Tax season might be over for most people, but if you ended up finding out that you owe a little bit more than you were expecting, or even a lot of bit more, here is an episode that can give you some information about uh what you can do about that. Let's get into it. Joining us, we have Scott and Ennis from Priority Tax Relief. Gentlemen, thank you for joining us today. I know we're outside of tax season, but I feel like uh it's never really outside of tax season for you guys. Go ahead and introduce yourself to the audience.
SPEAKER_02Yeah, thanks for having us, Scott. Uh my name is Ennis Us Maili. I'm the senior vice president at Priority Tax, and you're absolutely right. Uh, we're not sleeping because the IRS doesn't sleep. So we're busy all year round.
SPEAKER_03Yeah, uh exactly. Uh uh, thank you for having us as well. Uh my name's Scott Taylor. I'm a tax attorney uh on staff here at Priority Tax Relief. And uh this is actually just when things start to get busy uh for us. Uh everybody's just posted their new balances uh from 2025, and the IRS is out looking to collect that.
SPEAKER_01So uh well, thank you for taking time now that it's becoming the busy season to join us uh here today. Uh let's go ahead and have a have a quick conversation about what it is that you guys are actually providing services-wise to to your clients. Um, and then we'll kind of get into a little discussion about how those things may come about and why people might need to be keeping an eye on their current situation and and realize if they should or should not be reaching out to you guys for assistance.
SPEAKER_02Yeah, so I mean the we provide a myriad of uh services to our clients. Uh a lot of time when people look for help with their tax debt, it's I'm looking to reduce it. Um, that's not a bad mindset. I would want the same thing, but there's value in getting uh consultation and approach on how to avoid number one, owing taxes in the future and how you can mitigate how much of your debt actually grows.
SPEAKER_03Yeah. Biggest value that we provide, I would say, is representation by somebody who knows what's going on with the IRS. Uh they make it purposely difficult and confusing because they make extra when they get to charge you penalties and interest. Uh so they're they're trying to keep you locked in debt.
SPEAKER_01So so this is the kind of service that I could probably do some of these things myself, but navigating these waters is going to be uh difficult for the average person, and probably getting representation is gonna have one, keep me from finding pitfalls along the way, and two, probably take a huge weight off of my shoulders from having to read all of the legal ease that's gonna come from the IRS.
SPEAKER_03Exactly. Uh for example, I once had a pr potential client call me uh telling me that the uh IRS was taking fifty thousand dollars from his bank account each month. Well, he had tried to go in, as it turned out, and set up a payment plan himself, uh, but he had accidentally set it up for the full amount of his debt. So they were trying to debit $50,000 each month under this payment plan instead of the it was around $500 that he should be paying.
SPEAKER_01Yeah, and that I'm sure adds up with non-sufficient funds fees if he's not sitting with $50,000 in that account to pull, though it would make for a very quick payback plan if it if it managed to pull that and just pay off his entire debt.
SPEAKER_02Some of his other bills might suffer, but yeah, that one gets paid.
SPEAKER_01Well, and that's kind of kind of why we you would be in a in a plan to begin with for paying stuff back. You're trying to budget so that you're not having because if you've got the money sitting in your bank account, nobody wants to be hounded by the IRS month after month uh to try and collect their due.
SPEAKER_02Yeah, I always say, listen, uh, for the representation piece, it's easier to win a game when you know the rules.
SPEAKER_01Very true. Yeah, there that that's nothing that uh that anybody wants to do is walk into a situation blindly and just run the assumption that, hey, uh no, it's fine. They'll tell me exactly what I need to do and make it super simple. Government work is always that way. There's never any red tape, it's straightforward. Just, you know, swipe your card at the at the terminal like you do at the gas station to purchase your energy drink in the morning or your coffee. No, I've I've never uh experienced anything uh straightforward when it comes to dealing with taxes. It's always the guessing game of uh we know how much you made, you should know how much you made, we know how much you owe us, but you need to tell us that number first. So what exactly is it? So we've we're talking about representation. You also mentioned um knowing how to avoid this. Do you guys get a lot of clientele uh calling you ahead of time to to kind of do consultation about, hey, I have this situation coming up that I think might become a problem?
SPEAKER_02It happens. I think uh when it comes to our industry, um, more times than not, people are coming to us once there's an issue that's presented. However, throughout the course of the year, once uh the April deadline starts to come around, somebody who knows, oh man, I didn't have enough withheld in 25, they're gonna be a little bit proactive and say, I haven't filed this yet, but I know I got $5,000 coming my way that I can't pay. Let me reach out. So we'll we'll get some of those people. Unfortunately, by the time they call, it's already too late. You already haven't had enough withheld. So those are the ones that we can bring on as clients and help them with future planning and uh taking care of their tax returns moving forward.
SPEAKER_01I feel like that is kind of this thing where you're like, I've never had a problem before. I always get a couple hundred dollars back. Why would I consider uh needing to talk to tax professionals? I've got my my uh my easy form that I fill out, or go through whatever random tax provider company, HR block, liberty tax, whoever. And uh all of a sudden you're you're looking at, oh, you owe because you didn't set something up properly. Or uh in my case, the first time it happened was self-employment tax. Um I was I was not properly prepared as a young business owner for uh for that one. And that that ended up being quite the bill at the end of my first year.
SPEAKER_03Uh oh, and it that's one of the most common ones that gets people is you know, they set aside money for income tax, sure, and they're just not prepared for the amount extra that you pay in self-employment tax. And so frequently uh people come to us with a problem like that already. The tax planning side of our uh representation usually comes in with helping them plan to avoid the problem in the future. Because you can fix most problems with the IRS if you're willing to get into compliance, right? If you're willing to get back on track. And so helping people get to a point not only where they're in compliance, but where it's sustainable for them. Because you know, you pay that 15.3% self-employment tax every year, and that gets nasty. But minimizing that, uh, you know, bringing it in, that that's where we really get involved in planning.
SPEAKER_02Another big mistake people make is uh they'll be uh an S-corp. And that's actually really great to have that knowledge to say, okay, I am going to take the S selection and I am not gonna now have to pay this 15.3%. But they'll do it for a guy who's a smaller business, maybe he's making 150 and above, and they'll come and they'll call and they say, Oh, my business owes taxes. And my first question is, do you have employees? And they'll say, No. It's like, okay. Now, if your S-corp owes business taxes, it's usually a payroll tax. So what happens is they forget that as an S-corp, you are now also an employee. So you have to pay employer taxes on yourself. And they're thinking, no, no, I don't know what's going on. The IRS is completely wrong.
SPEAKER_01Well, and I know that that that's kind of one of those big question marks for young businesses. Are you going to be running as an LLC, as a sole proprietor? Are you going to be doing business just as yourself, which I think also falls under sole proprietor? Um, or are you going to shift yourself over into something along the lines of an S-corp? And understanding the difference between what those actually mean is it falls right into that trap of, well, as I was a sole proprietor, I didn't have to do this. Why all I'm doing now is paying myself a salary as I move to an S-corp. Why, why is there this sudden massive shift in my taxation?
SPEAKER_03Well, and the big thing too is that especially when you get into payroll taxes, those are the most serious uh kind of taxes. That's where you're messing around with the Social Security Trust Fund, and the IRS takes that incredibly seriously. Uh so that's the fastest way to a revenue officer, that's the fastest way to getting bank accounts levied and property seized uh is messing up on those 941s. And and like you're saying, there's got to it's not straightforward. It gets complicated. And at that point that you're considering taking the S election, you really should have a professional helping you plan this out in some way.
SPEAKER_01Yeah, reaching out to find uh an attorney, uh tax consultants that can actually kind of help you navigate and understand why are you making this change, what are you going to benefit, what are the additional costs that are coming along with it, makes a lot of sense as far as the planning ahead representation side of things. Um yeah, I know that I I never shifted out uh on my own up into an S-corp. I just decided to set 30 cents out of every dollar aside into a different account just so I would have it available to pay my taxes uh with later. Uh, but I was I was in a nice situation where I was able to do that and just pull that money aside and set it into a savings account. And it was it was pretty simple for me. But not everybody has that type of a luxury.
SPEAKER_02No, and especially depending on the business. I mean, if you're having to, if you do have employees, you're having to pay the employees, you're having to pay for materials. Now, on top of that, if you're you have a business, you gotta pay your quarterly taxes and you gotta keep up to date on that. So it's it's very easy to get underwater if you don't know how to manage your money properly.
SPEAKER_01Yeah, and I think that that's kind of what we're what we're we're driving towards in this conversation is that initially speaking, most of the people aren't coming to you until they find themselves staring up at the surface from underwater. They feel a little bit about that pain and then they realize, oh, well, maybe I I do need somebody to assist me with this. Uh and and that's how they end up coming to you guys. So let's let's kind of shift gears a little bit. What are some of the standard scenarios that you guys see uh when people are coming to you?
SPEAKER_02Well, there's really uh just a few ways somebody's gonna oh a tax set, and and Scott can interrupt me here, wherever. First one, and the one that's the simplest, uh, is withholdings. I can't tell you how many times I've gotten a client on the line who's said that they have a local tax preparer that's uh referred to them by everybody in their town because they always get a big refund. What happens is this person will tell them, hey, go ahead and claim uh nine if you're gonna get a massive refund. And then they're on the phone with me and I'll ask them, okay, well, how many dependents do you have? I don't have any kids. Well, then you're not gonna be able to provide nine socials to justify your refund. And then that that uh tax repair is getting audited. So withholdings is easily one of them. Um capital gains is a big one. You know, when you pull out of an IRA retirement account and you sell stocks, gambling. A lot of people don't even know that unemployment benefits is still taxable. Um cancellation of debt that generates a 1099 C. You know, changes in the tax code when your kids grow up and and age out, if you forget to change that. Um and then SFRs, which is another really big one. And what is SFR? Go ahead, Scott.
SPEAKER_03SFR stands for substitute for return. Uh it's when the IRS prepares your return for you. Um so you think about it, you're supposed to turn in a tax return each year, right? And you have to ask the question what happens if you don't? If you don't, the IRS receives your W-2s and 1099s and everything as well. They keep it in a file called a wage and income transcript, and they'll eventually just prepare a return for you based on that transcript. Now, sometimes if you're just making W-2 income, it's not going to be that different uh from what uh you would get yourself, except the IRS is gonna slap a nice under-reporting penalty uh on you as well for making them do the SFR process. If you're if you're making 1099 income though, and you're self-employed, right, uh or if you've got stocks or you're selling capital assets, there are deductions that you get for expenses and basis and things like that that aren't necessarily reported to the IRS, and they're not gonna do extra work to find it for you. They're just gonna tax you on your gross profits on those substitute for returns.
SPEAKER_01Uh and so a lot of times, which they they owe me, I'm probably gonna aim towards the high side so that I'm on the winning end. Um and and that sounds exactly like what this is. If the IRS has to fulfill your your tax uh filing for you, why would they find all of the uh deductions and uh credits that that you're owed if you don't tell them? They have no incentive to go find.
SPEAKER_02No, I'm not gonna give you a bone if you're not being compliant with me. Why why am I gonna help you out? The the the thing that a lot of people don't realize is the states will do this as well, especially for those people that are working in one state and live in another. They'll forget to file for one of those states, and then the state will do the same for them. Or when they move, they'll forget to file from the state that they moved uh from.
SPEAKER_01Yeah, you're like, I moved like 18 months ago, why am I still dealing with oh yeah, because it's this year's taxes, etc., etc.
SPEAKER_03Um another common scenario, right, is social security. A lot of people don't realize that uh social security can be taxable under certain circumstances, right? And so if you're just getting social security, sure it's not taxable, you don't have to file a return, but you start drawing a pension with it, right? Or you take a side job to make ends meet, and suddenly anywhere from 50 to 85 percent of your social security income is considered taxable, uh, and that just creates these balances for people with no ability to pay.
SPEAKER_01And of course, in this scenario, like you just brought up, they've taken on a second job to help end to help end make ends meet, which means that they're probably not swimming in cash uh if they're collecting social security, doing a secondary job, which means any of these unexpected uh costs are really going to impact their more strict budget.
SPEAKER_02Absolutely.
SPEAKER_01Now you mentioned windfalls uh uh capital gains uh being a thing. Do you regularly run into uh clients who have say sold property or uh in the let's go with the Amazon world, sold a bunch of stock options uh from their employment there and just weren't thinking how much they were going to need to change their uh their withholding or hold aside in order to pay those off.
SPEAKER_03Pretty frequently, right? And what will happen is it'll be that same scenario that uh Ennis mentioned earlier. They'll have a local CPA or tax preparer that they were referred to. They'll say, Hey, I sold this. Should I report it? Uh and the tax preparer will say, it'll ask maybe a couple uh questions and say, Oh no, that's not taxable. Don't worry about it. Well, here's the thing: the IRS is gonna get the report of the sale minus any deductions that you qualify for, minus any tax deductive free status that you qualify for, minus anything like that. So they're going to, within a year or two, uh, start an exam uh of your return and assess you tax based on that wholesale price. And then you've got to go back, you've got to find the closing documents and hope that you still have them. You've got to find proof of your basis. You know, in the event of like a home sale, you've got to find proof of your basis, any improvements that you made, all for a house that you sold two to three years ago, and who knows if you still have that.
SPEAKER_01And and for a lot of people out there listening, because you mentioned houses, mortgage situation, uh, basis in this is also uh regularly referred to as people's equity in their house, how much they actually have already paid off, correct?
SPEAKER_03So basis is how much you paid for uh for a home, right? Uh simply put, plus any improvements that you made to it. Equity is slightly different, right? Because that's that's how much you have available, that's how much you'd get from the house. Um when you're doing taxes for a capital asset, you get a deduction equal to your basis uh from those taxes. So your taxable income, say you sold a house for $100,000 and you paid $50,000 for it, you'd only be taxed on $50,000 of that income.
SPEAKER_01That's a quality clarification because I know uh I would have mixed the two up initially, being like, oh no, no, because I understand what tax basis is in some investment concepts. But when it was applied to a mortgage situation, I'd be like, okay, that that one might have caught me uh when it came time if I was filing this on my own, um, which I know enough about uh money and and taxes to know that I don't want to be the guy that does that.
SPEAKER_03Uh fair. Yeah. Uh and I mean keep in mind, like in the eyes of a of the law in most states at least, uh, when you take a mortgage out for a home, you're still treated as the owner. So you're treated, you're given credit for the amount of that mortgage as far as your basis. If you take out a loan, again, in this pie in the sky world where a home only costs $100,000, you take out a loan to cover that, right? Uh, you're getting credit on your basis for $100,000 paid in on the premise that when you sell that, you're also going to be paying off the mortgage and you'll only get the actual uh equity, the portion that you've already paid off.
SPEAKER_01Okay. And that kind of goes back to our uh phrase capital gains. So if you bought in at $100,000 and you sell for $150, your your gain on that property is going to be $50,000, which is where that taxation is coming in.
SPEAKER_03Exactly. Now there's other deductions that you can get qual you can qualify for as well. Frequently, uh people qualify for the primary residence exemption, which is just if you lived in your home for at least two of the last five years. If you're single, you qualify for a $250,000 deduction off that sale. If you're married filing joint, you qualify for $500,000 off that sale, just non-taxable off the top. And frequently, that makes the difference between somebody paying a whole lot of capital gains tax and paying nothing. And the IRS is not going to give you that deduction. You have to claim it.
SPEAKER_01Oh, of course not. No, uh this is we we've had some some conversations on the podcast before talking about tax prep uh and how, yeah, the IRS isn't exactly your friend. Uh, they're not as scary as they could be, but at the same time, uh, if you end up on the wrong side of them, they're going to be coming after you. Um because Uncle Sam wants his dollar bills. Um, and that's kind of what they need to do. So let's go to a scenario that I I've completely messed something up. I went to uh my cousin Joey uh to do my tax prep because he's really good at that stuff, or at least that's what he told me. Um, and now I find myself owing $10,000, $15,000 worth of back taxes uh that I don't have the ability to pay off. Well, let's walk through a scenario here. What is uh what are kind of my options? What would you guys be doing for me at that point in time?
SPEAKER_03Ennis, do you want to or do you want me to hop in? Yeah. Uh so first thing that I would do, right, is I would jump on a call with to the IRS with you. And that's the first thing we do with everybody that calls us. Uh, this is just to verify the scope of the problem, right? Right. Because a lot of times you have you know you have $10,000, $15,000 that you know about, but there's a year that you accidentally missed filing five or ten years ago that the IRS is looking for, or maybe there's a substitute for the return. Exactly. Uh so that's the first thing that you do, right?
SPEAKER_01Okay.
SPEAKER_03Um second thing that you do uh is you uh uh you do what's called a collection information statement. It's a couple different varieties of these with the IRS. Uh the most common one is using a form 433A. Uh so a lot of times we'll refer to it in the lingo as just a 433A because this form is kind of the core of negotiations with the IRS. It's gonna list out all your assets, all your income, and all your expenses uh and determine what's negotiable. A lot of people like to think of negotiating with the IRS like a settlement in a lawsuit. It's not really the way it works. You should think of it more akin to a bankruptcy, right? You got to show that you've got an inability to pay uh in order to qualify for relief. Now, what we specialize in from that point is determining what the IRS knows about uh and what has to be reported to the IRS, right? Uh, and that's kind of the where there's room for negotiations is what uh what does the IRS know about? What do we have to report under the law, and what information can we not disclose to them, right? In order to keep you protected from collections. Uh from there, there's a couple different options. Uh, the broad program umbrella at the IRS is called the Financial Hardship or Fresh Start Initiative. Uh, it covers anything from a payment plan to a non-collectible status. Occasionally we'll see clients qualify for true settlement offers with the IRS, uh, which are just things like you pay me $5,000 over over five months and we'll forgive the $15,000 debt. Okay. But those are pretty rare.
SPEAKER_02They're even more rare when somebody tries to fill them out themselves. There's like a there's a 2% chance uh that those close when somebody fills them out themselves. It's a pretty decent sized booklet, and you have to be very accurate with all that. And the thing that people don't recognize about the offer as well is it depends on the length of time. They're gonna look at you as of today, meaning the day that they are reviewing the offer, not the date that you submit it. So if you were pretty broke two years ago when you submitted it, but now you're Elon, you're gonna have to pay that back. It's not gonna matter.
SPEAKER_03Yeah. And the other thing to keep in mind with offers, right, is that there's a real temptation to over-disclose. Like they're going to comb through your financials with a fine-tooth comb to make certain that you don't uh you don't have any way they can collect on you.
SPEAKER_01Uh and like you said, like taking a look at what what we need to disclose allows you guys to craft the narrative in in the client's favor, uh, to basically be like, hey, look, this is this is what we need to get out of this to protect them and still make do on the taxes that they owe in the most favorable way for everybody.
SPEAKER_03Big thing to keep in mind with the IRS too is that time is ultimately on your side. Uh so all tax debt has a statutory expiration date associated with it. At a baseline, this dates 10 years from the date that the tax is assessed.
SPEAKER_00Okay.
SPEAKER_03Uh that can be paused and told and stalled out by a few different things. Bankruptcy is one of the more common ones. Right. But things like that can pause it. So finding out what that statutory expiration date is uh with your debt uh can make a huge difference. So, for instance, let's say, you know, going back to the example, you come to me with $15,000 in debt from 2025. We call the IRS and find out you have a debt from 2016 that they assessed to you in 2018, that's another $50,000. Right? I can look at that two ways. I can negotiate based on $65,000 in debt and try and get you in the best payment arrangement possible, and the IRS will milk every penny they can from uh on that fifty thousand dollars for 2016, and they're going to apply any payments that you make uh to them to 2016 first because it expires first, right? Or knowing that the debt was assessed in 2018, we can find out that expiration date, find out it expires in 2028. That's only a year and a half from now. If we can stall out IRS collections for a year and a half, it's a real possibility that you walk away from that 2016 debt and only have to pay the 2025 debt. And it's that type of strategy.
SPEAKER_01Okay, that is that is a pretty big deal because I can imagine a lot of people in that scenario learning that immediately panicking about how they have to handle this. And we've discussed on the podcast many times when it comes to fraud, when it comes to uh like those text messages that you get that say that you owe tolls, um, that it's all designed to create that panic where you no longer think clearly, and having representation that is thinking clearly for you is probably the number one factor that's going to keep you from having to pay on that 65,000 that you just mentioned, uh, as opposed to just that 15. Clear heads, uh creating a nice clear path forward uh for your betterment. So, do you guys have any any stories uh that you want to share with us about uh some clients that you've worked with, not naming names, of course. Um just some things that maybe some people out there listening can uh can relate to and kind of understand, maybe see that hey, this is a situation similar to what what I'm in or what I'm dealing with, uh, and how those things have kind of resolved.
SPEAKER_02I mean, we have a lot of horror stories, unfortunately.
SPEAKER_01Um, cautionary tales are great too.
SPEAKER_02Yeah, this one is uh the one that I'm thinking of is not a boat that everybody's gonna be in, but if you have some gold, here's what happened. We had uh a client uh a couple, an older couple who had some gold. They somehow got into communication with somebody online um that told them that they were hacked. Oh, that's what happened. The the wife was online, something happened on her computer. It said that you got hacked. Call this number so we can uh remove it. They called in and the person said, Oh, this is terrible. We got to get you on with the uh sheriff. So then they get transferred over to somebody who's pretending to be the sheriff of their town. The sheriff says, Oh, this is even worse than I thought. We got to put you into witness protection. Um, we have to clear out your asses to make sure that you're gonna get protected because you're getting um hacked. They disclose that they had all this gold. $900,000 worth of gold, I think. Somebody came to their house and uh said that they're gonna pick up the gold and put it for them in a safe. Came by the house twice. $900,000 gone because they liquidated all of it, they got hit with a tax bill. So could you imagine everything you've worked for your entire life driving away?
SPEAKER_01I mean, and it yeah, drives right back to that whole that whole fraud concept of like don't panic, make the right calls. Like, if if you're putting me in touch with the sheriff, um, and why is the sheriff dealing with with some virus or fraud situation on my computer? Like, there's enough red flags in that story, looking at it from this point. I'm sure that that that poor couple uh was very concerned about everything and made very poor decisions uh in that. That is that is very cautionary.
SPEAKER_02I misspoke. That's how they got the gold. They told them to liquidate their 401k and convert it to gold. Oh, okay. And then they drove off of the gold.
SPEAKER_01Wow. Yeah, at that point in time, like we're we're we're taking we're taking gift cards a step further at this point. Uh like Home Depot gift cards, sure, but but no, we want gold bars out of this.
SPEAKER_03Uh that is the sophistication level that some of these scams go to is insane when you start talking with people.
SPEAKER_01Um, it's bad enough that they liquidate their their 401k, but but then to get hit with the taxation aspect on that is is uh salt in the wound um for that particular situation. It's actually something that we haven't discussed before on on the podcast when we've had all of our conversations about fraud, is the potential tax implications coming back later and just reminding you that you did this thing and that, yeah, because you made that choice, here's an additional fee coming along on top of it. Just a quick reminder for that that paper cut with the lemon juice. Uh nothing about that feels great.
SPEAKER_03Scott, do you remember what we ended up doing for them? Uh, you know, I know I don't remember in that particular case, uh, but I can tell you for those who have been victimized by fraud, the IRS has been badly behind in how they categorize these uh and in their response to these. They just recently this year, this past year, um released a new guidance for preparers uh that does create a way for individuals to claim casualty theft losses uh in the event of fraud. I'll tell you it's a little bit complicated. You gotta prove that you entered into the transaction for a profit, and you gotta prove that there's no aspect of recovery and a few other things. Um, yeah, and that's that's the avenue that we'll take in that case, uh exercising that uh through filing an amended return and then going through the appeal system to prove that these people lost the money uh and didn't actually profit. Um the fundamental rule of taxation, right? The the basis of everything is that you're taxed on gains you experience. So it doesn't make sense if you take out and lose everything from your 401k, right? That you should be taxed on that. And that's kind of the fundamental fairness argument that we're making uh with this argument.
SPEAKER_01Yeah, that does that does make a lot of sense. Moving at the speed of government to finally get around to providing some sort of protections against fraudulent situations like this one. I I I love to hear that. That's a great move in the right direction, but but as you mentioned, probably not the smoothest, and it doesn't make much sense for the government to not want to take their money um at that point.
SPEAKER_03Uh oh, and uh you know, the government will absolutely try to take your money while you're going through this process, right? You need to be active and aware of notices from the IRS while you're uh while you're trying to litigate this debt, essentially, because uh it's always easier to keep your money from the IRS than to try and get it back from them. Yeah. And they the collection side, you gotta keep in mind that they don't care. They're given accolades on how much they can pull in, and they know they're not gonna pull in things from the Jeff Bezos and the Elon Musk of the world. So people like this client who just liquidated their 401k, they don't have anything left, they can't hire an army of attorneys uh to defend them. These are the IRS's favorite targets. And you get on the phone with them and they're gonna try and stick you in a payment plan, collect any money that you have right there, uh, and just leave you figuring out the rest on your own.
SPEAKER_01And Ennis, this actually brings me back to something that you had mentioned earlier with the uh the the local tax prep guy who is well known for getting people refunds. Um, Scott just mentioned it. Uh, why do people aim for large refunds by having more withholding? Like at that point, you're basically asking the government to give you all of your money back because it was yours to begin with. Well, it's just a lack of knowledge.
SPEAKER_02They don't realize they don't realize what a refund means. Um, a lot of the times we'll get clients who who say, Yeah, I just want to make sure that I keep getting my refunds. Well, a refund just means that you overpaid on your taxes throughout the year. So when somebody says they're gonna get you a big refund, they're not putting two and two together that that means, oh, I'm gonna underpay on my taxes. You didn't make less money or more money.
SPEAKER_03It's kind of the worst savings account that you could possibly have because you're not you're not getting interest on any of that. You know, you're not making anything on that. In fact, you're losing the opportunity to invest the money. So exactly.
SPEAKER_01It's effectively an interest-free loan to the government at that point in time, that then you have to argue for them to give back to you. Like I my my goal has always been to be as close to zero on my tax return as possible, which means I gave them just enough. And if I have to err one way or the other, I'd prefer to get money back. Uh, because that feels better than owing fifty dollars, getting fifty dollars. I mean, and I I feel like at that point in time I'm okay with with lending them fifty dollars, but uh I've always I've always been of the mindset uh aiming for for zero is is the goal. And you'd be correct.
SPEAKER_03Yep. That's the exact advice we give all our clients.
SPEAKER_01Now, I did at one point in time end up in the exact opposite situation with the withholdings, where um I filled it out very poorly uh because I am a brilliant individual at times and ended up not counting in um or considering my wife's income uh and ended up very much undershooting on the withholding on my account. And we ended up owing a decent chunk that year because uh it like her income moved us up in in taxation, ended up owing uh four figures, something in that range, um, like two thousand or something along those lines. I was like, okay, I need I need to fix that because that is definitely not what my my end goal is. Uh that is not close to zero at all.
SPEAKER_03Oh, and you'd be surprised how often it happens, right? Like you don't it goes back to just things you don't consider. Like you retirement withdrawals are a big one that does that kind of thing to people. That's that's often how they get in trouble with it, because you'll ask the person that you're withdrawing from your 401k or your account, wherever it may be, well, do I need to withhold taxes? And they'll tell you if it's an early withdrawal before you're 59 and a half, they might tell you, oh yeah, just hold 10%, you'll be fine. But they don't consider that that's going to be taxable income now, if it's from a pre-tax asset. Uh, and they don't consider that your normal income, you know, is going to go up in tax bracket and your withholdings are not going to account for that.
SPEAKER_01Uh and of course, like you mentioned, it it it also very much depends on what you're pulling from on the taxation categorization that those funds are coming from. Is this pre, is this post-tax dollars uh on the investment? Yeah, that'll that'll impact a lot. And it like, yeah, you can pull exactly $10,000 from one account or another, and one of those is going to impact your taxes more than another one will. Exactly. Uh, do you guys have any more stories for us of uh some clients that you've worked with or some cautionary tales uh for the people if they see something coming about, reasons that they should uh be looking up your phone number to give a quick call for your assistance?
SPEAKER_03I can uh give another cautionary tale and then I'll try and see if I can come up with a good news story uh to close it out on too. Um so when I first started, I got involved in tax during law school. Uh the a lot of law schools run uh tax clinics uh for low-income taxpayers, basically, places where you can go, the student can get experience representing you, uh, and the person gets help for free. Um one of our clients there uh had uh just uh helped run a business for most of her life. Uh and they liked her name, so they said, Look, we've got this other investment that we're starting up. Uh, we want your name associated with it, and we'll cut you a check every month from it. She said, Great. Right? Um that sounds wonderful. Uh signs on as I can't remember if she was the treasurer or the CFO off the top of my head. But uh one of those higher-up responsible positions. Right. Well, turns out uh this business was a bit fraudulent, uh, and they weren't holding any of their 941s. Right. Um now this lady doesn't know what's going on, she starts getting notices from the IRS, considers them junk mail, tosses them away. Right. Um she gets really sick after that, and her husband is the one that calls us. Uh, and they start we start looking into it. It turns out that there's been a revenue officer assigned to this business. The business has been shut down for fraud, and the revenue officer has gone through what's called the trust fund recovery process, which means that he's assessed the penalty the taxes that the IRS would owe to her personally because she's a responsible party. Never mind that she never had any actual knowledge of this, never mind that she never never was involved in any of the transactions. She owes now over a million dollars in tax debt. Um ultimately uh the IRS chased her to her grave uh over this. Uh she eventually passed away, and her heirs had to liquidate her property uh in order to pay off the debt with the IRS because there was a revenue officer um seeking it. Um it was kind of the nightmare scenario. Uh, and as I look back on it now, there was a lot that could have been done uh to avoid it. Starting with if you're accepting responsibility in a business, right, be aware of what's going on in the business. But second, uh don't ignore these notices from the IRS. She had chances to fight this, and she could have made a case during the trust fund recovery interview process to avoid liability. But because she chose not to participate and just ignore the notices, this all got assessed to her. Her appeals rights had expired by the time she came to us, and there was no avenue left to help.
SPEAKER_01That is uh a lot of of of caution right there for for people involved and a lot of moments to uh have have taken advantage of that slip by that that lead to this situation.
SPEAKER_03Uh so I mean if there's one thing that I can I can preach to you, right? It's just you have rights still, even though you have a tax debt, and these notices are giving you the chance to exercise your rights. And the IRS is trying, is counting on you to ignore these notices so that you don't claim your rights as an American citizen. Uh and if you do that, you're gonna end up stuck with the debt. The earlier in the process you get to somebody who can help you, the more options you will have.
SPEAKER_01Yeah, the like preaching people acting at the earliest convenience uh or the earliest moment possible, or even before something starts showing up is something that we we hear regularly. Uh taking the initiative to handle these things, even in a standard collection scenario, uh, and obviously with the IRS, we're talking a relatively elevated collection scenario. Um, but reaching out as early as possible. If like you're missing if or you know you're going to miss a loan payment on your car, reaching out to the lender immediately before you have a late payment on your uh on your record is going to put you in a much better position to have that conversation with them, not ignoring the notices from the IRS is going to help you out a lot as well. Yeah, that that all of that seems to track pretty pretty solidly with everything that we've heard in in multiple avenues here. If something's happening, act early.
SPEAKER_02What what all what you'll see is that they'll they'll work a job cash. It's been great for a few years, and then that business owner will decide to get a good CPA. And that CPA will tell them, Hey, you're losing money hand over fist by paying these guys cash and not 1099. So then they'll go back in and submit 1099s for the prior years to this individual, and now they owe taxes on money they thought was going to be tax-free.
SPEAKER_01Like big changes like that can really impact a bottom line, especially like going back and retroactively doing that feels like like a a tax liability that should be a red flag to a business owner. But if you're if you're not minded, if you're if your mind's not working in that direction, you're trusting somebody to be like, yeah, go back and do this, um, without them explaining to you the full financial impact of that. Ooh, yeah, that I could see that being a a pretty hefty bill at the end of that uh tax filing.
SPEAKER_03Yeah, you're gambling in that case, because that that uh statute of expirations that I mentioned, right? It only starts to run once you file a return. Until then, the IRS can look back as far as they want if they find out that you're hiding money. And if you do this enough years in a row, right, then you risk having criminal intent imputed to you. Now that's not something that That we commonly see, right? Most of the time the IRS is just looking on what to collect. But there are cases where you know you have you make $100,000 ten years in a row and you never pay any tax on it. The IRS is going to start looking at you as less of a uh innocent victim and more of a tax evader. Uh and those are the people who do jail time over taxes.
SPEAKER_01All right. Gentlemen, any any final thoughts for everybody out there listening before we sign off for today's episode? And then after that, I do have one other thing.
SPEAKER_03No worries. One thing that's on my mind uh is there is that we we haven't mentioned during this podcast so far. Um there has been a big court case recently uh that affects tax law. For anybody who has tax debt related to years 2019 through 2022, um there's a court case that involves the penalties and interest on those years, and you may be eligible for relief on those penalties and interest, uh, but you've got a claim deadline of July 10th.
SPEAKER_01So very short timeline at this point in time. So if if you're if you have debt 2019 through 2022, reach out, do the thing immediately before July 10th, and you might have an opportunity to mitigate or or uh help yourself out in one of those situations.
SPEAKER_03We've seen it range anywhere from a couple thousand dollars to literally hundreds of thousands of dollars available for taxpayers to get back under this. Uh, so you don't want to miss that deadline, especially if you've already paid the tax, you can get a refund for it if you file before July 10th.
SPEAKER_02Uh so yeah, and I'll say this for anybody who's wondering who is in a predicament or is uh gonna be in a predicament of owing taxes, starting a business, not knowing how to structure that business to keep the most money in their pocket, reach out to somebody. Reach out to the right people. It's gonna hurt you more to try and go at it on your own or through YouTube or what have you than to spend the time having a conversation with somebody. It's also gonna take you a lot longer to get a hold of the IRS than somebody who can at least guide you in that direction.
SPEAKER_01Yeah, every day that they delay answering your phone call is another day that interest is is piling up on what you owe. So they have no no real big incentive to uh to to be in contact expeditiously. All right. So I've got I've got uh 10 rapid fire questions for you. First, instinct, uh, and Scott, we'll we'll start with you. What is the biggest tax myth you hear all the time?
SPEAKER_03Uh for me, it's that paying your taxes is somehow patriotic, right? Uh there's this belief that if I pay more in taxes, that uh I'm being a better citizen. Uh that's not the case. In fact, there's a somewhat famous Supreme Court case uh that that makes a point that you have a right to structure your affairs to pay as little tax as possible. You gotta pay some tax, but you've got a right to structure it so you pay the minimum. All right.
SPEAKER_02If I'm receiving uh disability or social security as one of my income streams, I don't have to pay any taxes.
SPEAKER_01All right. What's one IRS letter people should never ignore?
SPEAKER_02Uh LT11.
SPEAKER_03For me it's uh CP90 or LT1058. All three of these notices go together if they mean that there's a levy coming.
SPEAKER_01Gotcha. Who makes more preventable mistakes? W2 employees or business owners?
SPEAKER_02Preventable mistakes I'm gonna do.
SPEAKER_03Yeah, that's hard to disagree with. Uh I'll say that 1099 owners do make like not turning in your expenses is a big preventable mistake. But yeah.
SPEAKER_01I I feel like you're also in the range of having more W-2 employees than than business owners out there. So pure numbers game, I think that that would win, in my opinion. Uh what's a tax issue people worry about way more than they should.
SPEAKER_03Um so you asked us a question about letters a minute ago. Um on the Converse side, there's a lot of letters from the IRS that seem scary that will demand a response uh within 30 days or things like that. Uh really what you want is somebody who's an expert to look at these. And if an expert tells you it's not something to worry about, don't worry about it. Uh it just um we can take care of responses that are necessary in order to keep you protected. Uh, but we know the difference between letters to worry about and letters to not, and don't let it keep you up at night because the IRS is going to pound you with notices, trying to get you to call them and give them money. Gotcha.
SPEAKER_02For me, this one's um a little bit wiggly, I'd say, but uh paying estimated quarterly payments. If you're good about saving your money and you'd rather keep that until the end of the year and you know you're gonna have a tax bill and you can pay it, do that. That's what I did. The penalty for me was maybe a few hundred bucks, but it was worth me having that money in my bank account to run the business.
SPEAKER_01There you go. Uh what's the most common side hustle mistake you see?
SPEAKER_03I'll take the obvious one, uh, Annis, and make you come up with a harder one. Uh 1099 truckers are one of our biggest uh biggest clients because they just they don't collect their income uh and they don't uh statements and they don't file uh and they don't keep track of their expenses. We've had a few people like send us literally Walmart sacks stuffed with receipts from drive-in, drive-throughs, and truck stops and things like that, that we need to go through and figure out five years of deductible expenses for them.
SPEAKER_02Uh mine would be being a sole prop. Because uh, even as a side hustle, you can probably make some good money. Set up your LLC. Set up your LLC so you get the advantages of all of your deductions and write-offs. And what people don't realize is as soon as you make over like $600 on a 1099, you have to file it. So you might as well have some structure to it because who knows, a side hustle can become a profitable business.
SPEAKER_03Exactly. I'll throw in there too. Lcs give you liability protection. Uh sole props don't. That's totally unrelated to tax. But uh as an attorney, you always want an LLC instead of a sole prop.
SPEAKER_01If everyone listening did one thing this week to avoid future tax problems, what would it be? Or what should it be, I guess.
SPEAKER_02God help ahead of time.
SPEAKER_03Yeah. Um don't take extra deductions you don't qualify for. Like the number of people who, like Ennis said, put more dependence than they have on a return. You're gonna have to prove that, right? Yep. Don't don't put something you can't prove on your return.
SPEAKER_01Uh we'll we'll go with a a sort of shitskrie uh reference here. What's something people think is a write-off that usually isn't?
SPEAKER_03Medical costs. Uh technically, it is an itemized deduction, but only to a percentage that extends uh that exceeds your taxable income that I can never remember the formula for. I always have to have one of our CPAs explain it. But uh it ends up being you have to have like hundreds of thousands, if not millions, in medical costs to make it worth itemizing.
SPEAKER_02That's a good one. Um the one that Scott said is the one that comes to mind for me. I don't know if you got another one on there.
SPEAKER_03Scott.
SPEAKER_02No, that that works.
SPEAKER_03Yeah, that's the most obvious one. Uh there are other uh like probably the second one would be separating personal from business expenses. So that's another lesson for anybody starting a business. Don't commingle funds. Keep a personal account for your personal money, a business account for your business money. It makes life much easier. It always sucks to have to be the bearer of bad news and go to a client and say, Hey, these lunches that you paid for yourself, you know that that's not out of your business account. You know that's that that wasn't anything related to business, that's not a deductible business expense, right? But I used my business account.
SPEAKER_02And for W2 guys, it's much more limiting. If you're a business owner, you have a little bit more. But um, like yeah, like miles on on a car. You know, are you actually using it for business? Is it a personal vehicle? How often are you using it?
SPEAKER_01I put a company bumper sticker on it. That's advertising, right? All right. What's worse? Not filing or not paying? Not filing.
SPEAKER_03Um I'm gonna disagree and go with not paying. Uh I think that uh if you have a debt on record, um, there's less options to you uh than if you haven't filed the return yet. There's more that I can do for you on a resolution side.
SPEAKER_02I say not filing because they're gonna file for you, and the not uh the failure to file is a big penalty.
SPEAKER_01Okay.
SPEAKER_02Reasonable argument.
SPEAKER_01What's the biggest sign someone is avoiding a tax problem instead of addressing it?
SPEAKER_03Not answering our calls after you've signed on as a client.
SPEAKER_02If if that debt grows uh more than $200 in penalties and interest, you've probably avoided it for too long.
SPEAKER_01All right, last one.
SPEAKER_03Oh, stacking debt years after years is the other thing that I'd throw in there. You just you don't care about it at that point.
SPEAKER_01Finish this sentence. Most tax problems start when most tax problems start when you think you're smarter than the system, is what I'd say.
SPEAKER_03Um this has been designed and refined over more than a hundred years. Uh and you almost certainly aren't thinking of something original that nobody's tried before. They will eventually catch up with you.
SPEAKER_02Yeah, they start when you think you have enough knowledge to do it yourself.
SPEAKER_01All right. I was gonna say they start when you get your first job and have to pay taxes, but um, that's just me.
SPEAKER_03Can I change my answer? Because I like that one.
SPEAKER_01All right, gentlemen. Well, thank you so much for joining us on the podcast today. Um, if you guys out there are feeling nervous about your taxes, your tax situation, if you owe something, if you're receiving letters from the IRS and you don't understand what those letters mean, uh give these guys a call. Priority tax relief. They are here to assist you to put you in the best position uh that you can possibly be in with your taxation if there is owing, so that you understand what exactly your situation is. Uh, actual help that understands the IRS, all of the legal stuff. Gentlemen, thank you for joining us today. Thank you, Scott. Thanks for having us. And for everybody else out there, this has been Dollars and Cents, HAPA Community Credit Union's financial literacy podcast. Until next time.