DARRIN T. MISH: Welcome welcome welcome. This is the IRS solution attorney, Darrin T. Mish. Joined today in the studio by my lovely cohost, Katrina Madewell. Click here to watch or read more information on IRS Back Taxes.
KATRINA MADEWELL:That’s me, welcome to the show.
DARRIN T. MISH:How are you doing?
KATRINA MADEWELL:Doing great, how are you today?
DARRIN T. MISH:I’m doing pretty darn good as a matter of fact. We have just an incredibly cool IRS train wreck of the week in our last segment today so you’ll want to make sure that you stay tuned to hear that. It’s always fun to share war stories and share happy endings for sure.
KATRINA MADEWELL:That’s the best. The train wreck of the week, it’s my favorite part. That’s why we got to save it until the end.
DARRIN T. MISH:Yeah, that’s why…that’s my favorite part of the show as well. Today, what I think we’re going to do is we’re going to talk generally about the consequences of having IRS problems and state tax problems and just kind of like a high-level overview on what you do. What you should do if you have an IRS tax problem or a state tax problem. Here in Florida where we’re recording, we don’t really have state income tax. Not for individuals anyway. But the show goes out on a podcast to all 50 states and we represent clients in all 50 states so it should have some overlap and help some people around the country.
KATRINA MADEWELL:Absolutely. Don’t forget to mention that you can help anybody in any state. Just because we’re here, you represent people everywhere.
DARRIN T. MISH:It’s always fun to represent somebody on the west coast because of the time difference and heaven help us if they’re in Alaska or Hawaii because there’s a 5 or 6 hour time difference depending on the time of the year. So it can be a little bit hard to coordinate talking on the phone and stuff, but in this day and age most people, even if they’re local, come into the office one time and then that’s pretty much it. We do the rest by phone, fax, email.
KATRINA MADEWELL:Skype. Hangout.
DARRIN T. MISH:Skype. We actually don’t do a whole lot of live video, but I’m open to it. It’s just most people haven’t quite figured that part out. Most people at home I don’t think have a video camera. Or I guess we could do it Skype.
KATRINA MADEWELL:I don’t know. Most people do it on their phones too.
DARRIN T. MISH:My Ex Pack clients, when they’re in other countries, we do skype quite a bit because I don’t want to pay for a call to Guatemala or Ecuador or whatever. We just do skype to skype. It tends to work out.
KATRINA MADEWELL:In this day and age, why not? It’s what everybody does. It makes sense.
DARRIN T. MISH:I was doing one with a guy about a year ago and he was in Puerto Rico and the bandwidth down in Puerto Ricco it’s just not good so we couldn’t really get it done. In most countries the bandwidth is actually higher than here.
KATRINA MADEWELL:Today’s episode we’re discussing the consequences if you owe the IRS or state taxes.
DARRIN T. MISH:Yeah, you know one of the first things you need to look at or consider is:Did you file the tax returns or not? It’s kind of important because there’s some pretty serious consequences if you don’t file the return. The first thing that comes to mind, it’s actually a crime not to file a tax return. There’s a six year statute of limitations so theoretically you can be criminally charged and you can go to Federal prison. Probably a club med kind of place. Probably not all that bad, but who wants to go to prison? It’s probably a good idea to go ahead and file your tax returns if you can. Most people really can’t. There are people that get kind of twisted up and get kind of hung up on perfection so they think they want to sharpen that pencil and get everything absolutely crystal clear perfect. I think that’s probably a good ideal for most people, but when you’re six years behind, ten years behind, thirty years behind. I don’t think we need to sharpen the pencil and get it exactly right. I think we just need to get close enough.
KATRINA MADEWELL:How does the plan to what you talked about on some of the other shows where if you’re filing these back taxes and you get a refund and you have no penalty but in more cases than not, I imagine people owe. So if they owe, what if they’re looking for deductions to write that amount down. I would imagine maybe that’s what holds them up?
DARRIN T. MISH:Yeah, if you think that you’re not going to woe if you sharpen the pencil and get every single deduction, then yeah, we’re probably going to want to do that. But by far, 80, 90, 95 percent of our clients, they’re going to owe a big fat balance.
KATRINA MADEWELL:So you’re just saying take the hit, whatever it is. The taxes you owe, the penalties, all that jazz and then let you fix it?
DARRIN T. MISH:Yeah, because if you’re going to owe 50,000 or 100,000 or 500,000, are you going to write a check even for the 50,000? Most people the answer’s going to be no. Now if they earn 250,000 dollars a year, or whatever, and they’re going to have to pay, then it’s probably not a good idea to just sort of guestimate your income and your deductions and be conservative and file returns with big large balances. I get that question a lot. People are like well…
KATRINA MADEWELL:I have to find all my stuff.
DARRIN T. MISH:Yeah, they think they got to go find every receipt and stuff. Most people have the fire, flood, hurricane sort of situation.
DARRIN T. MISH:Where there’s some hugely, sometimes legitimate excuse.
KATRINA MADEWELL:Quickbooks crashed.
DARRIN T. MISH:Yeah. I’ve actually had that happen, it’s not fun.
KATRINA MADEWELL:I’ve had to, that’s why I’m laughing.
DARRIN T. MISH:Usually people have a pretty good reason why they don’t have any documentation, but that doesn’t really help in the preparation of the tax return, right?
DARRIN T. MISH:One of the things we can do, and we do do for clients, is we go ahead and get a power of attorney for them, we discreetly, electronically, get the transcript information from the IRS for the client. So one of the transcripts we get are called the wage and income transcripts which are the w-2’s and 1099’s and 1098’s and 5498’s and all these tax forms.
KATRINA MADEWELL:IRS code numbers.
DARRIN T. MISH:Yeah, we get all those tax forms and for some people it just makes sense to go ahead and use that stuff to make the returns. Because remember, and this is not necessarily common sense, but remember all the missing returns have to go back at least six years have to be filed before we can even start to resolve the problem. So if you haven’t filed last year’s return, it’s actually today…well if you haven’t filed 2014’s return by the 15th of October, or after the 15th of October, you have to get that return filed before we can even help you to solve the problem. Does that make sense?
DARRIN T. MISH:So every return going back at least six years has to be filed or we can’t even begin to start to help you. What I would say there is just if you have to estimate, just be conservative in those estimations so that we can get started resolving the problem.
KATRINA MADEWELL:So what happens after October 15th again? Since that’s right around the corner. We’re literally less than a week.
DARRIN T. MISH:Every year, there’s millions of people that miss the extension date, and those returns will be late. If those returns are late, ultimately if they’re unfiled, one of the penalties that comes up is pretty harsh. The failure to file penalty is 5% of the tax amount owed each month. Every month it’s 5%, to a maximum of 25%. If you ultimately, if you never file that return, that’s a pretty steep penalty. If you just file it late, then there’s a different penalty. It’s a half percent, one half of one percent of the tax liability each month. So that’s a huge difference. 5% versus a half of one percent? So there’s a really big difference. It’s important to note, if you don’t file the return in many instances what the IRS will do is they’ll take that wage and income transcript that I was just referring to, and they’ll benevolently go ahead and prepare a return for you. Interestingly enough…
KATRINA MADEWELL:I never knew that until I started hosting the show with you. I had no idea that the IRS would actually file a return for you.
DARRIN T. MISH:Some taxpayers think that’s kind of a cool idea. I saved the money and the tax brackets correct.
KATRINA MADEWELL:How do you know if they do that anyway?
DARRIN T. MISH:You start getting notices for a tax year you never filed a return for.
DARRIN T. MISH:And usually it’s an odd popping number that makes your head want to explode.
DARRIN T. MISH:That’s a substitute for a return and sometimes in the business we call it an SFR. If you have a substitute for return, those really excessive penalties, the failure to file 5 percent, the tax liability for each month, those get applied. Now, there’s a happy ending for the substitute for returns. If you can file an original return after the substitute for return is filed, then the IRS 99 times out of 100 will accept your return. Unless it’s ridiculous. Unless you look at the return and it like makes your face turn red and you start laughing, then they’ll go ahead and accept that return. Then they’ll abate the excess tax interest and penalties. So sometimes it’s a good idea to file an original return and sometimes it just doesn’t matter.
KATRINA MADEWELL:So sometimes you deal with the problem head on. Let’s figure out what we can settle this train wreck for and move on.
DARRIN T. MISH:But the solution is going to be to file an offer in compromise, which we talk about on this show a lot. An offer and compromise is where you make a deal. You try to make an offer to settle for less. If you’re going to file an offer anyway and you have a bunch of substitute for returns. Let’s say you owed 200 grand. But if you filed original returns, you’d cut it down to 100 grand. Does that make any difference for most people?
KATRINA MADEWELL:Not really, not at that point.
DARRIN T. MISH:It’s sort of a rhetorical question. No, it doesn’t really matter because most people aren’t going to stroke the check for a 100 grand, so why are we going through the extra expense, effort, emotional upheaval and all that to file those returns. So you don’t really need to do that. You would just go ahead and file your offer and compromise and then you kind of move on. If you filed the offer and it gets rejected for some reason, then you’re going to want to go back and kind of reconsider. Hey, maybe we should file the original returns and we can move on from there. There used to be a reason why you would always file an original return and that was because, and we can talk about this more later, perhaps. Where some taxes can’t be discharged in bankruptcy and it used to be we would file the original return, we would wait a couple of years and those would be eligible for bankruptcy. But there’s some bad case law out there now that says once an SFR, always an SFR. So once a substitute for return, it’s always kind of considered a substitute for return so it’s not going to be discharged going into bankruptcy.
KATRINA MADEWELL:Did something change in the tax law or that’s just kind of the way stuff went down?
DARRIN T. MISH:We have kind of an interesting challenge in our country right now and that is judges have a propensity to make law. They read the statute and they decide what they want the outcome to be and they go ahead and reason sort of backwards. I’m not sure I’m even supposed to say that publicly. It is what seems to be happening. There was some case law that came down a couple years ago and it’s really poorly reasoned actually. The judge just doesn’t like the idea that taxes can be discharged in bankruptcy. Since he’s appointed for life and his check comes from the US Treasury, he decided that these tax cheat sort of people aren’t going to get the benefit of a discharge.
KATRINA MADEWELL:What do they do at that point? They have to take it to federal court?
DARRIN T. MISH:This case actually was a bankruptcy case and then bankruptcy cases sometimes get appealed to district court and that was a district court opinion. Now, the good thing about it is district court opinion is not binding on the entire country. It’s not really binding anywhere. It might be sort of persuasive in the district in which it was decided, but there’s some…what happens is the government drags this argument out whenever they want to use it and then what happens is in the context of the bankruptcy, in order to fight that determination then you have to do what’s called an adversary proceeding. So it’s like a trial within the bankruptcy and most people can’t afford to do that.
KATRINA MADEWELL:How costly is that? Just curiosity? Rough idea of range and price.
DARRIN T. MISH:Typically most guys are going to charge you hourly and it’s going to run 5-10 grand probably. It might be worth it for some people, but the risk of not winning is substantial so most people aren’t going to do that.
KATRINA MADEWELL:So, what if tax returns are filed on time, but maybe they just didn’t have the money to pay them.
DARRIN T. MISH:Then we’re going to have to go through a variety of possibilities for solutions. If tax payer sort of ignores the balances, which is pretty common in my practice.
KATRINA MADEWELL:Like, whoops, don’t have the money, I think I’ll just not take care of that right now.
DARRIN T. MISH: Yeah, there’s a bunch of bad stuff that can happen, Tax liens can happen. The government can file a federal tax lien, typically in the county where you own property or where you live.
KATRINA MADEWELL: So, it’s better to not file and wait, is that better? I’m just saying, I’m just playing devil’s advocate and if I think I’m going to owe the IRS 10 or 15 grand I just don’t have the money and I want to take care of it, but I don’t have the money right now. Should I wait to do everything or just…let that tax fall on me?
DARRIN T. MISH:It’s so cool having a non-lawyer cohost because she asked me…If I should publicly tell the world they should commit crimes. No, it’s probably not a good idea.
KATRINA MADEWELL:Tell me what I should say.
DARRIN T. MISH:No, it’s good radio, you know. You got to ask the question.
Jeff:That would be professional suicide on your part, wouldn’t it?
KATRINA MADEWELL:So, I’m going to guess, I could be wrong, you can correct me, but I would say if I owed the IRS 20 grand I didn’t have the money to write a check, I would probably wait to file it and wait to handle all of it until I could deal with it. That’s what I would do.
DARRIN T. MISH:Well, remember, though, the late filing penalties are racking up. Not substantially but they’re still a half of one percent up to a maximum of 25 percent.
KATRINA MADEWELL:But the alternative is that they can lien my stuff and file a federal tax lien
DARRIN T. MISH:Yeah, there’s a happy medium there somewhere. I’m not exactly sure where it is. When the IRS files a federal tax lien, people, a lot of people, think that the tax lien attaches to the address that they live at. So I get a lot of comments where people are saying, that’s not even my house, that’s my mom’s house, or my Grandma’s house, or whatever. The tax lien technically attaches to all of the taxpayer’s property. Real and personal wherever it may be. That sounds kind of fancy, right? What’s real property? I think you know.
KATRINA MADEWELL:I know how we describe it in real estate is if you were to take the house and turn it upside down. Anything that would fall to the ground via gravity is personal property. Anything that would stay attached is real property.
DARRIN T. MISH:I love that definition, I’ve never heard that. That’s awesome.
KATRINA MADEWELL:But now it makes sense. When I walk into these places and they have these fancy built-in’s that are screwed into the wall that they plan on taking, or like I sold this property on Bayshore and she had 200 year old french drapes and shutters that were old, gates that were literally nailed to the window because that was part of the decor, we have to explain that that is actually real property unless you disclose it otherwise.
DARRIN T. MISH:Aren’t they fixtures?
KATRINA MADEWELL:That’s real property. It’s attached to the property. If it’s nailed into the wall and it’s not something that would fall to the ground, that’s personal property.
DARRIN T. MISH:I don’t know how this came up in my family, but I have a little girl. We were talking about moving. She walked throughout the house and she says, I want to keep that chandelier and that chandelier and that chandelier and I had to break it to her that those are probably staying, honey. There was some crying.
KATRINA MADEWELL:You can take them, you just have to either A-take them down before you show the property or B – disclose that right away.
DARRIN T. MISH:Yeah, I told her, you know that could I guess could be part of the contract. That might make it kind of harder to sell the house.
KATRINA MADEWELL:Usually it doesn’t hold it up for that kind of stuff.
DARRIN T. MISH:So, the tax lien attaches to real and personal property wherever it may be. Technically it attaches to the socks in your drawer. Does the IRS want your socks?
KATRINA MADEWELL:Ew, no.
DARRIN T. MISH:Probably not. Especially if they’re not clean. It attaches to real property so that’s real estate. That’s your house and stuff. The address on the lien is not really operative. Not so much. It doesn’t attach…
KATRINA MADEWELL:That’s just the mailing address and the return. Isn’t it? Isn’t that where they mail it?
DARRIN T. MISH:Yeah, it’s just your last known address. This comes up quite a bit, it’s kind of a cool little loophole and you know how I like loopholes. If they file the tax lien in either the wrong county, like the county where the real property is not located, or if they just fail to file a tax lien in a county where real property is located, then it doesn’t attach to that real property. So, let me give you an example. You have a primary residence in Hillsborough county, they filed a lien there and then you have a beach house in Pinella’s county and they either don’t know about it or they just forget and they don’t file the tax lien over in Pinella’s county, it doesn’t attach. That house is actually freely conveyable in Pinella’s county and the beach house, you can sell it and there won’t be a tax lien.
KATRINA MADEWELL:So it won’t convey to that property, but the one in the county where it is, it does.
DARRIN T. MISH:Right. Sometimes it happens, you know, there’s counties, there’s communities are split, there’s a county line running down the middle. Lutz is a good example. It could be in Hillsborough County, it could be in in Pesca County.
KATRINA MADEWELL:This would be a great one for the title person to chime in because I’m thinking about this with my real estate brain and when they do a title search they’re going to look for that kind of stuff because they look for judgements too and they usually want you to knock them out.
DARRIN T. MISH:That’s exactly why the rule is the way it is. That’s why there’s case law that says no, no, no, the tax lien has to be filed in the correct county because otherwise you wouldn’t be able to convey a good title. Right? You can’t expect the title researcher – I’m not sure what the term is for that person – but the person researching the chain of title to check for liens in every county in the United States? And that would be ridiculous. So the people that live in those counties where they accidentally file the lien in the wrong county, they just luck out. We had one case where ultimately we settled it with a bankruptcy and they lived in Sarasota and they filed the lien in Hillsborough. There are two or three counties in the middle. They had never had lived in the county where they filed the lien, it was just a boneheaded mistake. Filed a chapter 7 and completely wiped out all the tax liability, the lien did not survive the bankruptcy and they were pretty happy campers.
KATRINA MADEWELL:That can be a pretty hefty bill in some cases, too.
DARRIN T. MISH:Oh, yeah, for sure. Its basically saved the equity they had in their house from the tax bill.
So, I think we’re about to break and when we come back, we’re going to go ahead and talk about a couple more solutions that come up with resolving IRS tax problems and we’re going to talk about some really fun new stories this week.
KATRINA MADEWELL:Hang tight, we’ll be back in a minute.
DARRIN T. MISH:Welcome back here at the IRS solution attorney. Something kind of unusual happened at the break which is kind of fun. The real fun actually occurs at the breaks. If you want to go ahead and watch us live, you can always watch us live when we’re taping at wtan.com.
DARRIN T. MISH:There you go. Or Periscope.
KATRINA MADEWELL:By the way, you’re listening to Mr. Darrin Mish. He’s our hostess with the mostest. Host with the mostest.
DARRIN T. MISH:Absolutely.
KATRINA MADEWELL:I’m your co-hostess.
DARRIN T. MISH:I’m just learning this radio stuff. I’m Darrin Mish the IRS solution attorney. Something unusual happened at the break and that was Jeff, our producer, who you can’t see if you’re watching us live, actually had some really good questions about who has to file and things like that so I told him, hey let’s wait until we’re back on the air so we can go ahead and answer those.
JEFF:I have the face for radio, that’s why the camera’s not on me. I should be outside doing this. The question I asked, who has to pay taxes? Who doesn’t have to pay taxes? Who is exempt from paying taxes? Do people on disability have to pay taxes? And who has to file and who doesn’t have to file?
DARRIN T. MISH:Ok, so, for the record…
KATRINA MADEWELL:And age, that one probably comes up a lot too.
DARRIN T. MISH:For the rest of the show we’re just going to go ahead and answer that question. But no, all joking aside, let’s kind of break that down. If you have more than 400 dollars, it used to be 600 dollars, but I just looked it up, it’s 400 dollars now, in self-employment income. So 1099 type income. Then you’re supposed to file a tax return. Sort of interesting. 400 bucks is a pretty low threshold.
JEFF:Where did they come up with the 400?
DARRIN T. MISH:Who knows with the IRS.
JEFF:Who determines this arbitrary number?
KATRINA MADEWELL:Does it have to do with the 1099s, they have to issue them for that dollar amount?
DARRIN T. MISH:I think you have to issue a 1099 if you’ve paid out over 600.
KATRINA MADEWELL:That’s what I thought.
DARRIN T. MISH: So I’m not really sure why there’s a discrepancy between 4 and 600. Generally speaking to answer that question is congress passes statutes and then the congress has allowed the IRS to promulgate regulations. Interestingly enough, regulations are not actually law. So it’s debatable whether or not you actually have to follow them. However, that’s an uphill battle. What happens is they, congress will pass a big, broad law like Obamacare, and in the Obamacare example, the IRS published tens of thousands of pages of additional regulations. So all those have to be fought out in court ultimately if people have challenges to them. So I don’t know how they came up with 400 versus 600 versus 6,000. That kind of thing.
JEFF:That’s income for people who are working? What about people who are disabled?
DARRIN T. MISH:That would be self-employment income. You don’t get a W-2, you don’t have taxes withheld so they really are going to go low for that money because there’s a lot of people in our economy they’re kind of working in a hidden economy.
KATRINA MADEWELL:Like cash passing kind of stuff?
DARRIN T. MISH:Yeah, where they’re just working for cash and they’re struggling to get by so they don’t bother with the whole tax filing thing. My favorite story is the gentleman that came into my office, he was extremely nervous, visibly shaken and he hadn’t filed – he finally disclosed to me he had not filed a tax return since 1960. That’s my favorite story.
KATRINA MADEWELL:And I guess he got a letter, that’s why he actually finally came in?
DARRIN T. MISH:No, actually he was completely off the radar. They weren’t after him because he was working in a pure cash economy.
JEFF:So what made him shaky?
KATRINA MADEWELL:That’s what I’m thinking. What made him pop up out of the blue?
DARRIN T. MISH:Just the pure guilt of 45 or 55 years, whatever it was…
KATRINA MADEWELL:That’s a lot of years with no sleep.
DARRIN T. MISH:Yeah, he finally kind of cracked, you know. It got to the point where it just bothered him so much that he decided to look for help. Now there’s a happy ending because we filed the last six years of his returns. I don’t think he owed all that much money honestly because he wasn’t making that much money. Then we did an offer and compromise and ultimately settled the case and he got to live happily ever after. He was really upset with himself because it took him 50 years to decide to resolve the problem.
KATRINA MADEWELL:And you made it look so easy for him, Darrin.
DARRIN T. MISH:I don’t know about easy.
KATRINA MADEWELL:So if you have disability or social security, you still have to file a return?
DARRIN T. MISH:No. You don’t have to file a return if you’re on social security disability, or if you’re purely social security income, you do not have to file. There could be some reasons why you might want to file.
JEFF:IF you make money while you’re on disability.
DARRIN T. MISH:Yeah, if you have an additional income where tax is withheld.
JEFF:There’s a cap somewhere in there.
DARRIN T. MISH:Yeah, there’s some…
JEFF:2500, 3000. Some ridiculous low amount.
DARRIN T. MISH:Yeah, way to put me on the spot.
DARRIN T. MISH:I’m not exactly sure what that number is.
KATRINA MADEWELL:You got to look that up.
DARRIN T. MISH:Yeah. One good thing about law school is literally I don’t think you know how to do anything when you get out of law school except you know where to find the answers. I think that’s pretty valuable. It takes three years plus an undergrad degree for them to teach you where to look when you have a problem.
KATRINA MADEWELL:And you have to know how to dot your i’s, cross your t’s, and argue. Don’t forget that.
DARRIN T. MISH:Yeah, when I was a young kid, my mother used to always tell me you’re going to go to law school because you can argue with a fence post. And I’m actually not like that really anymore. I think it’s been beaten out of me now after having practiced law for 22 years.
JEFF:If you have a kid everything changes.
DARRIN T. MISH:Yeah, that’s because they argue with you.
KATRINA MADEWELL:You’re argued out. So what if somebody has retirement income, Darrin, and they’re living off interest and annuities or whatever.
DARRIN T. MISH:I think it’s going to depend on whether that requirement income was taxable or not taxable. So if it was some sort of situation where it was like proceeds from a Roth IRA, where there’s no tax implications and they’re not going to necessarily have to file. But if it’s from a traditional IRA where they have to pay the taxes, they’re going to have to go ahead and file. Retirement accounts bring up sort of interesting scenarios where I cannot tell you how many times I’ve seen a large withdrawal from a retirement account that was taxable and they made this huge withdrawal in December. Now, why would that be interesting? Because if they had cut that withdrawal in half and taken half in December and half in January, many times they would have paid way less taxes.
KATRINA MADEWELL:Because that’s how much they took in one calendar year.
DARRIN T. MISH:Yeah, it’s the calendar year. Unless you’re one of these crazy people who’ve elected some different tax year other than the calendar year. For normal taxpayers (inaudible)
JEFF:What is the red flag for the IRS as far as money being deposited?
DARRIN T. MISH:Money being…Well I’ll tell you a story about a case that I’m working on right now.
KATRINA MADEWELL:I do know they follow ten grand because I have friends that track that stuff internally from the banks. I know that’s a hot number, but you probably know a better number.
DARRIN T. MISH:So everybody listening, they’re the ones saying don’t deposit ten grand.
KATRINA MADEWELL:I didn’t. We didn’t.
DARRIN T. MISH:Certainly, if there’s a deposit of currency of over ten thousand dollars, then what happens is the bank is mandated to go ahead and notify the treasury department through what’s called a CTR, a cash transaction report that you deposited more than ten thousand dollars in cash. Now, is that necessarily a red flag? No. It isn’t because all it means is there’s a report that more than ten thousand in currency was deposited. Does that necessarily mean you’re a drug dealer a money launderer or anything like that, or terrorist.
JEFF:Do they look at you differently? I mean (inaudible) red flag.
DARRIN T. MISH:They might at the bank, you know, temporarily. But if you have large amounts of money running through your account anyway. Like in my business, a ten thousand dollar deposit isn’t really that big a deal.
KATRINA MADEWELL:So if I transfer the same ten thousand dollars multiple times between two accounts I’ll drive them nuts, is that what you’re saying?
DARRIN T. MISH:Yeah, you’re probably going to create a tax problem too because…
KATRINA MADEWELL:I’m just kidding.
DARRIN T. MISH:If you get audited they’re going to count that ten thousand every time it goes in. So I have that problem a lot of times in audits too. I would say, I wouldn’t worry about big currency deposits unless it’s a very common thing. Think about like a convenience store owner, he might be making, if he’s doing really good business, they might be doing ten thousand dollar deposits every day. Now we hear about these forfeiture cases that come up from time to time where the government swoops in and seizes the money, but I’ve heard a lot of those cases where there’s a perfectly legitimate reason why they’re dealing in so much cash. So that’s really unfair and it’s one of the areas of the law that really needs to be changed. The government should not be able to swoop in, take your cash, and then make you prove that it was clean. Congress really needs to pay attention to this and clean that up.
KATRINA MADEWELL:So what about people that are not U.S. citizens, but they’re making money here in the U.S.
DARRIN T. MISH:My favorite story about that is I represented a Canadian citizen, living down in Mexico that had U.S. source income. And he ended up owing about 1.2 million dollars. I kept saying, why do you even care? Why don’t you just…
KATRINA MADEWELL:Stay in Mexico.
DARRIN T. MISH:Why do you even care? And ultimately the IRS has IRS agents in over like 140 countries so he cares because they were coming for him in Mexico and the type of business he was in, he couldn’t, he wouldn’t make the same kind of money if he didn’t have the U.S. market. Ultimately what we did in that case is he ended up doing a chapter 7, we wiped out 1.1 million in a bankruptcy and then he had like 100 grand left and we did an installment agreement on that.
KATRINA MADEWELL:That’s pennies compared to over a million bucks.
DARRIN T. MISH:Yeah, so, if you’re a non-resident, if you have a green card, no matter where you live in the world, you’re going to have to pay taxes on your U.S. source income. Actually if you had a green card, you’re going to have to pay taxes on your worldwide income. The United States is one of only two countries in the world where we have to pay taxes on our money, no matter where we earn it.
KATRINA MADEWELL:It’s about that time, we got to take a quick break. We’ll be back in a minute. Hang tight, we’ll be back with the Train Wreck of the Week. You’re listening to the IRS attorney solution show.
DARRIN T. MISH:Welcome back. I’m Darrin T. Mish, your IRS solution attorney with Katrina Madewell, my cohost.
KATRINA MADEWELL:Welcome back to the show. Welcome back Periscope watchers.
DARRIN T. MISH:We were answering some questions from Jeff, our show producer, and it’s been a lot of fun. I wanted to kind of circle back for just a second and talk about U.S. citizens living overseas. Do they need to file tax returns and the short answer is yes. They do. And they often don’t know that they have to file returns. Just about every week I get a call or an inquiry or something from a U.S. citizen living overseas and the Philippines or Thailand or China or Russia. All kinds of countries. I’ve actually represented clients on every continent except for Antarctica. I’ve been doing some research. At McMurdo station in Antarctica, there’s over fifteen hundred people that live on that U.S. base. So I have a standing offer and that is if anybody calls me from McMurdo station in Antarctica with an IRS levy or anything like that, I’ll take care of it for free just so I can say “Every continent in the world.”
KATRINA MADEWELL:Pro bono, that’s a deal.
DARRIN T. MISH:I know there’s guys down there who get wage levies and bank levies. There’s actually two ATM’s in Antarctica. They’re Wells Fargo. That’s kind of a cool fact, don’t you think?
KATRINA MADEWELL:Yeah, I don’t even know how you know that.
DARRIN T. MISH:Well, what happens is….Actually I watched a documentary about McMurdo recently, but there’s about 1500 people that go down there during the Antarctica summer, which is our winter, and then there’s like a few hundred that over winter. They literally stay inside for six or eight months at a time and there’s actually a pecking order. They get irritated when the summer people show up because they’ve been locked up together for months and months. But that’s a standing offer. Anybody in Antarctica, I’m all yours. No problem. Just go ahead and hit me online and we’ll take care of it.
U.S. ex pats overseas have to file tax returns. But there’s kind of a cool thing for most of them and that is called the foreign income exclusion. It’s between 92 and 95 thousand dollars I think. That first kind of 95 thousand dollars they don’t have to pay tax on. That’s congress’ little bone they threw to people living overseas. We were talking over the break if you were working in a Philippines that’s a great deal because the money is not as valuable there. But if you’re working in Saudi Arabia or Dubai or something where you might blow through that in a month or two. Because it’s really expensive to live there. Then that is not so good.
There’s a news story I wanted to get to this week just because I love the headline so much. It’s Peculiar Man Indicted for Tax Evasion. So when I saw that headline, I thought, that’s so cool. What was peculiar about the man? Well, it’s kind of a letdown. It’s about a man in Peculiar, Missouri, which I didn’t know even existed was actually indicted for tax fraud. So he’s having to deal with that. He apparently failed to file tax returns for 2005 and 2006, and then for 2007 through 2009, he actually filed substantially correct returns, but left the tax line entry blank and failed to submit any payment. So according to the indictment, the total loss for those few years from 2005 to 2009 was 264,294 dollars. I handle cases of that size and many times that size on a regular basis where people are not indicted and not criminally charged, but it’s just a matter of this guy, this Peculiar man who was very peculiarly unlucky I guess. Maybe he did something to draw a substantial amount of attention to himself.
It looks like actually he might have been what we affectionately call a tax protestor and that’s not a pejorative term. I don’t mean anything negative by that. It’s just a type of person who…
KATRINA MADEWELL:I’m not paying the taxes, I’m not paying the government anything.
DARRIN T. MISH:Yeah, they want to assert that it’s unconstitutional or illegal or something. There are people that say I’m a Common Law citizen.
JEFF:Sovereign. I’m a sovereign country.
DARRIN T. MISH:Yeah.
KATRINA MADEWELL:So the next story is fabulous, we have to have time to get to this one.
DARRIN T. MISH:Ok, which one?
KATRINA MADEWELL:The next one is a man convicted of growing marijuana guilty of tax evasion. You know people are talking about this. They’ve legalized it in some other places.
DARRIN T. MISH:Yeah, you know, this is how they got Al Capone back in the day and we’ve talked about this before on the show. If you’re engaging in strictly illegal activity, technically you’re supposed to report your ill-gotten gains on I guess as a schedule C, I’m not really sure. I guess, assuming it would be substantially the same as getting a 1099 for your ill-gotten gains, your drug dealing proceeds.
KATRINA MADEWELL:So this Lincoln man was convicted in August of growing more than a hundred marijuana plants has pleaded guilty to tax evasion. He probably should have reported some horticulture income or something.
DARRIN T. MISH:Yeah, right, exactly.
DARRIN T. MISH:Actually maybe he could do a schedule F. This is some tax geek humor for you. Schedule F is for Farmers.
KATRINA MADEWELL: I love it.
DARRIN T. MISH:There are different breaks and whatnot for schedule F filers. Haven’t really been presented with too many Schedule F’s. I have done a few and they have a tendency to be people from the Midwest who moved down here to retire or whatever. I think in today’s day and age, you have to be a special kind of determine to be a farmer. I don’t understand with all the government red tape and labor problems and pestilence you have to put up with, you have to be some kind of determined person with very strong streak of wanting to gamble.
JEFF:OR a really big green thumb.
KATRINA MADEWELL:Or it’s in their bloodline or something.
DARRIN T. MISH:Yeah, for sure. It could be a family thing. For sure.
Let’s do a recap of what you can do if you find yourself with a tax problem. The first thing that’s kind of obvious that people really know about is an installment agreement. Right? If you owe 50,000 dollars or less, it’s pretty easy typically to get a payment plan, which we call formally an installment agreement. If that’s not going to work, if you just can’t afford to pay anything, then there’s a situation where the IRS can declare that you are currently not collectible. Another phrase for that is hardship status. If you can demonstrate you cannot afford to pay anything on a monthly basis, it can kind of put you on the back burner and they’ll throw you into hardship status and they’ll leave you there usually for a year or two at a time. Sometimes pretty much forever.
JEFF:Is there any debtor prisons still?
DARRIN T. MISH:No, there’s not debtor’s prison and that’s why this Peculiar man’s case is kind of interesting. He wasn’t thrown in jail for not paying the tax. He was indicted actually, I don’t know if he was thrown in jail. I want to take that back. He was indicted because he didn’t file for a couple of years and then the other years he didn’t file a correct return. So he’s not being indicted for not paying necessarily. So we definitely don’t have debtor’s prisons. There’s one exception. Child support. You don’t pay your child support. If you find yourself in front of a judge and you haven’t paid your child support, he’s probably going to throw you in jail until you figure out a way to pay the child support. It’s kind of interesting that people get really resourceful from jail and they figure out how to get that child support paid.
JEFF:So deadbeat dads get your toothbrushes ready.
DARRIN T. MISH:Yeah, child support is one of this obligations you cannot ignore. And I think that’s kind of a good thing. It’s important that people live up to their obligations.
KATRINA MADEWELL:I don’t know if I understand the whole driver’s license thing, though. If most of them can’t go to work, how are you going to make a living?
DARRIN T. MISH:As a society we’ve gone kind of crazy suspending driver’s licenses for all kinds of things. I think they do that because they want to have a big stick and they want to make sure, hey you don’t have a driver’s license, you want to make sure that people should pay their child support or pay their traffic tickets, or whatever. But then you run into these entire classes of people, usually blue collar lower income kind of people who just, they can’t drive. A lot of people don’t know this, but if you get pulled over for driving on a suspended license, time number three is actually a felony. So now you might be going to prison for up to five years for driving on a suspended license.
So I get it. We shouldn’t have people that have multiple dui’s and things like that that are driving on suspended licenses. But if you don’t pay some traffic fine because you couldn’t afford it, or you didn’t know about it. That happens rarely, but it does happen. Then people end up driving on a suspended license and then the more that happens, the more that happens, the more serious it becomes.
KATRINA MADEWELL:It’s harder to get out of the hole. It’s like a bigger hole, they just keep digging and digging and digging and they just can’t get out.
JEFF:I think they call it habitual.
DARRIN T. MISH:Yeah, for sure. It’s sort of interesting, the more rural the county that you get pulled over, the more in trouble you get in if you get caught. So if you get a driving license suspended in Hillsborough County, I don’t know, probably not that much is going to happen to you. You get pulled over in Sumter County and they’re going to put you under the jail because nothing bad ever happens in Sumter County.
JEFF:You in a whole heap a lot of trouble, son.
DARRIN T. MISH:Yeah, I’m not really picking on Sumter County. I’m just looking for a place.
KATRINA MADEWELL:They’re looking for something to do.
DARRIN T. MISH:Yeah, I was looking for a rural kind of place where not a lot happens. There’s a good part and a bad part of that. I would kind of like to live in a county where there’s no murders during the year. That’s kind of a good thing.
JEFF:Don’t mess with Grady Judd.
DARRIN T. MISH:Yeah, he’s out of Polk County I believe. Imperial Polk County.
The next thing, if you don’t qualify for a hardship status, could be an offer and compromise, and that’s where the taxpayer can make a deal to settle for less. There’s a mathematical equation that kind of goes into that. It’s basically monthly disposable income times twelve plus your assets equals the amount of your offer. So, that sounded like a bunch of gibberish so let me give you an example. If we could demonstrate that your monthly disposable income was only a hundred dollars. A hundred dollars times twelve is twelve hundred dollars. Let’s assume you have no assets, which is pretty common unfortunately in our society. Then you could settle your IRS case theoretically for 1200 bucks. Doesn’t really matter if you owe a half a million, or 50,000. I’m just making up hypothetical numbers. If we can successfully demonstrate that that’s all they could recover under that formula, then they’re going to go ahead and take that deal.
JEFF:And they’re happy with that?
KATRINA MADEWELL:Well, a turnip is still a turnip at the end of the day, right? You’re not going get any blood out of it.
DARRIN T. MISH:I’m not sure if they’re happy about all…I’ll tell you a funny story about that. I have a case right now where the liability is 2.2 million. We offered $754 I think. And that was because when we did the math, that’s what the math came out to. The IRS gentleman who might listen to the show, I’m not really sure. We’ve done business together for many years. He called me for the first time to talk about that case and he was actually angry with me. He told me was angry about it. And I kind of laughed. I laughed and laughed actually. I said let me tell you why we offered so little. First of all, it met the math equation and second of all, when you negotiate, you don’t offer…I know we’re going to go up, but I want to go up from 754 dollars, not up from 10,000 or whatever. So that case isn’t settled. It looks like it will settle eventually, maybe. No, they’re not very happy about it, but a lot of times there’s not a lot they can do about it. We’ll talk about the Train Wreck of the Week here at the end of this segment, I think, and you’ll hear about a case where they’re happy enough to accept it.
KATRINA MADEWELL:Something is better than nothing.
DARRIN T. MISH:Yeah, you have to think about the primary goal of an offer and compromise is not actually to recover the money, it’s to get that taxpayer back into the system. So the opportunity cost for not accepting the offer is that taxpayer very likely is going to stay out of the system for many more years or drop out completely or continue to file returns and not pay their taxes. You wouldn’t believe, I see people year over year that owe 15,000; 25,000; 50,000. Every single year. So typically when we do an offer and compromise they get back into the system and they kind of get straight. Because one of the requirements is we got to get them current. Which means we have to file all of their back tax returns, we got to get them making estimated tax payments if that’s appropriate in their case. One of the conditions of an offer is they have to stay current for five years after the offer. If they violate that, if they have a new balance due during that five years, then the offer and compromise is defaulted and all of that tax penalty and interest comes back. So there’s a really big stick at the end of that. So I think the compliance rate for that five year term, at least in my practice, is really good. Because people get it.
KATRINA MADEWELL:And nobody wants to unwind that mess.
DARRIN T. MISH:Yeah, they get it.
JEFF:The incentive is there.
DARRIN T. MISH:Now, I do have one that I can think of where they did default. There was some kind of extreme life emergency that happened. I think somebody died and they ended up with another balance due. It was just kind of sad, but ultimately that person’s just going to end up in hardship status and the statute of limitations is going to expire.
So let’s talk about the statute of limitations real quick. A lot of people don’t really know this, but there is a statute of limitations for the collection of tax and it runs ten years from the date of the assessment of the tax. Now, what does that mean? What does assessment even mean? I’m not going to give you the technical definition of an assessment, but basically when you file a tax return and it has a balance due, the tax is assessed. If you then later go through an audit and they decide there’s another nice number they’re going to add, they’re going to add tax interest and penalties, then that’s an assessment. So you can have multiple assessments on the same tax year. You could have one where it was the tax due on your return on April 15th or whatever and then if you get audited two and a half years later, then there could be another assessment and those both have ten year statutes and they’re not running…they’re running concurrently, but they didn’t start at the same time. Does that make sense?
DARRIN T. MISH:So you could have one expire, let’s say if you filed a return in 2015, the first one might expire in 2025, and the second one might not expire until 2027 because there are two different assessments so they have different statutes.
KATRINA MADEWELL:We got about 30 seconds left for our Train Wreck?
KATRINA MADEWELL:We’re almost there.
DARRIN T. MISH:Lastly, we talked about it…
KATRINA MADEWELL:By the way, before we forget, because we will. All of these stories, these news stories and more, are posted up on getirshelp.com. You can hit the blog link at the top right of the page and get all of these stories.
DARRIN T. MISH:There’s actually another site, too. You can go to irssolutionattorney.com and there’s, that’s purely just the radio show and the podcast is there.
So lastly, some taxes can be discharged in bankruptcy. There’s some complicated rules that aren’t that interesting. Just think about the fact the returns have to have been filed and they have to have been due for at least three years. If they’ve been filed for more than three years, then there’s a decent chance that some of those taxes could be discharged in a bankruptcy. A lot of people don’t think about that and nine out of ten bankruptcy lawyers don’t even know that taxes can be discharged in bankruptcy. So that’s kind of a scary thought.
KATRINA MADEWELL:That is very scary.
DARRIN T. MISH:What we do, is we don’t actually handle your bankruptcy, but we can help do the analysis to see if it’s a legitimate solution for you and we can refer you to somebody who can take care of you in that area if that becomes part of the weapons in the arsenal we’re going to use against the big, bad IRS.
KATRINA MADEWELL:So I think it’s right about that time.
(Train Whistle and Crash)
DARRIN T. MISH:In today’s IRS Train Wreck of the Week, we’re going to talk about a pretty interesting case. I think this case lasted about three years and it started with the gentleman, the husband in this case, was a truck driver. He was an over the road truck driver and he grossed a lot of money. Probably five, six hundred thousand dollars a year. But truckers work really really hard and he had to pay all of his costs out of that money. So when he knitted it down, he was living just barely hand to mouth. What happened in this case was one of the issuers of the 1099’s that he received accidentally, inadvertently issues two 1099’s to him for six figures each so one was like say three hundred thousand and one was three hundred thousand and eighty-five dollars. Literally they were that close. And it was really obvious that it was just a situation where the second one was the higher and it was supposed to be a corrected 1099, but we could never unravel it. We couldn’t get the issuer to retract one because most likely they had written off double on their taxes. So what we had to do ultimately…
KATRINA MADEWELL:I can’t even believe they can get away with that. Really.
DARRIN T. MISH:Yeah, it’s really hard to unravel. Ultimately what happened is the IRS issued what’s called a notice of deficiency which is a scary looking letter that says you’ve been audited and now you owe us in this case another hundred thousand dollars. With a notice of deficiency you get the right to file a tax court petition. So that’s what we did, we filed a tax court petition. We basically sued the IRS, saying, nuh-uhn! Prove it!
This was really cool. Usually these cases last for a year or two where there’s a lot of back and forth between me and the IRS appeals or me and IRS council where there’s a lot of negotiation and stuff happening. Frankly in most tax court cases we kind of split the baby and we kind of work out a deal. In this case, it was really really cool. There was some vindication. In the shortest tax court case in the history of the world, I don’t know, like a couple weeks after filing the petition, I immediately got a phone call from the IRS council, he conceded, he stipulated we win, it’s over. He’s like I can look at it obviously, it’s obviously a mistake. That kind of common sense is not that common in the government, so that was a really cool part of the case. But there was still 49,000 dollars left for these taxpayers. So I saved them about a hundred there, potentially a hundred there. But they still had about 49,000 dollars left over. Just this Monday, we got the letter that the IRS settled that case for $1452. So, pretty good deal. My favorite part of my job is to make those phone calls and explain that we’ve won to the clients. This was sort of an interesting phone call. English is not their first language. I’m talking to the missus who was more fluent in English and I explained to her that it was 1452 dollars and she was so sweet she says, Ok, and how much do we have to pay after that. And I said no no no. That’s it. 1452 dollars to settle the 49,000 dollars and she started crying and she was so happy. She got off the phone real quick so she could call her husband and let him know that their nightmare with the IRS was finally and completely over. But remember, they got to stay current, file on time, and pay for five more years. There’s a pretty good deal for the government too. They’re going to have a taxpayer who is Johnny on the spot from now on and their nightmare is over.
KATRINA MADEWELL:You’re listening to the IRS attorney solution show. I’m your cohost Katrina Madewell.
DARRIN T. MISH:And I’m your IRS Solution Attorney, Darrin T. Mish. Thanks for joining us. We’re out.