Profitable Painter Podcast
Profitable Painter Podcast is a rich resource for anyone interested in starting, running, and scaling a professional painting business, offering valuable insights, strategies, and interviews with industry leaders. Through case studies and in-depth discussions, we deliver a vivid picture of the painting industry, with a disclaimer that any financial or tax information is general and not a substitute for professional advice.
Profitable Painter Podcast
How to Tackle Unfiled Tax Returns from Previous Years
Uncover the keys to navigating IRS tax issues for painting business owners with expert insights from Richard Dunton, a seasoned Enrolled Agent. Learn how understanding and tackling your tax obligations can alleviate the stress of dealing with IRS scrutiny. In our conversation, Richard explains what it means to be an Enrolled Agent and the role they play in representing and advocating for taxpayers. We explore the mental burdens of overdue filings and tax debts, and how taking a proactive stance can safeguard your business from potential pitfalls.
Facing unfiled tax returns or mounting penalties? Don’t face the IRS alone. This episode highlights the essential steps to compliance, from obtaining IRS transcripts to seeking guidance from trusted tax professionals. Richard and I delve into the potential consequences of ignoring tax responsibilities, such as the IRS filing a Substitute for Return on your behalf. By enlisting a tax professional, you can create a plan that addresses your tax debt effectively. Join us in this enlightening discussion aimed at empowering you to focus on growing your business, free from the shadow of IRS concerns.
this is daniel. I'm a cpa that works exclusively with painting business owners to help them know their numbers and what they mean and save big in tax, and I'm the founder of bookkeeping for painters. And today I'm here with richard dunton enrolled agent enrolled agent, yes, yeah and uh.
Speaker 2:Advising director for bookkeeping for painters. So people ask me sometimes, like what does that mean? Enrolled agent? That's something that we haven't actually heard of before and it's actually a very old credential. It's one of the oldest in the country. It is a credential that is offered by the IRS and it means that the person who has that credential is allowed to represent taxpayers. Before the IRS it's generally used to do things like tax resolution, resolve back tax debt problems, that sort of thing. And enrolled agents are kind of like CPAs, who focus very narrowly on taxes, who focus very narrowly on taxes.
Speaker 2:And today we thought we'd talk a little bit about what happens if you maybe have a little bit of a bad history with the IRS.
Speaker 2:Maybe we haven't filed all the tax returns that we're supposed to, maybe we've got some back tax debt that we haven't taken care of yet, and then what can you do about it, what shouldn't you do about it and what should you do? You know, as a business owner it's very easy to get in over your head with some of the filings and the forms and the payments. It's a very complex tax code that we have in this country, probably one of the most complex in the world and sometimes we don't know what we are supposed to do and sometimes we get so busy running our businesses that we don't, you know, take the time necessary to find out and make sure that we're filing all the forms that Uncle Sam is requiring, sure that we're filing all the forms that Uncle Sam is requiring. So you know, daniel, you and I have talked to a lot of business owners and it's not uncommon to see people kind of fall behind on their filings.
Speaker 1:Yeah, it definitely comes up a lot where folks come to us and they haven't filed their tax return for the last three years or whatever the case is, and you know it happens, life happens and the biggest thing you can do in this situation is to tackle it head on.
Speaker 1:You know, don't bury your head in the sand and it's a judgment-free zone, you know, and I'm sure that's the case for tax professionals everywhere.
Speaker 1:They're there to help you and it is complex, but it can be solved. Most of these things can be solved and the worst thing you can do in these situations is to bury your head in the sand, because it's going to make things a lot worse as opposed to just tackling it head on, getting it taken care of and getting that off of your, your mind, you know, so you don't have to worry about it anymore, which I think is a huge tax on your, your mental space. I mean no pun intended there, but like keeping, not not handling these things, um, like these irs issues, these tax issues, really has a uh, takes up some bandwidth on your ability to think about your life and your business, and just get it taken care of so that you can move forward, because if you're going to hit any level of success in your business, you got to have this taken care of. Otherwise you're just. You have a huge target on your back.
Speaker 2:Yeah, you don't want the IRS living rent-free in your head keeping you up at night. But you know, in a way the IRS they almost encourage that behavior because the IRS is not going to be proactive, right, like if you forget to file something or don't know about a requirement. It's not like they're going to call you up on the phone and say, hey, make sure you get this taken care of before the deadline next month. They are more than happy to let you miss the deadline and then not contact you for months, years, while the whole time penalties and interests are building up. Because the IRS knows that the statute of limitations or in other words the amount of time they have to assess and collect those taxes, that clock does not start ticking until you file your return. So if it's five, eight, 12 years, they're okay with it. The clock hasn't started for them. Only once you file and the taxes are assessed do they then have an additional 10 years to collect on it. So they've got time. Hopefully they might send you a letter if you're missing a return. But don't expect a lot of help or proactiveness on the part of the government, which I think none of us is really. The government's a pretty low bar. I don't think any of us are expecting anything too intelligent from them, but the point is it's not going away Right. You can't outrun it. As long as you have a Social Security number, they know that you exist, and as long as you are alive on this planet, they can come after you for those back tax returns.
Speaker 2:So if you're in that situation, what is the first thing you want to do? Well, it's like any kind of triage situation. You want to assess the damage and understand what you're looking at. So if it's more than a year or two of noncompliant filings, or if it's more than a few thousand dollars of back tax debt, I recommend that you talk to a trusted tax professional. Cpas are good. Enrolled agents are very, very good, because they specialize in this sort of thing. Not all of them do, but most of them do. Look for those who advertise those services. We certainly have been able to help a lot of our clients with this sort of thing, and the first thing that I want to do is pull your IRS transcripts. This is getting our baseline information. We're going to find out how many tax returns still need to be filed. We're going to find out what kind of action the IRS is taking behind the scenes that they may not have notified you about. We're going to find out what information has been reported to the IRS on your behalf and that's really going to be necessary to start crafting a plan to become compliant and take care of the back tax debt. I've got an example of what an IRS transcript may look like here.
Speaker 2:Now this report is from some very powerful tax software that we use. The raw data that you might get from the IRS is not going to be this well put together, but if your professional knows what he's looking at, he'll be able to make heads and tails of it. If your professional knows what he's looking at, he'll be able to make heads and tails of it. In this report you can see they've got every year listed and they know whether a return was filed or not. In this case they're missing a return for 2018 and also 2023. We also know if there is a balance on the account. In this example there is no balance, but if there was money owed, it would appear here. We know if there's collections active on the account. We know if the IRS is taking a closer look at it when the examination is active. We know if they've put liens against your property to try and collect. So this is just a tiny part of the overall report.
Speaker 2:A lot of good information in here to help you understand where you stand. Additionally, we know what information has been reported to the IRS on your behalf. On the bottom here we've got a portion of the wage and income summary. So for this taxpayer, we can see that the credit card he was processing credit card payments in his business and the credit card company sent him a 1099-K which shows that he had $655,000 of credit card receipts in 2021, $844,000 in 2022, $465,000 in 2023, and so on. It's going to show W-2s, 1099s, schedule K-1s all sorts of information, and it's important to know because, well, one, we want to make sure that's right, but two, we also don't want to miss anything because we don't want to try and file a return and get compliant. And then, oops, there's a whole bunch of brokerage statements that never got on there and now we've got to amend the thing best to at least know what the IRS knows, and then we can tackle it head on.
Speaker 1:Yeah. So I think a lot of folks they'll get kind of complacent. Like if you haven't filed for a year or two, two, and you're not really hearing anything from the IRS, like nobody's coming to your door or sending you nasty letters, you can kind of start to think. I think some people might maybe start to think like, oh, I can maybe just get away with this. But if you have a social security number, you have a tax transcript, what Richard just went through and the IRS probably has a good amount of information on you to act on. And they maybe haven't acted on this information yet, but it doesn't mean that they won't at some point in the future. They're probably just prioritizing other folks over you and they're working through that list.
Speaker 2:Yeah, and if they've got data and no tax returns, they do have the option to do something that's called a substitute for return, and that is where the IRS uses the information they have to create a tax return on your behalf. This tax return is not in your best interest. This has all of the income the IRS can scrounge up on you none of the deductions, none of the credits, none of the good stuff. So a SFR or substitute for return is good for the IRS. Sfr or substitute for return is good for the IRS. It's terrible for you. Don't let the IRS file your return for you. Be in control of it and you tell them what information they need to know at.
Speaker 2:The next step is getting those missing tax returns filed. So that is going to require getting your business information. Hopefully you've got some kind of books and records. If not, maybe we have bank statements. Maybe we've got a shoebox of receipts. We're going to have to compile this together because we want to make sure we get all the deductions that we're entitled to. This together because we want to make sure we get all the deductions that we're entitled to. This is where a good bookkeeper can come in and help too. We've done many cleanups for folks who have been behind in their bookkeeping and we've been able to reconstruct a profit and loss and a balance sheet from bank records and receipts. It's a bit labor intensive, but if you have a significant amount of income, you want to make sure that you are not overpaying your taxes because you've missed expenses. So a good cleanup, a good set of books, will go far. Once we get that together, we can go ahead and get those returns filed and we can plug those missing gaps in the tax transcript. All right, so that's the paperwork part.
Speaker 2:Right Now comes the really hard part, and that is now that it's filed. They're going to start assessing the tax. Assessing the tax just means they're taking the numbers off your return and they're saying, okay, now you owe it. And now that you owe it and it's been assessed, we can start talking about how they're going to collect it. This is when the clock starts. They've got 10 years to collect, so they probably aren't going to get too aggressive up front. They're going to send you some letters, they're going to add the penalties and interest. You're going to get a huge amount due At this point.
Speaker 2:We now shift from compliance over into resolution, so we want to come up with a plan to handle all of this back debt. Now, I know nobody's got a bunch of money sitting around, so it's almost certainly going to involve some kind of installment plan. Or if you don't have enough income to pay it back over the next six years, you might qualify for what they call a partial pay installment plan, where you make less than the full monthly payment. Or you might qualify for the offer and compromise. Offer and compromise is that thing that maybe you hear on like late night TV commercials. You know, settle your debt with the IRS for pennies on the dollar. I wish it was that easy.
Speaker 2:The ads tend to make it sound like you know a car negotiation where you sit down at the table with the car dealer and you jot a number down on a little post-it note and you slide it across the table and you cross your fingers in hopes that he takes it. It doesn't work that way with the IRS. There's paperwork involved, big surprise, there's a lot of numbers, there's a lot of formulas. Have assets? Then an offering compromise could be a possibility, but more often than not we're going to be looking at either a partial pay or possibly, if you're really hard up, we might be able to get the account classified as currently not collectible, which is a pause. The 10-year clock keeps running, but the IRS doesn't come after you while you're currently not collectible. Keeps running, but the IRS doesn't come after you while you're currently not collectible.
Speaker 2:So we could do a whole episode on, we could do several episodes on resolution options, but I just want everyone to know that you're going to see a big number and it's going to scare you and you're going to think I can't, I can't deal with this.
Speaker 2:We can work through it and as long as you are making a good faith attempt to work through it, the IRS is not going to take collection activity against you.
Speaker 2:So if you're in a payment plan, you don't have to worry about waking up and having your bank accounts levied where they've just contacted Chase Bank and yanked the money out and now you can't make payroll. You don't have to worry about your passport getting seized. You don't have to worry about any of the nasty notes, nasty letters. All of that's going to be put on hold as long as they think you're making an effort. But if the IRS doesn't hear from you or you stop making your payments and they can't get a hold of you, they're going to think the worst and that's when they're going to start bringing in the bigger guns and making your life miserable. So this is just one of those things where it sucks. I get it. Get a trusted advisor on your side, let them get between you and the IRS and be proactive, and it will suck a lot less if you're putting forth that effort.
Speaker 1:Well said, it's just one of those things you got to bite the bullet on. Once you get this past, you just imagine what you would the sense of relief like getting this taken care of, not having that nagging thing in the back of your head like, oh, this is kind of haunting me, like getting that off of your out of your mind, getting it care of can can really free up some of your headspace to to worry about the important things in life instead of the IRS. So yeah, absolutely.
Speaker 2:And you know we're not. We're not trying to scare anybody here, but it's. It's good to understand that there are some consequences for not dealing with your IRS problems. If you're not compliant with your taxes, the IRS can revoke or deny the renewal of your passport so that you can't travel abroad. They do have that right. Another thing is that you might not qualify for loans. Maybe you want to buy a house or a new car. Your business needs an SBA loan. If the banks do not have past tax returns, they're not going to feel comfortable giving you money and that could put a real damper on your financial situation.
Speaker 2:Another problem if you try, one of the first things the IRS is going to do is put a lien against your property. If you owe taxes and you might not be able to sell your house. If there's an IRS lien on there, it will absolutely come up at closing. Another disadvantage is if you have a business like an LLC or especially a corporation, and you have not paid your business taxes, you will lose your corporate veil protection. So if somebody is to sue your business, they might want to go through it into your personal assets, your personal savings account, your personal home. You want the protection of that corporate veil to keep them out. And if a judge looks at your business and says, hey, you haven't really been operating like a true business entity, you haven't done your tax filings, I don't think you should get corporate veil protection. And it happens all the time where a plaintiff blows right through that and goes after somebody and attacks their personal assets because they did not maintain that protection of the LLC or the corporation by treating it like a legitimate business and tax returns is going to be one of the first things they look at.
Speaker 2:Additionally, you might be trying to bid on jobs like government jobs. Those are some of the most lucrative contracts out there government work. Daniel and I have met painting business owners who make well over a million dollars a year painting military housing installations or federal buildings. It's kind of their bread and butter. But if you're not compliant with your taxes, there's a good chance the government will deny your ability to make a bid so we could be missing out on future work.
Speaker 2:So just you know there's a million reasons to take care of your tax debt. So just you know there's a million reasons to take care of your tax debt. And the truth is it doesn't have to be scary. There is a light at the end of the tunnel. But we do recommend you know finding a trusted advisor to get between you and the IRS to help you understand what needs to be done and to present your best options. They're well worth the investment and can usually get you a much better outcome than you could on your own. And just one more tip, since I'm up here spilling If you're in a really bad situation and you're thinking about hiring somebody to help you, do not call the IRS and talk to them first. Contact your tax professional, get your power of attorney signed, make your plan. But do not contact a revenue agent or a collection agent on your own, because what you say to them will be recorded and it could seriously impact the amount of options you have moving forward.
Speaker 1:Yeah, good stuff, all right. Well, if you have any thoughts about getting help, or if you have any experiences you want to share or ideas for a future podcast, go to Facebook, type in Grow your Painting Business. We'd love to hear from you and with that, we will see you next week.
