s considered tax evasion right?
DARRIN T. MISH: What we are trying to talk about today here on the show is the difference between legal tax avoidance, which is setting up your affairs like Mr. like Judge Learned Heads said. Setting up your affairs such that you pay legally less tax is fine, but setting up your affairs so that you pay no tax because you don’t think the system is right or just or legal that’s tax evasion. So there is a difference and you know Mr. Schiff is actually serving a sentence of I believe 13 years actually he’s passed away but he was serving a sentence of 13 years when he died on October 16, 2015, so that was a guy that basically, I have nothing bad to say about him, I do believe that he as a tax protester believed everything that he was saying with every fiber of his being he, he…
KATRINA MADEWELL: Thought it was Unconstitutional to pay taxes.
DARRIN T. MISH: He committed his life to that cause and I have some respect for the fact that he never wavered. I don’t think he was a crook in the terms of…
KATRINA MADEWELL: His belief.
DARRIN T. MISH: Of his beliefs…it just so happens that his beliefs were against the statute passed at the time.
KATRINA MADEWELL: It’s not the way the law interprets the beliefs, unfortunately.
DARRIN T. MISH: Well one of the challenges of tax protestors have I think as a movement is that there’s a real practical need that we have as a society for tax revenue, the Federal government as a beast is growing every day, it needs money and if a judge would find that income tax was Unconstitutional and therefore illegal our entire society would really have significant problems.
KATRINA MADEWELL: Not be as we know it that’s for sure. You are listening to the IRS Solution Attorney show we are giving you some examples today of tax avoidance versus tax evasion and we talked a lot about tax evasion in the first half, when we come back we are going to give you some ideas and some thoughts on legal tax avoidance and we will answer some questions you are welcome to call us we are live in this nasty weather day, 888-404-1010, 888-404-1010. If you even just want to say hi or tell us about traffic we are here. Back in a minute.
DARRIN T. MISH: Welcome back to the IRS Solution Attorney show I’m your host THE IRS Solution Attorney Darrin T. Mish today we are talking about…
KATRINA MADEWELL: Your co-host I’m back Katrina Madewell I just ran out in the hall real fast.
DARRIN T. MISH: Today we are talking about the difference between tax avoidance and tax evasion we’ve given you some examples and some definitions of what tax evasion is. Tax evasion is a crime and they basically consist of taking actions to an unlawfully avoid paying taxes. Tax avoidance is kind of the opposite it’s the lawful avoidance of paying taxes and we talked about Judge Learned Hands famous quote where he basically says tax payers are under no obligation to pay more taxes then legally, minimally necessary.
KATRINA MADEWELL: Obligated.
DARRIN T. MISH: Yeah actually or absolutely. So we talked about in tax avoidance the you know how people get the home mortgage interest deductions and that allows them to legally avoid paying more taxes than they should. There’s some other issues that come up as well, some that come to mind is you know if you have, if you are a small business owner and you have a Sub S corporation for example, it’s a little bit different than being a sole proprietor, a sole proprietorship is what happens if you just decide I’m going to hang a shingle and I’m going to start a business, like my handyman example for…
KATRINA MADEWELL: Right.
DARRIN T. MISH: The guy puts up ads on Craigslist and he just decides he is going to go do odd jobs for people that would be a sole proprietorship and his taxes would be generally a little bit higher than typical cause he has to pay what’s called self-employment tax, self-employment tax is just both halves of the Social Security tax that we as employees pay.
KATRINA MADEWELL: But it’s not uncommon for somebody to start there to see if they could make the business a go.
DARRIN T. MISH: Absolutely. It’s totally normal, not always advisable but do very, very typical for people to start out as a sole proprietorship.
KATRINA MADEWELL: Because they can always change later.
DARRIN T. MISH: Absolutely. So then the next sort of tax avoidance strategy in that scenario would be to form yourself a Sub S corporation or and S corp. An S corp is typically for smaller businesses and they can have a limited number of members but you use an S corp because you have, it’s called a passer entity, so the corporation doesn’t pay separate taxes all of the profit passes through to the shareholders and then the shareholders pay taxes on that money, so far so good?
KATRINA MADEWELL: Mmm Hmmm yep got it.
DARRIN T. MISH: Got what I’m saying? Ok so in an S corp what happens is the shareholders are supposed to take a reasonable salary. Now lawyers since the beginning of time have argued over what the word reasonable means and I would say in this context the word reasonable means what somebody in, in some private sector or government job doing the same job that you are doing would make, ok? So….
KATRINA MADEWELL: And by the way to you can do an LLC and elect to be taxed as a corporation.
DARRIN T. MISH: Absolutely.
KATRINA MADEWELL: And get the same benefits.
DARRIN T. MISH: Absolutely. I’m not a huge fan of the LLC as a, as a device for most small business owners but there’s much less case law. There’s some bad case law in Florida with regard to you know single or married couple member LLC’s but you are right they can be taxed as S corp as well. So in my example you have to pay yourself a reasonable salary and the rest of your compensation you can take out in the form of distributions and those distributions are not subject to Social Security tax or self-employment tax. Let me give you an example, let’s say a person has a $100,000 basically compensation from there S corp, they could take $40,000 as reasonable salary…
KATRINA MADEWELL: Distribution.
DARRIN T. MISH: And $60,000 is distribution, that $60,000 is going to be taxed at a lower rate than the $40,000 and that would be the example of a tax avoidance strategy that is perfectly legal, reasonable assuming the $40,000 you know.
KATRINA MADEWELL: And that’s the reason why most corporations actually are such.
DARRIN T. MISH: Yeah, yeah well at least small business corporations it’s one of the reasons why most you know, most of the small businesses in America are S corps because of that tax you know avoidance strategy and that tax avoidance benefit that we get from becoming corporations.
KATRINA MADEWELL: Right.
DARRIN T. MISH: There’s legal reasons in terms of liability limitations and things like that that we form corporations as well but.
KATRINA MADEWELL: And I think we have a question on our topic from Chrissy, let me patch her in.
DARRIN T. MISH: Hey Chrissy.
CHRISSY: Hi Darrin, Hi Katrina how are you?
KATRINA MADEWELL: Good welcome to the show.
CHRISSY: I have a question for you, say that I have evaded my taxes for 20 years ok and I am on the run and I am hiding out, what do you think is going to happen to me when they catch up with me?
DARRIN T. MISH: Well we talked about…
KATRINA MADEWELL: This is your average client Darrin.
DARRIN T. MISH: Chrissy we talked about the maximum penalty is up to 5 years in prison and up to a $100,000 fine but that’s just the maximum ok…
DARRIN T. MISH: So, so you are on the run…
CHRISSY: Well hiding out from them you know what I mean.
DARRIN T. MISH: Yeah.
KATRINA MADEWELL: What kind of taxes?
DARRIN T. MISH: Give me an idea what kind of money you’ve been earning.
CHRISSY: Nothing on the books astronomical.
DARRIN T. MISH: Ok, so you are kind of living hand to mouth is that what you are saying?
CHRISSY: Kind of but not really.
DARRIN T. MISH: Ok.
KATRINA MADEWELL: Any rough dollar figure annually?
CHRISSY: Rough dollar figure annually, probably about $80,000 but most of it’s not on the books.
DARRIN T. MISH: Ok. And do you just, are you interested in just staying off the books or do you want to or do you want to avoid the potential of being prosecuted for tax evasion?
CHRISSY: Well, if I’m going to avoid it, exactly.
DARRIN T. MISH: Oh you want to avoid, yeah you don’t want to get into trouble but you would like this to end is that what you are saying?
CHRISSY: Right but on the books I mean $80,000 usually, on the books probably maybe $30,000, $25-$30,000.
DARRIN T. MISH: Are you filing tax returns?
CHRISSY: No, because I don’t work.
DARRIN T. MISH: Ok, so it’s kind of hard to give specific legal advice here on the air but I would say generally…
CHRISSY: I also get widow’s pension, a widows Social Security.
DARRIN T. MISH: Ok.
CHRISSY: And most of my money that comes in is cash.
DARRIN T. MISH: Ok, so you know technically the correct answer is you should start filing tax returns, report that cash and just kind of move on with life.
CHRISSY: Well I’m 60 years old ok. I will be 61 very soon and I actually haven’t worked on the books per se in probably 3 or 4 years I guess. My dad passed away a few years ago and I haven’t worked literally on the book in what my dad left me in investment on property for my children.
DARRIN T. MISH: Ok.
CHRISSY: So what I have coming in is like my rent stuff from my properties but they just come to me in cash.
DARRIN T. MISH: So you own these properties and you are getting rentals in cash and those rental collections are not ending up on a tax return is that what you are kind of saying?
CHRISSY: Yes I am.
DARRIN T. MISH: Ok, so what I would suggest is that you go back and amend the returns for the past 3 or 4 years and…
KATRINA MADEWELL: I don’t think she has any returns is what I think she said.
DARRIN T. MISH: If there haven’t been any returns then we need to get some returns I would say going back at least 6 years and get those, get that all worked out and straightened out and then you can sleep better at night know that you are not going to be prosecuted for tax evasion.
KATRINA MADEWELL: Is there an age or…
CHRISSY: What I make off the books I do not have to show right?
DARRIN T. MISH: Well…
KATRINA MADEWELL: That is what we are talking about in regards to tax evasion versus tax avoidance.
DARRIN T. MISH: Well the law says you have to…
CHRISSY: Well the tax evasion but show me where I got the cash can’t prove where I got that cash ok you know what I mean?
DARRIN T. MISH: Yeah if the IRS were to audit you they have some pretty sophisticated methods for figuring out where the cash came from and they can also do what’s called a lifestyle audit so they can see based on your lifestyle that your income is not as little as what you are reporting.
KATRINA MADEWELL: It’s not enough to support what you are doing.
CHRISSY: My actual income that I get monthly that shows on the books is my husband’s…
KATRINA MADEWELL: Retirement?
CHRISSY: His Social Security because he didn’t get retirement he didn’t make it to his….
PAT GEORGE: Hey Chrissy you’ve been on the line to long I think they are probably trying to track you right now I’d hang up if I were you…
CHRISSY: Oh well they are not going to get me I promise I’m hidden.
KATRINA MADEWELL: Oh my gosh.
DARRIN T. MISH: Well so that, so that the basic answer is if you have, if you have income from any source in America it’s supposed to end up on a tax return and you are supposed to pay taxes for it. I understand the vernacular that the way you are phrasing it that you don’t have to show it, but under the law you have to report it under the law.
KATRINA MADEWELL: Well let’s say….
CHRISSY: In actually because I’ve only got rent from the one property that has been cash that is the only one that I really have to show right now right?
KATRINA MADEWELL: Well, I mean you don’t know without looking at everything but basically that’s what you are describing is tax evasion versus tax avoidance is that correct Darrin?
DARRIN T. MISH: Yeah so, so buying the rental house to take the depreciation to reduce your overall tax liability that is tax avoidance, not reporting the rentals on your tax return that’s tax evasion.
DARRIN T. MISH: That’s tax evasion, so there’s the difference that this is not a staged call that is a perfect textbook example of the difference.
DARRIN T. MISH: So I’m not, I’m not running you down I’m not saying anything bad about you I’m just saying that the way you are handling your affairs right now is not technically correct.
KATRINA MADEWELL: And when they catch up to you, you can call Darrin at 888-get-mish, 888-get-mish.
CHRISSY: I have his number. I do have Darrin’s number by the way.
DARRIN T. MISH: Chrissy, that’s great Chrissy thanks for calling in today.
CHRISSY: I may call you in need ok.
KATRINA MADEWELL: Thank you.
DARRIN T. MISH: Sounds great.
CHRISSY: I appreciate it you guys. Have a great day.
KATRINA MADEWELL: So the next part of our show is going to be talking about the legal ways you can do tax avoidance but thank you for the call.
DARRIN T. MISH: Well that would be an example I mean she just came up with a really great contemporaneous, spontaneous example and that would be you know the depreciation from a rental property is a pretty good tax….
KATRINA MADEWELL: Any repairs, any management…
DARRIN T. MISH: Yeah all those things are all tax deductions, but the failure to report the income from the rental cause you are getting it in cash is not a great example of yeah…
KATRINA MADEWELL: But you are going to get some deductions but they want you to pay some taxes on that income.
DARRIN T. MISH: Yeah absolutely. A lot of times in the rental scenario people get confused they think that the, well they take the rental and they want to deduct the mortgage, the mortgage payment itself and that’s not necessarily how it works.
KATRINA MADEWELL: Now is there a minimum amount of income you have to have to even file or is it any amount income?
DARRIN T. MISH: Yes there is a minimum…
KATRINA MADEWELL: That is an on the fly question that he was totally unprepared for but I asked it anyway.
DARRIN T. MISH: I know that for, if you are self-employed you get a1099 the minimum is $600 or more that you have to file and for tax payers it’s a little bit different, there’s a whole bunch of different variations here but you can basically think of it as $20,000 or so in wages you have to file.
KATRINA MADEWELL: So in that scenario for the rental income?
DARRIN T. MISH: Oh you are going to have to report the rental income period.
KATRINA MADEWELL: Ok.
DARRIN T. MISH: So, yeah, she’s not doing some things right being and that was actually a really interesting example on how Americans look at this, I mean she kept saying, I get asked this question all the time do, I have to quote show that income? And that’s even the phrase that people use, do I have to show the income? Yeah, you do, that’s the short answer yes you have to show your cash income, it has to end up on a tax return.
KATRINA MADEWELL: Well, technically you should be filing that one way or the other whether you have a vacant property that’s not being rented correct and you take your loss on your expenses or it’s the balance…
DARRIN T. MISH: Yeah and there is a whole bunch of rules that pertaining to the rentals and how much time do you use it and things like that, you know beach rentals are famous for being vacant for most of the year because people want to use them most of the year, I think the rule is 2 weeks or less in personal use something like that.
KATRINA MADEWELL: Not sure about that one at all. But you are listening to the IRS Solution Attorney show it has been a wild day, weather and a wild day for questions but we love them bring them on 888-404-1010, 888-404-1010 if you want Darrin off air he is 888-get-mish that’s 888-
DARRIN T. MISH: 438-6474, 888-438-6474
KATRINA MADEWELL: 888-get-mish, when we come back in a minute we are going to answer some questions that we got on Twitter @darrin_mish M-I-S-H we will be back in a minute. We will be back.
DARRIN T. MISH: Welcome back to the IRS Solution Attorney show I am THE IRS Solution Attorney Darrin T. Mish.
KATRINA MADEWELL: And I am your co-host Katrina Madewell we got Pat George back there on the board keeping you guys abreast of traffic and weather, all that beautiful stuff out there today.
DARRIN T. MISH: Today has been sort of an interesting show had a nice caller Chrissy called in and gave us the perfect example of the difference between tax avoidance and tax evasion. I think we have a couple of questions that we got on Twitter this week.
KATRINA MADEWELL: We did. The first one is going to be; how do I notify the IRS that my address has changed and that’s from Rick in Tampa.
DARRIN T. MISH: Well for most people, people who file tax returns on a regular basis if you put a new address on your tax return that is automatically going to change your address for IRS tax purposes however if you are one of my typical clients who hasn’t filed a tax return in years and you want the IRS to know your current address which is often a good idea for them to know what your current address is, trust me you are not hiding just because they can’t locate your physical person. You file a form 8822 with the IRS and I would suggest you send it in certified mail so that you can prove that they got it, it’s a form 8822 and the reason why if you are a non-filer the IRS, you would want the IRS to know your last known address, is if they prepare what is known as substitute for returns there going, that’s a return that they prepare for you cause you didn’t prepare one and it’s going to be high, it’s going to be much higher than appropriate, then they are going to issue you something called a notice of deficiency and that’s going to give you an opportunity to dispute that, to fight it if you don’t get that notice of deficiency, but if the IRS sent it to the last known address that’s good enough and they are going to go ahead and move on, they are going to roll….
KATRINA MADEWELL: So are you saying that if you don’t file you want to file form 8822 but if you do file they are going to get it automatically from your return?
DARRIN T. MISH: Exactly.
KATRINA MADEWELL: Ok.
DARRIN T. MISH: That’s basically the bottom line right there or sometimes you might be filling and you might mid-move, you might move mid-year and then you might still want the IRS to know about your new address in case that maybe you have something that is pending with them and you are expecting mail, you know you want to make sure that they have your current address. Now there is a big scandal with the IRS and that is that they don’t have time to update these change of address, change of addresses from the 8822 so it may or may not work, but the reason why I want you to send it in certified mail is that at least you can prove that you made the attempt to get them to change your address.
KATRINA MADEWELL: And Ken has a great question too, which we have answered this before but it’s very, it’s a very, very good question. He wants to know is there an age limit on claiming my child as a dependent?
DARRIN T. MISH: Well generally speaking your child has to be under the age of 19 or if a full-time student under the age of 24. If your child is permanently and totally disabled, then there is no age limit what so ever. So it’s 19 unless they are a full-time student then it becomes 24 if they are totally and permanently disabled there is no age limit what so ever.
KATRINA MADEWELL: And umm that’s yeah that’s going to say disability and then call it all that jazz right?
DARRIN T. MISH: Right.
KATRINA MADEWELL: Like dependent, like they are still paying their bills, taking care of them kind of thing.
DARRIN T. MISH: Right, I think I was pretty much a dependent until I was about 26 but I did go to law school…
KATRINA MADEWELL: Well you were an attorney you had major student loans. So our story headline really quick before we do the train wreck of the week is Facebook might owe the IRS has much as 5 billion dollars in back taxes, great story.
DARRIN T. MISH: Yeah so even Facebook, this was an I believe a Washington Post story Facebook confirmed last week it may face a tax bill of up to 5 billion dollars but the company has enough money, here’s the bottom line they have enough money to fight the IRS for a long, long, long time.
KATRINA MADEWELL: That is like craziness.
DARRIN T. MISH: So that is the difference right there between mega billion-dollar company who has a dispute with the IRS who could afford to fight, who could afford you know teams and armies of lawyers to combat the teams and armies of lawyers on the side of the IRS versus your average person who doesn’t have those resources and can’t you know can’t afford to fight like that. I can tell you they are not going to do an Offer in Compromise for Facebook.
KATRINA MADEWELL: Well because they are probably not going to win. So that’s it that’s the time where it’s the IRS train wreck of the week.
DARRIN T. MISH: This is the segment of the show where we talk about somebody who came into my office and essentially their IRS situation was a train wreck, they were a bit troubled and we got them out of it. So in this story today we had a couple, a young couple and one was an electrician and one was a graphic designer so these are not real high-income individuals they are just sort of your average run of the mill middle class you know kind of families and they have managed to rack up a pretty good size tax bill, it was $50,396 and to your average family that is a lot of money.
KATRINA MADEWELL: Indeed.
KATRINA MADEWELL: What’s their income kind of like just curious on that tax bill any rough idea?
DARRIN T. MISH: Well there’s not a correlation as I recall their income was somewhere between $60-80,000 a year so you are not talking about…
KATRINA MADEWELL: Tax bill equal to annual income.
DARRIN T. MISH: Yeah and it wasn’t a tax bill from one year it was as I recall there was somebody in the family had, that had been previously self-employed and managed to run up the tax bill. The long story short we filed what’s called an Offer in Compromise, an Offer in Compromise is where you make a deal to settle for less with the IRS and it’s based upon a relatively simple math equation but we went ahead and filed the offer and because of some of the assets that they owned our offer was $19,587 so this is not one of those 5 or 10 cents on the deal…
KATRINA MADEWELL: Right.
DARRIN T. MISH: You know cases that we talk about so often, this was something like 40% of the tax bill but ultimately the IRS accepted the $19,587 so pretty good deal for those folks.
KATRINA MADEWELL: Maybe you started too high Darrin.
DARRIN T. MISH: No I can assure you that I never start too high on those negotiations.
KATRINA MADEWELL: Just kidding.
DARRIN T. MISH: It just worked out that way but you know if you came into the office and said Darrin I owe the IRS $50,000 can we get it settled for under 20 you know most people would be pretty happy with that result and they were really happy about it. The nice thing is they are allowed to go on and live their life and move forward with things you know.
KATRINA MADEWELL: I know because that’s got to be hovering over anyone’s head having that kind of tax liability.
DARRIN T. MISH: I can tell you as having, as having had tax bills almost, not every year but for many years during my career it’s one of those things that just eats away at you at night if you have trouble sleeping at all that’s one of the things that your mind is going to go to in the middle of the night, you are there in the dark and you are staring at the ceiling you are thinking how in the world am I ever going to get out of this hole that I have dug for myself. You know $50,000 in my practice is kind of a relative, you know modest, relatively modest tax debt, I have just as many $200,000 cases as I have $50,000 cases so when the number is big enough for you as the taxpayer to not have any idea how you are ever going to pay it then it’s probably a good idea to give us a call and see you know what your options are.
KATRINA MADEWELL: And you can reach Darrin at 888-get-mish and you can also get him online at getirshelp.com.
DARRIN T. MISH: Don’t forget the podcast on iTunes, don’t forget the app that is in the iTunes store and the Android store as well.
KATRINA MADEWELL: And what should they be searching for, for the podcast?
DARRIN T. MISH: Look under IRS Solution Attorney or IRS Problem Solver we, I’m not real sure if we’ve got it completely fixed or you can search under my name Darrin Mish that is D-A-R-R-I-N M-I-S-H.
KATRINA MADEWELL: We are trying to get the podcast to match the show there. So our special guest is going to close the show today, go ahead and give out the phone number again to reach Darrin Mish.
SPECIAL GUEST: 888-438-6474.
KATRINA MADEWELL: Great job and what message do you have for our lovely people listening today we appreciate every single one of you.
SPECIAL GUEST: Pay your taxes or Darrin will fix it.
KATRINA MADEWELL: What was that?
SPECIAL GUEST: Pay your taxes or Darrin will fix it.
DARRIN T. MISH: We’re out.