What You Need to Know About the IRS and Real Estate Investments

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DARRIN T. MISH:  That would be me I am Darrin T. Mish THE IRS Solution Attorney.

KATRINA MADEWELL:  And I’m your co-host Katrina Madewell and I just, I noticed doesn’t the intro say over 15 years, we are probably going to have to update that because it’s been a little longer than 15 years.

DARRIN T. MISH:  Yeah we’ve been doing the show at least 16 years I think our anniversary is about 16 years, one year.

KATRINA MADEWELL:  Radio anniversary.

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DARRIN T. MISH:  It feels like 16 years.  I think our 1-year anniversary is this month.  I don’t know the date of our first show I will have to look that up.

KATRINA MADEWELL:  We can dig for it.  I thought it was over a year?

PAT GEORGE:  I think it was May 34th.

KATRINA MADEWELL:  Oh Pat.

PAT GEORGE:  You know 7 days ago you were here right but it seems cause time flies, it seems like you were here 3 days ago, it just every time I turn around I see your smiling faces and I know that it’s almost time for the weekend.

KATRINA MADEWELL:  Yep.  He is always happy to see us Thursday but is even happier to see me on Friday.

DARRIN T. MISH:  We’re Pat’s anchor for the weekends.

PAT GEORGE:  Yes.

DARRIN T. MISH:  I can tell you that when I’m driving back across the bridge on Thursday mornings after the show is done I have officially you know gone over the hump and it’s all downhill from there.

PAT GEORGE:  Wouldn’t it be nice to have a 4-day week.

DARRIN T. MISH:  It would be.  I actually have done that in the past where….

KATRINA MADEWELL:  My husband has those every week.

DARRIN T. MISH:  I would work 10-12 hours a day and then take an extra day off during the week.

PAT GEORGE:  Right I wouldn’t mind doing that, 10 hours a day and have one of those 3 day weekends those would be nice.

KATRINA MADEWELL:  Chris works 4 10’s every week and then he rotates 4-day weekend, 2-day weekend, 4-day weekend, 2-day weekend.

DARRIN T. MISH:  Wow.

KATRINA MADEWELL:  It’s like a sweet schedule.

DARRIN T. MISH:  Yeah not bad at all.  What does he do for a living I don’t recall?

KATRINA MADEWELL:  City, city of Tampa.

DARRIN T. MISH:  Ok figures.

KATRINA MADEWELL: I know darn city workers.

PAT GEORGE:  Mayor.

KATRINA MADEWELL:  It’s the running joke.  City workers don’t work.

PAT GEORGE:  Isn’t he the Mayor?

KATRINA MADEWELL:  No he no.  He doesn’t even talk enough to be the mayor Pat.  He’s been in the studio you remember that.

DARRIN T. MISH:  He’s the Mayor of the band.

KATRINA MADEWELL:  Yeah he literally like, he’s, as many times that he has been in the studio with me well he’s never said one word on air ever.

PAT GEORGE:  That’s alright you make up for all of that.

KATRINA MADEWELL:  Yeah I do.

PAT GEORGE:  You don’t give him a chance to talk.

KATRINA MADEWELL:  We are as opposite as it gets like anything that you can imagine like we have this joke that even our lip curls on the opposite side, it’s, even the kids laugh at it we went out one day and ordered whatever (inaudible) and they were like do you want straight fries or curly fries and at the same time it’s like straight curly.

DARRIN T. MISH:  Opposites.

KATRINA MADEWELL:  The kids started dying they’re like man you guys are so opposite.

DARRIN T. MISH:  So we decided what we are going to talk about on the show about you know 3 minutes ago right Real Estate…

KATRINA MADEWELL:  Real Estate stuff yay.

DARRIN T. MISH:  Yeah Real Estate we had a little debate, it was short, I lost you know because Katrina talks more than I do.  Anyone who has ever looked at the transcript of the show can tell that Katrina in fact does talk more than I do.

KATRINA MADEWELL:  Oh snap I have never looked at the transcripts.

DARRIN T. MISH:  In fact I had a, I had a client call, a prospect call this week in Maryland or someplace up north and they had mentioned that they knew the name of my daughter and I said oh you must of been reading, or you must of been listening to the radio show and she says no I read the transcript and she goes you know that Katrina person your co-host she tries to get you off track all the time, I’m like I know, I know that’s part of her job.

PAT GEORGE:  Well you also have some success stories that maybe before the end of the show that you can talk about, I saw on Facebook.

DARRIN T. MISH:  Absolutely we will have the train wreck of the week.

PAT GEORGE:  Right.

DARRIN T. MISH:  For sure.

PAT GEORGE:  Yeah you have a good segment of the show.

DARRIN T. MISH:  Good segment of the show.

KATRINA MADEWELL:  We have to keep Pat engaged you know that is why I talk and I go off topic because I can always tell when his eyes start drifting that he is no longer interested in IRS stuff and I just keep that conversation moving I’m just saying.

DARRIN T. MISH:  When he picks up the IPhone he is lost.

PAT GEORGE:  You know a lot of people aren’t interested in the IRS until they are involved with the IRS.

DARRIN T. MISH:  I would say that is probably most people right?

PAT GEORGE:  Right.  Those are 3 letters that they don’t like to pop up in their mail.

KATRINA MADEWELL:  Yeah then when they hear us on the radio they are like wait who’s that guy again oh yeah 888-get-mish yes I need to get mish.

DARRIN T. MISH:  Don’t forget the website getirshelp.com so today we are going to talk about the IRS and Real Estate Investments.  You know this is kind of a minefield there’s a lot of people who have rental houses and sort of dabble in it and may think they are going to be able to write off any losses that they might have.  You know back in the wild west days of the real estate which I call 06 or 07 or…

KATRINA MADEWELL:  December of 06 was exactly the high peak of the market and the change in January of 07.

DARRIN T. MISH:  Ok so I call that the wild west days and that’s when a lot of people would come into our office and they had a tax problem but they had a bunch of equity in their primary residence or in there you know rental properties or whatever and the answer was quite often go get a mortgage and pay the IRS off and then that all changed around 2008 after the crash there was nobody having equity anymore.

KATRINA MADEWELL:  Yeah because the running joke is all you needed to do was fog a mirror and you could get a loan.

DARRIN T. MISH:  Yeah that was pretty much how it was and I actually didn’t buy any houses in that time frame I bought early and rode that thing all the way through but today we are going to talk about the IRS and Real Estate investments and just you know the IRS has been cracking down on investors who attempt to use their passive real estate investment to offset other income.  I actually had a case, an audit recently where I had a couple that was, they actually owned I think it was either 5 or 7 rental houses across, they were split between Texas and Oklahoma and the couple lives here in Florida, in the Tampa Bay area and the husband actually had a relatively high wage you know income and these rental houses actually had significant losses every year until those losses kind of helped to offset the tax that he was paying from his wages and they had been through a similar audit in the past where the IRS brought up something called the material participation test and we will talk about that in a little bit but they succeeded in that audit so they kind of thought that maybe what they were doing, going forward and they kept preparing their own returns year after year after year and eventually they got audited and they didn’t know that there had been a rule change, a law change in that interim time frame and they didn’t fare so well on the material participation test because of the documentation requirements going forward and so we actually lost on that, it was better then what it would of been but they, actually ended up having to pay some extra tax because they just didn’t have the right documentation that they needed for the, to get the passive losses accepted.

KATRINA MADEWELL:  Which we’ve talked about that before on the show that if those self-prepared returns get audited a lot more frequently than the ones that are CPA prepared.

DARRIN T. MISH:  Yeah I think it ended up costing them about $25,000 with penalties and tax and everything all in and that’s a lot of money to save the $500 or whatever it is a year to have the return professionally prepared and I can’t remember the exact issue but it was like one little zinger it was like one little thing and if they had just had the advice or known about that rule then they wouldn’t of, they wouldn’t have ended up with that extra tax.

KATRINA MADEWELL:  We’ve talked about that before to.  I forget with one of the shows we talked about I think it was how to avoid an audit or something and we were discussing that hey that little bit that you pay the CPA can far outweigh anything that you would have to pay later if you missed something like a rule change or deductions they find or that kind of thing.

DARRIN T. MISH:  Right, absolutely and it’s probably better to have a CPA where you have a relationship of some sorts so you can get a little bit of consulting in there in addition to just the tax preparation you know, that is what we aspire to at my office but we can’t always do that cause a lot of times people don’t want to spend any time talking about their tax situation you know they just want their tax return prepared and usually with as little documentation as humanly possible.

KATRINA MADEWELL:  Can you just make it go away.

DARRIN T. MISH:  And it’s because self-employed people are busy you know they are busy doing whatever it is that they do and you know I count myself in this sometimes, you don’t want to spend a lot of time planning you want to spend a lot of time doing.

KATRINA MADEWELL:  Right.

DARRIN T. MISH:  So.

KATRINA MADEWELL:  Cause as entrepreneurs we don’t feel like we are actually getting any work done, when we are planning you have to be like in the trenches.

DARRIN T. MISH:  That’s for sure but you know there’s a really smart saying I can’t remember it exactly but basically for every hour that you spend planning you just save many times those hours doing.

KATRINA MADEWELL:  Agreed definitely, definitely, definitely.  So talk a little bit about because not everyone listening may have rental property and you were saying in that particular scenario that the people actually were taking more and more passive losses every year so explain what that means?

DARRIN T. MISH:  So one of the things that they were doing was they were, it’s actually ok to deduct the cost of travel to the rental property to do, to inspect it you know regularly, to prepare some things like that.

KATRINA MADEWELL:  So what costs like mileage?

DARRIN T. MISH:  Yeah like mileage but keep in mind the houses were in Oklahoma and Texas and they live in Florida.

KATRINA MADEWELL:  Oh.

DARRIN T. MISH:  So they were going out to Texas once a quarter to check on these houses and they were deducting all those expenses.

KATRINA MADEWELL:  Now is that not allowed?

DARRIN T. MISH:  It’s allowed….

KATRINA MADEWELL:  It looks weird is that what you are saying cause of the miles?

DARRIN T. MISH:  It does look weird cause it’s pretty far right?

KATRINA MADEWELL:  And there’s 2 of them in totally different states.

DARRIN T. MISH:  Yeah and the IRS had a problem with the fact that they were deducting, the husband and the wife were going, they are saying no wait a minute you are trying to maintain that only the wife is the real estate professional here so the husband can’t even go, or he can go but you can’t deduct those costs for travel.

KATRINA MADEWELL:  So I presume maybe they both flew and paid for 2 plane tickets was that what it was?

DARRIN T. MISH:  Exactly, if they had driven then it doesn’t cost anything, doesn’t matter which person was in the car.  But it could theoretically cost more to have a hotel I suppose for 2 people.

KATRINA MADEWELL:  Not really.

DARRIN T. MISH:  I usually just, when I book a hotel I usually put just one person and just show up at the desk and do my thing but so there was some extra expenses and whatnot and basically under Internal Revenue code section 5, 467 I don’t do that very often but I just did, Internal Revenue code…

KATRINA MADEWELL:  Nope never heard 467 I’m like gosh already…

DARRIN T. MISH:  It actually limits an investors ability to use passive losses to offset there ordinary or earned income.  So when we come back from the break we will go ahead and dive into that a little bit, talk about what that means to people who might have rental sort of real estate.

KATRINA MADEWELL:  Ok so if you have a rental property or your thinking about buying a rental property you could call me but you could also stick around and listen to some of those tax implications before we get back and you avoid yourself some headaches before you have to call Mr. Darrin Mish at 888-get-mish.

DARRIN T. MISH:  Or visit the website at getirshelp.com.

KATRINA MADEWELL:  Back in a minute.

DARRIN T. MISH:  Welcome back to the IRS Solution Attorney show I am THE IRS Solution Attorney Darrin T. Mish.

KATRINA MADEWELL:  I’m your co-host Katrina Madewell thanks for sticking with us through the break.

DARRIN T. MISH:  So before the break we were talking about the ever so engaging Internal Revenue code section 467.

KATRINA MADEWELL:  You’ve got to puff it up there Darrin you sound like a regular attorney, the Internal Revenue service code 467.

DARRIN T. MISH:  I know.  It actually limits an investors ability to use passive losses to offset their ordinary or earned income.  So what that means is you can’t use your real estate investment losses to offset your normal income ok?  Unless you can pass a certain test.  One of those tests….

KATRINA MADEWELL:  Wait a minute to offset your normal income so you are talking about like if you owed $2000 you can’t bump those expenses to cover that or are you saying you can’t have losses that would exceed your income?

DARRIN T. MISH:  Let me give you an example:  Say you make 150 grand as a wage earner so you are in a special tax bracket right you are paying more taxes then a lot of people but you have $50,000 in passive, you know real estate losses because you are deducting everything under the sun but you are really, you are just a passive investor, ok so let me define that a passive, most of the time rental activity is considered what’s called passive as opposed to active ok so passive would be you are not really doing much right, I have a rental house, I will tell you right now I don’t do anything, I have a, I don’t have a management company but so….

KATRINA MADEWELL:  Slumlord…

DARRIN T. MISH:  We actually collect the rent, it’s not a slum it’s a nice smaller house.

KATRINA MADEWELL: I’m just kidding.

DARRIN T. MISH:  But we even have a home warranty on the house so like if something breaks we just make a phone call, somebody goes there they fix it and we pay them and it’s fixed right.

KATRINA MADEWELL:  That’s actually a sweet idea for an investment property get a home warranty.

DARRIN T. MISH:  Yeah because you are deducting that $50 a month anyway right you are deducting whatever repairs happen anyway so to me I live an hour away from the rental house so I can’t go down there plus I don’t know how to fix a water heater.

KATRINA MADEWELL:  You’re not handy…

DARRIN T. MISH:  Yeah I’m getting more handy…

KATRINA MADEWELL:  You would not want Darrin to fix your water heater.

DARRIN T. MISH:  For the past like couple of weeks I have become a farmer so I have to learn how to fix stuff so the joke is….

KATRINA MADEWELL:  I will try not to fall out of my chair laughing.

DARRIN T. MISH:  Well for the first time in my life I bought a farm and now there is stuff that is broke that needs to get fixed and I’m running out of money so I have to figure out how to fix stuff.  So anyway most rentals are passive activities right so you are not doing much you are just collecting rent and you know making occasional repairs and things like that as opposed to active where active would be more like you’re actively searching out new rental properties you’re actively managing it, you are actively doing all the repairs you know you are actively doing things ok.  So there’s what’s called a Material Participation test for real estate investors and basically there’s 2 rules, there’s the 50% rule and the 750 hours rule so in order to qualify for Material Participation test you have to, the tax payer has to demonstrate that more than half of their personal services in all of their business ventures for the taxable year were performed in the area of real property, business and rentals.  Ok so what that means is as a practical manner is you have to have a log of everything you do in your professional life so that you can prove that more than 50% of it was pertained to real property.  Does that make sense?

KATRINA MADEWELL:  Ok.

DARRIN T. MISH:  So and then the second rule is it has to exceed or meet or exceed at least 750 hours during the year so you can’t just do, say ok I’m an active real estate investor and I, I can prove that more than 50% of it is in real estate because I don’t do anything else but it’s only 300 hours a year.  So no you actually have to have a log, you have to basically have a daily or at least weekly log of everything you did with a great deal of detail so we talk about mileage logs all the time right…

KATRINA MADEWELL:  Yes…

DARRIN T. MISH:  And how detailed mileage logs have to be well these Material Participation logs have to be crazy specific and in that audit that I was referring to in the first segment we actually had a perfect Material Participation log showing that definitely the wife had more than 50% it was more like 100% of what she did was pertaining to these rentals and it was way more than 750 hours a month I want to say it was in the, little over a 1000 hours but…

KATRINA MADEWELL:  So comparison for active and passive losses would be like people that are like I’m going to fix and flip that’s my job now compared to somebody like you that has one property and they are like yeah I’m not going to be really fixing stuff.

DARRIN T. MISH:  Yeah so the fix and flipper guy if that’s really his full time endeavor and it’s, it’s more than a part-time gig because we figure 40 hours a week, 50 weeks a year that’s 2000 hours so 750 hours is really kind of a part time thing, you know….

KATRINA MADEWELL:  It’s like 3/4’s of the way there.  1/3.

DARRIN T. MISH:  So in order to qualify as a real estate professional you can participate in like 6 different real properties sort of activities so it’s real property development or redevelopment, construction or reconstruction, acquisitions, rental or leasing, operation or management and brokerage trade or business.  So clearly you would qualify.

KATRINA MADEWELL:  For anything.

DARRIN T. MISH:  Right you would qualify as a real estate professional and you wouldn’t need, probably I don’t think have any kind of log because I mean….

KATRINA MADEWELL:  That’s my whole day.

DARRIN T. MISH:  That’s what you are doing all day every day.

KATRINA MADEWELL:  Like everything that you described is all that and then some.

DARRIN T. MISH:  Do you do construction and reconstruction?

KATRINA MADEWELL:  Not per se but I…

DARRIN T. MISH:  You tell people to fix a lot of stuff.

KATRINA MADEWELL:  Yeah, yeah, like I’m educated enough to go in and say yeah this is probably this and know which is the right professional to call versus I don’t know what this is.

DARRIN T. MISH:  So before the show we were talking about an orange wall.

KATRINA MADEWELL:  Yes we were.

DARRIN T. MISH:  So sometimes you walk into a house that you are about to list and you have suggestions that you make to people to change so that the house will sell better…

KATRINA MADEWELL:  Yes so this particular house Darrin and I were chatting on the way here to the show before the show and I was telling him that there was this house and I had suggest that they take some furniture out, we changed the bathrooms and upgraded those so they weren’t Formica, they were actually quartz or granite and then there was this orange wall that was in the living room as soon as you walked in and you know we had a lot of showings but in this market with a 2 month supply of homes which is the absorption rate that home should of already sold and so we had to end up reducing the price cause  it had been on the market and they had to repaint the wall so experience shows if you do those things first and then list it for the right price it’s going to sell faster for more money.

DARRIN T. MISH:  So you know to repaint that one wall was basically the cost of the paint and some brushes right?

KATRINA MADEWELL:  And time because time is in here so I mean that was probably a whole Saturday.

DARRIN T. MISH:  Yeah some time you know of the homeowner…

KATRINA MADEWELL:  Right. Yes, not the realtor, the realtor is not painting the house just so you know.

DARRIN T. MISH:  Well some will, the really hungry ones will cause I’ve talked to some that will but in that case that orange wall probably cost them thousands of dollars right I mean…

KATRINA MADEWELL:  I think so, because we started at 220 and had to reduce to 200 with the painted wall to get it sold.

DARRIN T. MISH:  Wow so.

KATRINA MADEWELL:  So keep in mind this was almost like 45-60 days into it, we’d already had several showings, people made offers on other homes including similar floor plans nearby that were less money, that’s what it was.

DARRIN T. MISH:  Right gotcha.

KATRINA MADEWELL:  So had the upgrades had it just tweaked a couple little things like taking some furniture out and that kind of stuff initially would have made a big difference.

DARRIN T. MISH:  Yeah so the moral of that story is you should listen to your real estate agent when they make suggestions.

KATRINA MADEWELL:  And the thing is, the big thing Darrin that I think most people miss is the way you live in your house and the way that you sell it are 2 different things.

DARRIN T. MISH:  Oh yeah.

KATRINA MADEWELL:  They are.

DARRIN T. MISH:  Oh yeah.

KATRINA MADEWELL:  I mean they are for everybody.

DARRIN T. MISH:  You know speaking of someone who had their house on the market twice in the last 6 months for sure, when the house is on the market it’s like it needs to be perfect…

KATRINA MADEWELL:  Yeah it does it has to be show ready, model condition, at least if you want that higher price.  If you don’t care and you got room to take stuff at the lower end of the range, then you can show it however you want.

DARRIN T. MISH:  We were all about no we are getting top of the market…

KATRINA MADEWELL:  Then you got to show top of the market.

DARRIN T. MISH:  We are going to break the record for our development and we did actually.

KATRINA MADEWELL:  Yeah and you can do it if some things are in order but you know the best advice we give people is to pre-pack, if you are not using it now or in the next month when you sell your home it should be in a box and out of the way.

DARRIN T. MISH:  We kind of cheated we threw all the clutter in the garage.

KATRINA MADEWELL:  That’s ok I would rather it be in the garage then in the house.

DARRIN T. MISH:  And people would look in the garage and they would say oh yeah that’s a garage with a bunch of stuff in it you know and our stuff would go in there to.

KATRINA MADEWELL:  Well the thing of it is, is people they usually have a listing budget for what’s it’s going to take to get the house on the market so then a lot of times the listing budget is eaten up on the inside of the house so they don’t have any more room to get storage or maybe they don’t want to move it twice or they don’t want to get a pod or whatever.

DARRIN T. MISH:  I always thought that storage was pretty inexpensive but it’s not when you have, we had 3 storage units and it was not cheap.

KATRINA MADEWELL:  So some people like you know me being ELP I’m going to give advice a little differently than some people and so this particular couple they are paying off everything, the 2 car payments, a whole lot of debt, a whole bunch of stuff and the loans are funky so they are adjustables, interest only so we are going to get rid of all that mess.

DARRIN T. MISH:  Oh nice.

KATRINA MADEWELL:  When we start over on the next house and the debt.

DARRIN T. MISH:  That’s very nice.  So when we come back after the break that is coming up here in a second…

KATRINA MADEWELL:  Have a little more time.

DARRIN T. MISH:  Ok we are going to be talking about some more about the Material Participation test and basically the problem that tax payers have is if you are making good enough money that you are interested in having passive losses off set your income then you are probably in a time consuming career like a doctor, lawyer or a dentist you know people that are working full time jobs and that’s when the courts are really, they are suspicious…

KATRINA MADEWELL:  Doesn’t make sense.

DARRIN T. MISH:  Doesn’t make a lot of sense how can you be a full time real estate investor when you have some other full time endeavor right?

KATRINA MADEWELL:  Yeah well they probably look at the careers to cause at the bottom of your tax return you are always putting what your job title is right so don’t you think that they look at those things?

DARRIN T. MISH:  That’s true. And the IRS actually uses that number so choose wisely when you decide to define yourself ok so choose wisely cause the IRS uses, there’s a number I think it’s called a SIC code, there’s a number on the bottom for every occupation profession and they use that number to decide how reasonable your tax return is.

KATRINA MADEWELL:  Ok so we are going to talk about that when we come back, it wasn’t on the outline but that is so relevant I think anybody listening to the show would grab some value out of that what do you think Pat agreed?

PAT GEORGE:  I agree a 100%

KATRINA MADEWELL:  Alright so listen up we are going to give you a code we will be back in a minute.

KATRINA MADEWELL:  Welcome back you are listening to the IRS Solution Attorney show we hope we are entertaining you today and you are enjoying your ride to wherever you are going.

DARRIN T. MISH:  So we were talking about the Material Participation test and passive, you know passive loss rules with regard to real estate investors and there is a whole bunch more after you pass you know the 50% and the 750 hours test then there is a whole bunch of more elements before you can decide, the course can decide or the IRS can decide if you are actually an active real estate investor.  It’s not good radio to go through all the rest of those requirements so you just look them up ok but….

KATRINA MADEWELL:  Post them on your site.

DARRIN T. MISH:  Yeah there’s, I’m sure we have information about that you just go to the site getirshelp.com and you can do a search on this kind of topic and you should be able to find it.

KATRINA MADEWELL:  It’s like an IRS encyclopedia over there.

DARRIN T. MISH:  Yeah it’s one of the things that was interesting in that audit that we were talking about in the first and second segments where the people had the rental properties in Oklahoma and Texas but lived in Florida and were writing off significant losses for travel and what not, expenses for travel which generated losses was, the problem that they had made is that they didn’t a proper grouping election, now here’s what that means so IRS wants you to treat each rental property like its own separate indistinct little business ok so then you, so some rentals you would have, you might have a loss or some you might have a gain and so on and so forth and you are not allowed to group them and have them considered as one activity unless you file something called a grouping election.  Now that doesn’t seem so unfair as I explain it right…

KATRINA MADEWELL:  Mm hmm

DARRIN T. MISH:  You have to make a one-time grouping election, here’s the problem there is no form, there’s no form for that…

KATRINA MADEWELL:  Seriously…

DARRIN T. MISH:  There’s no format for that, there’s no formal way to do it and if you make your grouping election then you better be able to prove that you made it.  Now my advice to this couple was going forward what I want you to do is make a grouping election every single year.

KATRINA MADEWELL:  So they just generally write this on their tax return?

DARRIN T. MISH:  Yeah you have to do…

KATRINA MADEWELL:  I am doing a grouping election.

DARRIN T. MISH:  Yeah you have to do like a cover letter and you can’t E-file this because there’s no form.

KATRINA MADEWELL:  Yeah but the IRS is so dumb they might lose it.

DARRIN T. MISH:  Ok now just so everybody knows….

KATRINA MADEWELL:  I’m just saying.

DARRIN T. MISH:  That was Katrina Madewell that said that…

KATRINA MADEWELL:  That was me.

DARRIN T. MISH:  That was not…

KATRINA MADEWELL:  Look I’m just saying people have mailed stuff and the IRS ironically just can’t find anything you cannot say that has not happened.

DARRIN T. MISH:  That kind of, so that kind of lends a, leads us back to the comments that I make in the past that if you do mail something to the IRS you are going to want to make sure you keep copies right and people always say well how long should I keep the copies, my answer, forever…

KATRINA MADEWELL:  Forever.

DARRIN T. MISH:  I mean digital storage is cheap now so you should just go ahead and keep it forever and if I was going to be making a grouping election every year because I had passive real estate losses I would keep a copy obviously forever but then I would also have proof of certified mailing as well.

KATRINA MADEWELL:  So you don’t think you should just type that on one of those lines in the tax forms?  You know you could just type itemized deductions.

DARRIN T. MISH:  I don’t think that would work, I think you need to make a separate grouping every year and I think you need to do some research about how it should be formatted and what it should say…

KATRINA MADEWELL:  And probably talk to a CPA about that to.

DARRIN T. MISH:  You probably should talk to somebody who specializes in representing real estate investors.

KATRINA MADEWELL:  Yes.

DARRIN T. MISH:  You know I’m not even going to say that I’m the best person to do your grouping election in fact I told that couple, I’m not the guy to do it I just, we’ve done the research and we know you have to had done it and you didn’t do it and we can’t prove that you did it and that was the law that changed from their first audit to their second audit.

KATRINA MADEWELL:  Gosh.

DARRIN T. MISH:  There was a law…

KATRINA MADEWELL:  And that’s all self-prepared returns like that whole time?

DARRIN T. MISH:  Yeah and so they were pretty good about doing the self-prepared returns because they had gone through the first audit and it went fine and then 7-8 years later whatever they go through a second audit and they are like we are going to be fine we have all these logs, we have all this stuff and what they weren’t ready for was this grouping election regulation or I don’t know if it was statute or not but it was passed and they hadn’t complied…

KATRINA MADEWELL:  I guess I’m smart enough to know that I would not try and tackle that myself like do my own returns leave that up to the pro.

DARRIN T. MISH:  Well there’s lots of people who could probably do their own returns.

KATRINA MADEWELL:  Simple returns.

DARRIN T. MISH:  If you are self-employed, if you have real estate, if you have corporate interest, if you have capital gains, you know if you have anything other than wages you probably should.

KATRINA MADEWELL:  Like my husband could probably file, if he was by himself he might be a simple on your own filer but I complicate everything so.

DARRIN T. MISH:  You are giving him lots of credit.

KATRINA MADEWELL:  I know.

DARRIN T. MISH:  He might be able to do it.

KATRINA MADEWELL:  He might.

DARRIN T. MISH:  Oh goodness gracious…

KATRINA MADEWELL:  But you know that’s a simple W-2 wage earner form compared to any self-employed tax complications.

DARRIN T. MISH:  Absolutely.  So before the break we were also talking about SIC codes right we were talking about the codes that every occupation profession has a number and you put that number at the bottom of the tax return and it helps the IRS computer decide if your return falls within those norms…

KATRINA MADEWELL:  I’m trying to remember if you could physically see that number or if it’s like an internal thing.

DARRIN T. MISH:  Yeah you can definitely see the number.  Usually the tax preparer or the tax payer if they are doing their own returns kind of picks, you know looks it up and picks the number.  So I look at the SIC code for disc jockey and that’s 792999 and Pat Georges situation it’s actually a sick code it’s a s-i-c-k code but anyway so that’s 792999 for a disc jockey but that’s really only a self-employed disc jockey I think you would have to look that up.

PAT GEORGE:  I know it’s been awhile since I played so I don’t know if I’m employed anymore, self-employed you know.

KATRINA MADEWELL:  Hot dog cart.

PAT GEORGE:  Add that to I’ve been too busy doing other things, I been too busy doing talk shows.

KATRINA MADEWELL:  He used to do the hot dog cart but he gave up on it.

DARRIN T. MISH:  Now I guess radio producer would be a different SIC code right?

KATRINA MADEWELL:  Likely.

PAT GEORGE:  Yeah if I didn’t work for a big company that already took care of all of that.

DARRIN T. MISH:  Exactly, withheld exactly the right amount of tax so you could have a big fat tax refund so you can go on like a cruise at the end of the year.

PAT GEORGE:  You know since day one I have always no matter what claimed zero on everything, is that good or bad?

KATRINA MADEWELL:  They’re going to take more right?

DARRIN T. MISH:  It’s not necessarily bad it’s what you are doing is if you are generating a refund of thousand dollars or two thousand dollars or something every year, what you are doing is you are just giving the government an interest for your loan while they are withholding extra money which is fine, some people have trouble saving money and some people just like that feeling of getting that quote free money at the end of the year.

KATRINA MADEWELL:  Or maybe they like the feeling of not writing a check to the IRS.

DARRIN T. MISH:  Yeah I like that feeling to but not enough to have them over withhold.

KATRINA MADEWELL:  But you look at that all day not everyone does.

DARRIN T. MISH:  That is true.  I look at big numbers at the bottom of tax returns all day everyday so it’s not necessarily bad it’s just you are giving the IRS an interest free loan to hold your money while they are over withholding.

KATRINA MADEWELL:  But I you know I never would have thought to really pay attention to cause some professions are a little more complicated and you could probably file under a couple of different brackets so depending on what you’re writing off and what that return looks like you might want to pick a different code over another.

DARRIN T. MISH:  Yeah I’m sure there’s, we were talking about before the break with certain SIC codes be audited at a different rate and what not so if you were in a profession that wouldn’t normally require a lot of travel, I’m trying to think of one, Librarian I don’t know you are a self-employed Librarian somehow, I just picked something that you are pretty much going to go and sit in a building right.  So if you had $77,000 worth of travel as a librarian it might be kind of hard to justify.

KATRINA MADEWELL:  Well I had a story with that.

DARRIN T. MISH:  Ok.

KATRINA MADEWELL:  I always have a story for everything right that’s why the transcripts are so long but anyway so I had this account before, I might of shared this before but she, I had some write offs for travel expenses cause I visit Pierce 4 times a year, my mentor is in San Diego so I do travel for business for different things like accelerate for Dave Ramsey’s next month so I will be going to that and so I have travel expenses right, hotel, flights that kind of stuff and so this tax professional that I had, it’s not the one that I have now, before she like when I gave her all my stuff she’s like how do you have so much travel expenses you are a realtor and I just looked at her and I said I don’t think you get it you may have done some tax returns for other agents but I don’t know that their returns look quite like mine.

DARRIN T. MISH:  Well there’s another issue to is that as your income goes up then your expenses will go up and sometimes your expense ratio goes up and somehow the IRS can kind of keep track of all of this stuff so that you know if you are a 7 figure earner as a real estate agent your return is going to look way different then if you are making $50,000.

KATRINA MADEWELL:  Right.

DARRIN T. MISH:  It’s going to look way different because if you are earning $50,000 gross as a real estate agent you are not going to have a lot of travel expenses you are going to have a lot of car and truck expenses right…

KATRINA MADEWELL:  Mileage.

DARRIN T. MISH:  You are going to have some but you probably aren’t going to have a lot of travel expenses because you can’t afford to go travel.

KATRINA MADEWELL:  Exactly.

DARRIN T. MISH:  Now you might be able to get away with it for one year because it could be you just got into it…

KATRINA MADEWELL:  Or it could be the annual like they have state, local, national conventions.

DARRIN T. MISH:  Could be…So the IRS computer has, they have, they calculate what are DIF scores and the DIF score there is one for every line on the tax return for every profession, every occupation ok so and they don’t tell us what they are but the IRS computer can kind of tell on every line of every return if that figure falls within the norms for that industry.

KATRINA MADEWELL:  There’s probably a little bit of a buffer I would imagine right?

DARRIN T. MISH:  I’m sure it’s pretty wide you know because they do enough audits in every industry that they know ok that person, like Katrina is going out to San Diego once a quarter and that’s an allowable expense because she’s doing, she’s making things happen versus…

KATRINA MADEWELL:  Will I connect with peers and mentors there; I get referrals from that so it does generate business right oh yes.

DARRIN T. MISH:  Well I do the same thing I have to go to Phoenix 3 times a year and I’m supposed to be in California right now but I’m so devoted to the show.

KATRINA MADEWELL:  Oh you ditched it.

DARRIN T. MISH:  So here I am sitting here in St. Petersburg instead I’m supposed to be in Napa Valley right now.

KATRINA MADEWELL:  It’s too bad we couldn’t time that out a little bit differently we could maybe do a remote from somewhere else, you would have to get up really early.

DARRIN T. MISH:  Except we would be live…

KATRINA MADEWELL:  6 am.

DARRIN T. MISH:  6 am from Napa Valley California…

KATRINA MADEWELL:  California time.  So…

DARRIN T. MISH:  The odds of me getting up at 6am after spending the night in Napa Valley are pretty much zero…

KATRINA MADEWELL:  I would have to have a room right next door, get up Darrin get up.

DARRIN T. MISH:  Good thing it’s not video.

KATRINA MADEWELL:  Exactly.  So I guess we should answer a question from a few of our listeners.

DARRIN T. MISH:  Ok.

KATRINA MADEWELL:  Because your train wreck might be a little long this week maybe.  So we have a question from Irvin he wants to know how much does an unmarried dependent student have to make before he or she has to file an income tax return?

DARRIN T. MISH:  Way to put me on the spot.  Unmarried dependent student huh…

KATRINA MADEWELL:  Yes so not married, dependent student would mean the parents were likely claiming them so this sounds like I don’t know I have a, I mean my daughter is 16 but I imagine if she was 18 and were still claiming her and she was in college and she’s making money because she is working at I don’t know Hollister or some place in the mall, I think that’s what Irvin wants to know do they have to file a tax return or is there a certain amount of income?

DARRIN T. MISH:  So the short answer is if she has a gross income of less than $6100 then she doesn’t need to file as long as it’s wages, now if it wasn’t at Hollister working at the mall if it was like one of my first jobs which was putting up open house signs or…

KATRINA MADEWELL:  Sign spinner.

DARRIN T. MISH:  You know, yeah…

KATRINA MADEWELL:  My daughter said one of her friends is a sign spinner.

DARRIN T. MISH:  We didn’t have those back when I was a kid but I used to put up those, you know the real estate signs that direct you to the new development so that you could go see the new homes and those go up on Friday’s and they come down on Sunday’s because it’s technically, it’s technically, it’s also against code enforcement so….

KATRINA MADEWELL:  Yes… Weekend traffic.  No they are considered temporary markings.

DARRIN T. MISH:  Well where I lived it was against code enforcement so they kind of had like an inside deal that as long as they came down on Sunday they were fine…

KATRINA MADEWELL:  People like me have fights with the county about that.

DARRIN T. MISH:  Well I was an independent contractor and so I was going to get 1099’d and so that would be different, the limit there would be $600 not $6100.

KATRINA MADEWELL:  Oh interesting.  All those little tidbits alright we will answer another question from another one of our listeners when we come back in just a minute.  You are listening to the IRS Solution Attorney show if you’ve got a quick question now’s your time to call in 888-404-1010, 888-404-1010 and if you don’t want to talk about it on air you can call Darrin directly at 888-get-mish.

DARRIN T. MISH:  Or visit the website at getirshelp.com

KATRINA MADEWELL:  And what does 888-get-mish translate to?

DARRIN T. MISH:  888-438-6474, 888-438-6474.

KATRINA MADEWELL:  We will be back in a minute.

KATRINA MADEWELL:  Welcome back you are listening to the IRS Solution Attorney show thanks for hanging out with us.   Mr. Darrin T. Mish is your host and I’m your co-host Katrina Madewell.

DARRIN T. MISH:  That would be me.

KATRINA MADEWELL:  Mr. Darrin Mish.

DARRIN T. MISH:  Mr. Darrin Mish.

KATRINA MADEWELL:  Just in case you couldn’t tell with the voice, just saying.

DARRIN T. MISH:  Didn’t we have another question?

KATRINA MADEWELL:  Yes we have one more question from Jay he wants to know can I receive a tax refund if I’m currently making payments under an installment agreement or payment plan for a prior year’s Federal taxes?

DARRIN T. MISH:  No.

KATRINA MADEWELL:  Yeah that’s the short answer sorry Jay.

DARRIN T. MISH:  Yeah you’ve got to take care of the prior balance before you are entitled to a refund now let’s say you were on an installment agreement and you owed $2,000 and your refund was $3,000….

KATRINA MADEWELL:  Then you would get a little refund.

DARRIN T. MISH:  Then you would get your $1,000 refund but they want to get paid and actually it’s in your best interest to get them paid anyway right…

KATRINA MADEWELL:  Yep, yep….

DARRIN T. MISH:  Because all a long interest and penalties are continuing to incur, sometimes not that bad sometimes really bad, it just kind of depends on the balance and how old they are and the situation.

KATRINA MADEWELL:  Just knock it out, get rid of it.

DARRIN T. MISH:  Yeah absolutely.

KATRINA MADEWELL:  Alright so we got a couple of headline stories that we are going to talk about today to.  One of them is the IRS Tax Levies caused hardship for Social Security recipients, this is an interesting story with our elderly.

DARRIN T. MISH:  So the IRS can go ahead and levy your Social Security up to 15% is the first threshold, 30% is the second and now the IRS is maintaining they can levy all of your Social Security benefits for retirement, we are talking about retirement, we are not talking about disability, Social Security Disability payments just retirement.

KATRINA MADEWELL:  That’s still kind of wild.

DARRIN T. MISH:  But that’s their position I…

KATRINA MADEWELL:   Like why in heck would they levy that though, cause are they even, I mean they are probably not even filing a tax return when just getting Social Security are they?

DARRIN T. MISH:  Well, think about it those Social Security payments are Federal payments right…

KATRINA MADEWELL:  Yeah…

DARRIN T. MISH:  And so it’s very easy for the Federal government to levy them, so what they do is take the percentage out and they send the recipient whatever it is less then what was levied.  Now it’s not that surprising to me that the IRS is doing this to retired people and that it’s causing hard ship because if you are living on Social Security, let’s say you are living on your $2500 a month Social Security check which would be pretty good, pretty good Social Security check.

KATRINA MADEWELL:  Yes.

DARRIN T. MISH:  But let’s say it’s $2500 and that’s your sole income and you owe the IRS I don’t know pick a number you know…

KATRINA MADEWELL:  How would that even happen?

DARRIN T. MISH:  Well what can happen is that sometimes there’s early withdrawals from 401k’s retirement accounts right, that happens a lot, the other thing that happens is that sometimes people just don’t pay the taxes on their taxable retirement distributions and then they just end up running you know tax debts and, I can’t say it’s entirely the IRS’s fault but if you find yourself in that situation you are either want to go seek help from a tax professional or you are going to want to call the IRS and explain to them the situation and try to get that levy stopped because if you can demonstrate that it’s constituting an economic hardship you can get the levy stopped.  Now what does that even mean, I just used one of those fancy big phrases right?  Economic hardship means an inability to meet life’s basic living necessities, like food, clothing, shelter, medical care, transportation….

KATRINA MADEWELL:  Housing, food.

DARRIN T. MISH:  Those types of things and if you can demonstrate that it’s causing an economic hardship they have to stop the levy, so I would submit to you that most people who are living exclusively on Social Security should not be having levies on them because almost by definition it’s constituting an economic hardship but that’s one of the reasons we do the show is to make sure that people know these things so they don’t suffer needlessly, there is so much fear wrapped around the IRS even amongst lawyers ok.  I represent a bunch of lawyers, I had lawyers in my office as prospects this week.

KATRINA MADEWELL:  Yes.  All your clients are lawyers and real estate agents.  We’ve already determined that.

DARRIN T. MISH:  Represent lots of lawyers and part of the reason is everybody’s afraid of the IRS and it’s really not that big bad of a thing if you know what the, if you know the system like I do.

KATRINA MADEWELL:  And so we have one more story so TIGTA, we’ve talked about TIGTA, so you have to explain who they are but the TIGTA reports and the IRS sends lien notices to the addresses.

DARRIN T. MISH:  Yeah so TIGTA is the, it’s kind of like the Secret Service of the IRS but they are also like the Internal affairs of the IRS so it’s kind of a bizarre situation, the protect the IRS employees from harm from the public, crazy people and that kind of thing but they also are the Internal affairs bureau’s.  It creates an interesting dynamic between the field level people of the IRS  and TIGTA.  But anyway, TIGTA did this investigation, they determined the IRS is sending liens to wrong addresses on a regular basis, I think it’s a computer problem, I don’t think it’s intentional but it is seriously a problem because they have got to send the lien to the last known address otherwise how are you going to know that a lien was filed against you, particularly if you move state, change states it’s going to be kind of hard to know that a lien was filed against you.

KATRINA MADEWELL:  Right on time.

DARRIN T. MISH:  So it’s about that time it’s time for the IRS train wreck of the week.  This is the segment of the show where we talk about somebody who came into the office and frankly there IRS situation was a train wreck and after they got involved with us we made sure that they left smelling like a rose.

KATRINA MADEWELL:  Fixed them all up.

DARRIN T. MISH:  Yeah exactly.  So in this case we had an individual who, I love these cases because they are near and dear to my heart, I’ve never served in the Military but I’m very proud of those who did make the sacrifices to serve in the military particularly if they went to combat and helped protect our freedoms and our way of life here.  This particular gentleman as I recall was a combat veteran and then after he came back from overseas in the mid-east, I think it was multiple tours, he came back and he went to the police academy became a police officer here in Florida and then ultimately became a swat team member so I mean this is somebody who has really in my opinion contributed a lot to our safety and security here in the states, he’s done a lot of hard work for not a lot of money…

KATRINA MADEWELL:  Yes we owe our military people and our police officers a big hats off.

DARRIN T. MISH:  Absolutely all first responders, firemen are kind of unheralded hero’s but if my place is on fire or if my, if I have a family member stuck in the house I want a firefighter to come you know and pull them out cause I don’t know how to do it, I have no idea, I would probably do it but I would  die so anyway  this particular individual ended up owing $32,778 to the IRS, honestly I cannot remember why he owed the money, it’s not even that important to me why he owed the money, I think it was a retirement withdrawal, early withdrawal from a retirement account kind of thing, I do know that he was in law school, he’s actually in law school right now because after his career, his 2 careers in the service and as a police officer he decided that he wanted to make that step and go to law school and become a lawyer and so…

KATRINA MADEWELL:  He’s probably going to have a GI bill so he should.

DARRIN T. MISH:  Yeah I don’t know exactly how that benefit works like.

KATRINA MADEWELL:  You get benefits like they serve and the pay for college.

DARRIN T. MISH:  His income is rather low right now because he’s in law school right now and I can tell you that law school is a very rigorous course of study and long story short we filed an Offer in Compromise that’s where you make a deal to settle for less, we ended up settling this case for $2,988 so just a little bit less than 10 cents on the dollar so good for him and I have to tell you that one of my favorite things about this job is making those phone calls after the offer is accepted, I make all those phone calls personally when I get the formal acceptance and I get to tell the people that their nightmare is over and that their problems with the IRS are gone hopefully for good.

KATRINA MADEWELL:  So how do you start those calls just curious.

DARRIN T. MISH:  There’s a little devil that sits on my shoulder that almost every time wants to like, wants to act like things have really fallen apart and I’ve never done that.

KATRINA MADEWELL:  Oh you should.

DARRIN T. MISH:  Because it would be to…

KATRINA MADEWELL:  It would be so highlighted.

DARRIN T. MISH:  It would just be to cruel to do that so I usually…

KATRINA MADEWELL:  No but they would be even more excited after they got off the phone with you see I would so do that.

DARRIN T. MISH:  I just don’t have, I just don’t have the nerve to do that so I typically just say hey I’ve got great news for you let me tell you what’s going on and by the end of the call a lot of times they are crying you know it’s been it’s that, it’s that much of an emotional release because if you’ve had these things particularly hanging over your head for you know decades and to have it finally be over that’s really, it’s really an emotional release for a lot of people.

KATRINA MADEWELL:  Well you are listening to the IRS Solution Attorney show and if you find yourself in a position where you need some help with the IRS where you get an audit, Darrin’s your guy, you want to call him at 888-get-mish.

DARRIN T. MISH:  That’s 888-438-6474, 888-438-6474 or you can visit our website at getirshelp.com, Twitter, Instagram, Facebook.

KATRINA MADEWELL:  @darrin_mish.

DARRIN T. MISH:  All those things you can reach us there, podcasts, app.

KATRINA MADEWELL:  We will be back next week.  Thanks for hanging with us.

DARRIN T. MISH:  Today we are out.

KATRINA MADEWELL:  Yeah, yeah, yeah.

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