Tax Expert Tells ALL: Tax Myths Debunked, Audit Red Flags & IRS Transcripts

00:00:00.000 | - Navigating tax advice on the internet can be tricky.

00:00:03.560 | So today we're digging into what most people get wrong

00:00:06.240 | about taxes and tax law,

00:00:08.700 | the myths that keep spreading wildly on social media

00:00:11.800 | and how to avoid costly mistakes when you file.

00:00:14.520 | I'm joined by Jasmine DeLucci, a seasoned tax pro

00:00:17.680 | who became an enrolled agent

00:00:19.000 | while she was still in high school.

00:00:20.960 | She knows this stuff inside and out,

00:00:23.400 | and we're gonna dive into the strategies and tactics

00:00:25.880 | to help you save money and take control of your taxes.

00:00:29.240 | I'm Chris Hutchins.

00:00:30.080 | If you enjoy this episode,

00:00:31.640 | please share with a friend or leave a comment or review.

00:00:34.520 | And if you wanna keep upgrading your life, money,

00:00:36.720 | and travel, click follow or subscribe.

00:00:40.120 | Jasmine, what do you think is wrong

00:00:42.080 | with so much of the tax advice you see on the internet?

00:00:45.080 | - I think a lot of my criticisms keep coming back to,

00:00:48.440 | people just look at the statute

00:00:51.760 | and then they make up in their mind what the law is.

00:00:55.080 | And so, right, 'cause we think, oh, well statute,

00:00:57.160 | we've got the law, like that's it, right?

00:00:59.040 | And, but if you've watched any of my content,

00:01:01.080 | you know that we've got several layers of law, right?

00:01:03.440 | Tax law has statute, treasure regulations, court cases,

00:01:06.680 | and then we even have more guidance from that,

00:01:08.440 | like revenue rulings, revenue procedures.

00:01:11.240 | So I think people that, people don't love when I say this,

00:01:15.160 | but it's like people that are really deep in tax law

00:01:19.160 | just don't tend to post online.

00:01:20.920 | So what I tend to see is the people that post online

00:01:23.640 | tend to have a very surface level of tax law.

00:01:26.400 | You know, they'll learn a little bit and they're like,

00:01:27.840 | well, shoot, do I wanna work myself to death

00:01:29.960 | and make 1/100th of what I could?

00:01:32.280 | Or do I just wanna post random thoughts online

00:01:34.880 | and make like 100 times more?

00:01:36.640 | So then they butcher that basic stuff and say it wrong.

00:01:40.000 | And I think it's genuinely like they don't know.

00:01:42.320 | It's not like a malicious intent, but most people just,

00:01:45.560 | when you read base level tax law,

00:01:48.200 | you get the wrong answer a lot of times.

00:01:50.640 | And that's what they're doing.

00:01:53.640 | - Is there an example that we could just use

00:01:56.200 | for everyone to understand something that you see posted

00:01:59.040 | all the time on the internet that just isn't correct?

00:02:02.440 | - Yeah, clothing is a big one.

00:02:04.700 | Clothing or fashion accessories or even like haircuts, right?

00:02:08.000 | We think of all these personal things.

00:02:09.920 | And so the first thing that's so fun for people to post,

00:02:12.840 | there was this one video that I use as an example

00:02:15.320 | where this licensed tax preparer is saying like,

00:02:19.720 | well, I deduct all my haircuts 'cause they're my brand.

00:02:22.320 | And he's like, well, I deduct my blue suits

00:02:24.360 | because blue is my brand, right?

00:02:27.160 | And that's your perfect example of,

00:02:30.120 | he's saying he's relying on IRC 162,

00:02:33.000 | which is our classic ordinary necessary business expenses.

00:02:36.400 | So you go there and you say, okay, yeah,

00:02:37.680 | well, it says ordinary necessary business expenses.

00:02:39.800 | The mistake he's making is he's looking at it and saying,

00:02:43.400 | I think it's ordinary necessary to my business.

00:02:47.160 | And so it's literally just like made up in his mind

00:02:50.960 | when obviously what we wanna do is go to the tax law.

00:02:53.320 | So then what do we do?

00:02:54.160 | We look at treasury regulations.

00:02:55.680 | For this one specifically, it doesn't help us.

00:02:57.560 | So then we go to court cases.

00:02:59.320 | The court cases say, that's cute,

00:03:02.840 | but you're gonna get a haircut anyways.

00:03:05.200 | They say personal grooming, it's just so,

00:03:07.240 | it's so inherently personal,

00:03:08.680 | it can't be for business purposes.

00:03:10.520 | And then we get that same result for clothing.

00:03:13.080 | There's actually a three-part tax court test for clothing.

00:03:15.960 | And so the one that everyone violates is,

00:03:18.440 | it's like, it can't be suitable for personal use,

00:03:22.280 | even if you only use it for business.

00:03:24.520 | So a blue business suit, very suitable for personal use,

00:03:29.080 | therefore not deductible.

00:03:30.720 | - Now, I remember one time my wife

00:03:32.520 | was selling to college campuses

00:03:34.440 | and part of their brand for the company

00:03:36.040 | was everyone bought like big animal,

00:03:38.240 | like almost Halloween costumes.

00:03:40.640 | Presumably that's not like a personal use.

00:03:42.400 | So that might've qualified as a business expense,

00:03:44.960 | but a suit, a shirt, a haircut, all these things are not.

00:03:48.720 | - You obviously wouldn't have purchased that

00:03:50.160 | for personal reasons because at the end of the day,

00:03:52.160 | tax law, a lot of times they just look to substance, right?

00:03:55.000 | We wanna look at the laws,

00:03:56.960 | but they're almost always built in a way

00:04:00.440 | to go back to substance.

00:04:02.160 | And so why did you really buy it?

00:04:03.440 | Well, I mean, you probably bought a blue suit,

00:04:06.040 | like, yeah, you're working in it,

00:04:07.400 | but like you can use that for whatever

00:04:09.040 | and you probably are using it for whatever.

00:04:11.240 | And so they just draw a line there to prevent abuse

00:04:13.960 | versus, yeah, I mean, something like super unique,

00:04:16.040 | there's probably no way she would have gone out

00:04:17.560 | and purchased that for any other reason.

00:04:19.600 | - Definitely not.

00:04:20.680 | And we're not just gonna talk about business related things

00:04:23.600 | in our conversation,

00:04:24.920 | but I wanna double click a little here

00:04:26.440 | on what would actually happen, right?

00:04:28.360 | Like if it got to the point that you had to debate this,

00:04:31.720 | is it kind of like innocent until proven guilty?

00:04:35.140 | Or like, do you have to be able to explain that,

00:04:38.640 | well, I actually live in the hottest part of the country.

00:04:41.700 | I never wear suits outside of when I'm on video in my studio

00:04:45.600 | so I actually think this suit is a business expense

00:04:48.280 | 'cause I would never wear it for personal reasons.

00:04:50.360 | - Yeah, there's always a practical element to it

00:04:52.400 | and I think that's also why people have gotten

00:04:53.880 | so comfortable giving whatever advice

00:04:56.160 | because first off, they don't do too many IRS audits

00:04:59.400 | and then when they do,

00:05:01.240 | honestly, IRS auditors aren't super knowledgeable

00:05:03.600 | a lot of the time if you're a small business.

00:05:05.520 | So practically speaking,

00:05:07.120 | if you just spend too much on clothing,

00:05:08.640 | they'll probably just disallow it.

00:05:10.160 | Now, if they look into it and they say,

00:05:12.000 | well, what were they?

00:05:13.120 | And you're like, well, they're suits.

00:05:14.680 | It's just like at that lowest level,

00:05:16.400 | they're probably just gonna deny it.

00:05:17.640 | Now, not to say you couldn't then introduce like,

00:05:19.800 | well, I've got my logo plastered all across the front of it

00:05:22.480 | and it made it super ugly

00:05:23.600 | so I would never wanna wear this thing for personal use.

00:05:25.560 | So there are like arguments you can start to pull out

00:05:28.200 | and the way I view it is if you're on bad law,

00:05:32.000 | like you wanna be more careful, right?

00:05:33.680 | And I think what a lot of people are doing online

00:05:35.440 | is they're pretending like it's good law

00:05:37.800 | and so then if you get into the argument,

00:05:40.720 | like you have to be super careful

00:05:42.040 | and you may still be able to get it through

00:05:43.720 | if you didn't abuse it so much

00:05:45.560 | because it's not gonna be noticed.

00:05:47.520 | Otherwise, you're gonna have problems.

00:05:50.480 | - Yeah, and by bad law and good law,

00:05:52.600 | you've kind of highlighted before

00:05:53.840 | that there's the statutes,

00:05:55.120 | there's the treasury regulations and the court cases.

00:05:57.680 | Would bad law be where there's a statute

00:06:00.280 | but it's been heavily kind of scrutinized

00:06:04.240 | or clarified in other ways?

00:06:06.640 | - Yeah, I would say bad law is like,

00:06:08.000 | if I do a full research and I look up what the answer is

00:06:11.560 | and I'm like, wow, everything's against us.

00:06:14.360 | The levels of authority you typically wanna have,

00:06:16.320 | we call it like substantial authority.

00:06:17.760 | So a 40%, 40% of what's out there

00:06:21.440 | is like gives you a good position.

00:06:25.200 | And if for things like you think of haircuts,

00:06:27.720 | I've pulled all the court cases.

00:06:30.200 | They all say no, like it's just what it is.

00:06:33.120 | So then you thinking, well, it's yes, right?

00:06:36.040 | A lot of people like to use the example of like Botox

00:06:38.240 | or different types of enhancements and stuff.

00:06:41.000 | And it's like, we've got the court cases

00:06:42.600 | and they just kind of laugh at the taxpayer

00:06:45.520 | every single time.

00:06:46.580 | And so when people all see like license preparers

00:06:51.240 | recommending it or they'll say,

00:06:52.360 | oh, this is a case of first impression.

00:06:54.080 | It's like, you're saying that

00:06:56.200 | because you haven't looked up all the court cases

00:06:58.600 | that actually exist already.

00:07:00.620 | - So I looked at a handful of the most common things

00:07:03.160 | on social media and one that I've seen a lot of

00:07:05.380 | is around hiring your kids.

00:07:07.320 | And this one seems like both I understand it

00:07:11.360 | and it also seems a little skeptical.

00:07:13.040 | Do you have any thoughts on that?

00:07:15.280 | - A lot of the themes I repeat, one of them is substance.

00:07:19.120 | It's like, we know with tax court, we know with tax law,

00:07:21.640 | we've got substance of reform.

00:07:23.360 | And so whatever form you put it in,

00:07:26.060 | it will always go back to like, what were you really doing?

00:07:29.200 | I think if you're genuinely working in the business,

00:07:31.900 | they're genuinely adding value.

00:07:33.240 | And then you also do wanna keep in mind

00:07:35.040 | things like state laws.

00:07:36.520 | If you are violating other laws,

00:07:38.360 | typically that alone can be a reason

00:07:39.920 | the IRS could deny something.

00:07:41.480 | I do think to some extent, if you are careful in areas

00:07:45.240 | where the substance is light,

00:07:47.400 | then you wanna be really strong on procedure, right?

00:07:50.040 | If you're gonna hire your kids,

00:07:51.160 | we want procedure to be really strong.

00:07:52.560 | Well, what would procedure be?

00:07:53.880 | That's all those technical formalities, right?

00:07:56.520 | I want an employment contract, I want an hours log,

00:07:58.640 | I want a calendar, I wanna know exactly what they're doing.

00:08:01.920 | We wanna actually issue a W-2,

00:08:03.600 | so we have really strong procedure.

00:08:05.620 | The substance is a little light, they're your kids,

00:08:07.400 | we're like a little bit skeptical,

00:08:08.800 | but we've got all this proof that actually

00:08:10.680 | we've got some substance there.

00:08:12.920 | Where people tend to go wrong in these types of areas

00:08:15.060 | is they do neither, right?

00:08:16.320 | The substance is light because, you know what?

00:08:18.000 | It's my kid and I'm just kind of paying them

00:08:19.440 | to take out the trash and I would never actually pay,

00:08:22.180 | whatever, $15,000 a year for someone to take out the trash.

00:08:25.240 | And then, oh, by the way, I have no employment contract,

00:08:28.520 | no proof, nothing.

00:08:30.040 | Whereas that might hold in a third party arrangement, right?

00:08:32.800 | If I hired a random person off the street

00:08:35.240 | and paid them 20,000 a year,

00:08:36.720 | I may be fine with not having an employment contract.

00:08:39.960 | I may be fine with not having all these technicalities,

00:08:42.120 | but because there's no related party nature,

00:08:44.580 | it doesn't get the same scrutiny.

00:08:46.880 | - Yeah, that makes sense.

00:08:47.760 | And one of the things that I noticed was interesting

00:08:49.880 | was in a lot of these kind of videos

00:08:53.200 | talking about all these great tactics,

00:08:55.200 | they don't clarify that even if you were doing them

00:08:58.120 | by the book, even if they were appropriate,

00:09:00.600 | if you just have a W-2 income

00:09:02.680 | and you're working at a company,

00:09:04.400 | like you can't write off your meals,

00:09:06.640 | you can't classify your car as a business expense.

00:09:09.680 | And a lot of these things that I've heard people

00:09:12.880 | one-on-one talking to them say,

00:09:15.040 | I work at Google and I'm taking a friend out to lunch,

00:09:18.220 | I'll just write that off.

00:09:19.260 | And I'm like, well, one,

00:09:20.260 | I don't know if you could write it off

00:09:21.300 | even if you did own the company.

00:09:22.900 | And two, I don't think you can do this as an employee.

00:09:26.960 | So are most of these things even relevant

00:09:29.180 | to people who don't own businesses?

00:09:31.140 | - So ever since the tax reform passed in 2017

00:09:34.540 | that started in 2018,

00:09:36.460 | there were some that would apply at the time.

00:09:38.540 | There used to be,

00:09:39.900 | you have to still get over that itemized threshold,

00:09:41.900 | but things like home office,

00:09:43.100 | you could take some of those things.

00:09:44.300 | But it was a, actually I had a professor

00:09:47.040 | who was a part of drafting all of the tax reform

00:09:49.740 | at that time.

00:09:50.580 | And they obviously had to fit within a certain budget

00:09:53.900 | over 10-year projections.

00:09:55.420 | And so because they made so many cuts in other areas,

00:09:58.380 | they had to have certain areas

00:09:59.820 | where they increased the revenue.

00:10:01.820 | And one of those was basically eliminating

00:10:03.460 | all of the deductions for employees.

00:10:05.340 | So right now, absolutely not, you get nothing.

00:10:08.420 | - What advice do you have for people

00:10:10.100 | for how to handle and scrutinize tax advice on the internet?

00:10:13.460 | How do you think people should try to figure out

00:10:15.580 | what's good and what's not?

00:10:17.340 | - At the end of the day,

00:10:18.460 | you want to actually get real professional advice

00:10:23.000 | if you're gonna rely on it.

00:10:24.460 | So ideally finding someone that you actually trust

00:10:26.940 | that can apply it to your situation.

00:10:29.020 | And I think social media serves as a great way

00:10:32.320 | to introduce the question,

00:10:33.740 | not necessarily that they have their answer.

00:10:35.900 | - And when you highlighted there's statutes,

00:10:38.040 | there's treasury regulations, there's court cases,

00:10:40.420 | all of these things can also be found.

00:10:42.140 | So I would encourage people to go look them up.

00:10:45.100 | I'm gonna share one example

00:10:46.180 | that's particularly relevant to the audience,

00:10:48.220 | which is I've often talked about how credit card points

00:10:52.460 | are treated as a rebate and they are not taxable.

00:10:55.340 | So I've recently heard some people questioning

00:10:58.740 | whether that's true.

00:10:59.980 | And the argument being really more on the business side,

00:11:03.820 | well, if you're using this to generate a profit,

00:11:07.420 | should it reduce your cost basis

00:11:09.820 | in whatever you bought or not?

00:11:12.860 | And so I looked and there was a revenue ruling

00:11:15.660 | that said a purchase incentive,

00:11:18.660 | such as credit card reward or points

00:11:20.620 | is not treated as income,

00:11:22.020 | but as a reduction in the purchase price

00:11:23.740 | of what is purchased with the rewards or points.

00:11:26.340 | And then there was this case where they actually decided.

00:11:31.060 | And what I thought was interesting was they decided

00:11:33.280 | this couple had generated a few hundred thousand dollars

00:11:37.120 | in rewards on two credit cards,

00:11:40.560 | buying gift cards and then kind of liquidating

00:11:43.840 | and reselling them as well as funding money orders.

00:11:47.000 | And the takeaway was when used to directly buy money,

00:11:52.000 | which they only included the money orders,

00:11:54.820 | you are turning a profit and that would be taxable,

00:11:56.800 | but to buy a gift card,

00:11:58.600 | which they felt was more of a product, you're kind of okay.

00:12:02.140 | And so, yes, I could go online and look all these things up

00:12:06.140 | if you wanna get clarity around it.

00:12:07.960 | If you're doing a little bit of this,

00:12:09.200 | maybe it's kind of okay to do a little bit of digging,

00:12:12.400 | but if you're generating hundreds of thousands of dollars

00:12:14.960 | of rewards a year,

00:12:16.400 | it might be worth going to read these yourself.

00:12:18.960 | - Yeah, or hiring even, reading them yourself,

00:12:22.240 | realizing that maybe there's not full clarity

00:12:25.240 | and then maybe even hiring someone

00:12:26.720 | to give an opinion on it, right?

00:12:27.960 | 'Cause there's always, I mean, you're never,

00:12:31.000 | I don't view it as like you're ever fully safe, right?

00:12:33.380 | Like at the end of the day,

00:12:34.660 | you can have an awesome, easy,

00:12:36.060 | clear tax position with the IRS,

00:12:37.780 | like not something as complicated

00:12:39.100 | as the credit card rewards,

00:12:40.740 | and you still face issues in audits.

00:12:44.180 | Like the reality is people think,

00:12:45.580 | "Oh, I'll just be good, I'll just," you know,

00:12:47.100 | but there's just so much bureaucracy.

00:12:49.980 | You have to check so many boxes

00:12:51.340 | that even safe positions are questioned in an audit.

00:12:54.280 | So I just view it as like,

00:12:56.160 | you just wanna protect yourself, like risk averse.

00:12:58.260 | So if you're taking a slightly more aggressive position,

00:13:00.420 | you can predisclose it on the return on an 8275,

00:13:03.860 | and then you're allowed to rely on less authority

00:13:06.320 | to take that position

00:13:07.740 | and reduce your exposure for IRS penalties.

00:13:10.660 | And you quite literally disclose positions

00:13:12.660 | that you still have to have a basis for,

00:13:14.620 | but you're allowed to,

00:13:15.460 | instead of having substantial authority at 40% basis,

00:13:18.960 | you're allowed to have, I think it's like 20% basis

00:13:21.500 | in your authority.

00:13:23.380 | So you're allowed to rely on less like law.

00:13:28.040 | So whenever I have situations where I'm like,

00:13:29.880 | "Well, this is something that I feel comfortable with.

00:13:32.380 | "We've got support for,

00:13:33.460 | "but there is some support on the other side

00:13:35.100 | "that I don't love."

00:13:36.480 | We can always proactively disclose it.

00:13:38.020 | And I've never seen that trigger an audit

00:13:39.500 | or do anything like that.

00:13:40.700 | - Okay, so that's basically saying,

00:13:42.620 | "Hey, I'm not as sure,

00:13:45.180 | "but I wanna let you know that I think I'm sure."

00:13:48.380 | - Yeah, saying, "I've got authority for this."

00:13:51.180 | You know, but it's something you may disagree with.

00:13:54.700 | So I'm just gonna proactively,

00:13:57.020 | I'm not trying to hide anything.

00:13:58.260 | I'm trying to be really clear about it,

00:14:00.280 | tell you the authority that I'm relying on.

00:14:02.180 | And yeah, and it's worked every time I've done it.

00:14:05.140 | I've never had an audit result from it, so.

00:14:08.060 | - And let's talk a little bit about audits.

00:14:09.940 | Almost everyone I know is scared of them,

00:14:11.980 | but don't actually understand them.

00:14:14.380 | Can you talk a little bit about what happens

00:14:16.220 | if you get audited?

00:14:17.820 | - Yeah, the audit process,

00:14:19.180 | I've been trying to provide a lot more clarity for it

00:14:21.500 | because unless you're just doing it,

00:14:24.300 | there's nowhere else you can learn about it.

00:14:25.900 | It's just, it's not, to me, it's not common sense.

00:14:28.800 | So when you get audited, I mean,

00:14:31.160 | that part is what you would expect.

00:14:32.640 | Like an auditor comes in.

00:14:33.720 | I do think people assume the auditor is really sophisticated,

00:14:37.440 | which if you were a much larger business,

00:14:40.240 | like there's different divisions, right?

00:14:41.560 | So if you're a very large business,

00:14:43.380 | you're gonna probably get someone sophisticated.

00:14:45.320 | But most people are under

00:14:47.000 | that $10 million gross receipt threshold,

00:14:49.400 | in which case they honestly,

00:14:51.340 | like these auditors are in the middle of training.

00:14:54.400 | They have so many check boxes to get through.

00:14:57.720 | Like they're just paper pushing.

00:14:59.640 | And I don't mean that, you know, say it to be mean,

00:15:01.520 | but it's just, it's government, right?

00:15:02.760 | They've been put into a position where it's like,

00:15:04.560 | just check these boxes, like just collect this,

00:15:08.480 | check the box, collect this, check the box.

00:15:10.440 | They're not really put in a position

00:15:12.080 | or trained to think too much.

00:15:14.200 | And so first off, I see people like way over explaining.

00:15:20.000 | If anything, I always make it such that I don't want

00:15:22.200 | my client to ever even talk to the IRS

00:15:24.200 | and there are sometimes they're more insistent than others,

00:15:26.600 | but there's never a positive that could come out of it.

00:15:29.520 | And I mean, you probably hear this

00:15:30.600 | in like every area of law, right?

00:15:32.000 | People think, oh, I'll just explain everything.

00:15:34.120 | And like, they'll just know that I'm not guilty, right?

00:15:37.360 | But they don't really care.

00:15:38.520 | They're there with their specific list

00:15:40.880 | of things they need to get through.

00:15:41.920 | And so I always try to avoid that.

00:15:45.160 | Honestly, a ton of adverse decisions at the lowest level.

00:15:48.380 | Like they're looking for receipts.

00:15:50.880 | Missing the receipt, denied.

00:15:52.840 | Missing the receipt, denied.

00:15:54.440 | That's it.

00:15:55.280 | And a lot of times they just try to get everything

00:15:57.120 | unless you control it.

00:15:58.160 | So they'll ask for literally the back end of your books.

00:16:01.480 | They'll ask for every receipt known to man.

00:16:03.960 | And then that's where ideally you have representation

00:16:05.980 | coming in being like, okay, well,

00:16:07.680 | we're not gonna give you the books

00:16:08.560 | because we actually printed everything out for you.

00:16:10.440 | And we're not gonna give you 8,000 receipts.

00:16:13.600 | So why don't you choose a sample size list

00:16:15.840 | of ones that are representative

00:16:17.400 | of the things that you're concerned about, right?

00:16:19.160 | So trying to limit that.

00:16:21.240 | But even with great representation,

00:16:23.000 | I would say at the lowest level,

00:16:24.600 | we just have adverse decisions against us.

00:16:28.480 | And that's where I think a lot of people think,

00:16:30.520 | oh no, I lost.

00:16:31.560 | Like it's so expensive to go to the next level.

00:16:33.600 | Like what do I do?

00:16:35.060 | To me, like I'm pretty quick to say, okay,

00:16:36.760 | if we're just not getting there with this person,

00:16:38.720 | then we just go to appeals.

00:16:40.020 | And appeals is where you really get someone

00:16:41.800 | that is actually, I don't know,

00:16:45.160 | like they're more concerned with the substance,

00:16:47.320 | like the big picture.

00:16:48.520 | So not to say they don't care about it at all,

00:16:50.160 | but they're less gonna be like,

00:16:51.200 | I need that receipt for this $40 meal.

00:16:53.440 | And they're more like, okay, well,

00:16:55.120 | is this person a real estate professional, right?

00:16:57.680 | And so then at that point,

00:16:59.000 | if you still don't get where you need to go,

00:17:00.780 | you can go up higher.

00:17:01.720 | You go to IRS counsel before actually heading to tax court.

00:17:05.220 | We almost never actually go to tax court.

00:17:07.960 | It's usually, like if you're actually going to tax court,

00:17:10.080 | you're probably a very large company

00:17:11.320 | because I would say they give more adverse decisions

00:17:14.840 | than negotiating with IRS counsel

00:17:17.200 | and negotiating with IRS appeals.

00:17:18.560 | So if you weren't able to resolve

00:17:19.920 | with IRS appeals and counsel,

00:17:22.140 | you're probably going to lose in tax court.

00:17:25.000 | - Obviously, it's all subject to audit.

00:17:26.440 | But if there's something that looks egregious,

00:17:29.220 | do they put scrutiny on that thing that looks egregious?

00:17:31.800 | Or as soon as you hit that audit,

00:17:33.560 | they're like, we're gonna look at everything.

00:17:35.440 | - They pretty much look at everything.

00:17:36.760 | - Okay.

00:17:37.600 | - Yeah, they may have picked it up

00:17:38.960 | for the thing that was egregious, right?

00:17:40.560 | So whenever you have like a massive loss on it,

00:17:43.540 | or maybe too much charitable contributions,

00:17:45.840 | that might've been the reason it was flagged.

00:17:48.540 | Every now and then,

00:17:49.380 | an audit might be limited to specific items,

00:17:51.600 | but usually they're like,

00:17:53.160 | oh, there's a Schedule C, give me all the receipts.

00:17:54.920 | There's a Schedule E, give me all the receipts.

00:17:56.720 | You know, you did a rental,

00:17:57.960 | give me your material participation log.

00:18:00.720 | - And just a personal question,

00:18:02.840 | on the receipt side,

00:18:04.240 | do you think that credit card transactions justify receipts?

00:18:09.800 | Or do you really need like the receipt receipt?

00:18:11.920 | - You need the receipt at the lower level, right?

00:18:14.680 | So that's, it's everyone's question.

00:18:16.200 | And maybe the IRS, like if the IRS were up with the times,

00:18:19.180 | they would change that policy,

00:18:20.100 | 'cause it's just ludicrous, but they're not.

00:18:23.380 | They're like very behind on technology.

00:18:25.180 | Just everything is very slow moving.

00:18:26.620 | So, you know, they can barely find enough people

00:18:28.620 | to take the jobs that they need.

00:18:29.700 | So no, at the lower level,

00:18:31.540 | I mean, I have a lot of IRS appeals,

00:18:34.180 | IRS audit cases at appeals,

00:18:36.060 | where what happens is people will not have the receipts.

00:18:40.020 | Literally the auditor will just deny everything.

00:18:42.260 | A lot of times, this is a generalization,

00:18:44.060 | but a lot of them will just say,

00:18:45.060 | oh, no receipt, nothing.

00:18:46.080 | And they'll just be like,

00:18:46.920 | pretend like there's not a business.

00:18:47.840 | Like, we'll just recognize the gross income

00:18:50.100 | and deny every single deduction known to man.

00:18:52.960 | And that's where appeals won't do that.

00:18:55.960 | They, there's what we call the Cohen rule,

00:18:59.120 | which is it's a, it's formed in tax court, right?

00:19:03.680 | So it's not a law formally,

00:19:05.240 | but it's a doctrine created by tax court

00:19:07.600 | that basically says, it's to the extent of like,

00:19:11.120 | we can see there's a business,

00:19:12.320 | we can reasonably estimate the amount of the cost,

00:19:14.360 | the like, expense that you had,

00:19:15.800 | we can reasonably estimate what it was on,

00:19:18.120 | which I would say credit card transactions

00:19:20.280 | and bank statements can meet that threshold to some extent.

00:19:23.760 | Then they're, they allow the expenses,

00:19:25.560 | but it's intended to be like a fairness doctrine,

00:19:28.840 | not so much like an offensive sword against the IRS.

00:19:32.720 | So it usually works at appeals and never,

00:19:35.200 | I mean, I've never have it really work

00:19:36.720 | at the lower auditor level.

00:19:38.760 | - And are there common things that flag people for audits?

00:19:42.440 | - Yeah, I definitely, I mean,

00:19:43.720 | negative schedule C's, negative schedule E's,

00:19:47.120 | large losses will flag.

00:19:48.960 | I see a lot of audits by association.

00:19:51.400 | So if you're involved in something else that has a problem,

00:19:56.360 | so I've seen people with,

00:19:58.720 | maybe you have like a conservation easement,

00:20:00.920 | conservation easement is under scrutiny

00:20:02.960 | and getting audited, the IRS doesn't like those,

00:20:05.760 | you know, you're there by association.

00:20:07.920 | I've also seen audits jump from person to person, right?

00:20:10.840 | So I, a lot of in the medical area,

00:20:13.120 | especially like kickbacks,

00:20:14.240 | if you had someone that got audited

00:20:16.760 | because he was written a check from the person

00:20:20.040 | with the problem, and then they look at your file

00:20:23.440 | and they say, oh, this person got a check,

00:20:24.960 | that check said ROI, this is a little sketchy.

00:20:27.040 | And then they say, oh, you haven't filed, boom, audit.

00:20:30.360 | - What about when you're amending returns after the fact

00:20:34.120 | and making changes, does that put you at higher risk?

00:20:37.520 | - If you're asking for lots of money back, yeah.

00:20:39.560 | That's also one of the ways I'll see people audited.

00:20:41.880 | So it's, you think about common sense, right?

00:20:44.680 | You filed your own return wrong.

00:20:47.320 | You already got it wrong once.

00:20:48.840 | And now you think, whatever, you're owed $200,000.

00:20:52.720 | And process-wise at the IRS, it actually,

00:20:56.720 | amended returns actually land on someone's desk.

00:20:58.920 | So it's not the same as like a superseded return

00:21:02.600 | or an original return,

00:21:03.480 | which is basically automatically processed.

00:21:05.160 | An amended return is much slower.

00:21:06.800 | It takes like honestly nine months up to a year sometimes

00:21:10.120 | 'cause it actually just gets stuck on someone's desk.

00:21:12.120 | And then if you think about a human, right?

00:21:14.240 | A human looking at something, if you're like,

00:21:16.480 | yeah, just I'm owed $300,000.

00:21:18.560 | We got all of these line items wrong

00:21:19.840 | and we changed literally everything.

00:21:21.560 | I mean, it's just so easy to like push it to the audit.

00:21:24.760 | - And how long does this whole process take?

00:21:26.520 | 'Cause I got a new CPA who reviewed my 2019 return,

00:21:31.520 | found a five-figure mistake

00:21:36.080 | right before the deadline to amend.

00:21:38.720 | We amended it, I feel like over a year ago

00:21:42.440 | and we literally just got the refund check.

00:21:46.200 | - Oh, nice.

00:21:47.040 | - Now.

00:21:47.860 | - That's good, that's good.

00:21:48.700 | - But it's 2024, it's almost 2025.

00:21:51.880 | It was like an 18-month process.

00:21:54.080 | When the IRS does flag things for audits,

00:21:57.020 | is that months later, years later?

00:21:59.840 | - It just varies.

00:22:01.280 | You can, so I know I always say this,

00:22:03.200 | but you can check your IRS transcripts.

00:22:04.740 | You can actually see if you've been flagged for an audit.

00:22:07.400 | So that'll tell you up to six months before

00:22:09.360 | it'll be like forwarded for an audit.

00:22:12.120 | So that's one way to check.

00:22:13.540 | The amended returns take a long time.

00:22:16.800 | Now, honestly, sometimes they get stuck on people's desks.

00:22:19.840 | Like they literally just sit there.

00:22:21.040 | So that's where sometimes we'll,

00:22:22.900 | we do this only after several months have passed,

00:22:25.400 | but you could go through like the IRS tax advocate

00:22:28.160 | and kind of check in on it and say,

00:22:30.160 | "Yo, like no one's getting back to me on this."

00:22:33.280 | 'Cause the IRS doesn't have to process your amended return.

00:22:36.000 | Like in theory, they could kind of sit on it.

00:22:38.200 | So usually they don't do that.

00:22:39.480 | But there are instances where it's like,

00:22:41.760 | "Is anyone gonna get here?"

00:22:43.240 | At some point, you don't wanna just wait.

00:22:46.360 | - When you do get it wrong,

00:22:47.360 | I have one example where a friend of mine got

00:22:50.960 | what they thought was a gift from a parent.

00:22:54.340 | But what turns out was that parent had a business entity

00:22:58.260 | set up with all the children in the family as owners.

00:23:01.640 | And so that gift was actually a distribution from a company.

00:23:05.840 | And they never got a 1099 or anything.

00:23:08.400 | And like three years later,

00:23:10.520 | they found out that the gift they got

00:23:12.120 | from their parents was taxable.

00:23:13.660 | But it took like years,

00:23:16.840 | and they owed penalties and interest on top of that.

00:23:19.840 | That seems like something that was flagged

00:23:24.280 | because the business entity submitted something.

00:23:27.840 | Maybe they even filed the 1099 with the state,

00:23:29.880 | but didn't send it to the children.

00:23:31.880 | So that seems like something

00:23:33.840 | where it comes back to the transcripts.

00:23:35.880 | I wanna talk about IRS transcripts,

00:23:37.360 | 'cause that's actually the reason we're talking today,

00:23:40.080 | because a really good friend of mine

00:23:41.880 | sent me a video you made about IRS transcripts

00:23:44.120 | and was like, "I've never heard about this strategy.

00:23:45.960 | "It's amazing.

00:23:46.800 | "You have to talk to this person."

00:23:49.120 | And so how are you using IRS transcripts

00:23:52.420 | to make sure you get things right?

00:23:54.040 | - Yeah, so you wanna check them.

00:23:55.260 | So I was gonna say in that instance you just described,

00:23:57.640 | there probably was a K1

00:23:59.160 | if you're telling me they're an owner.

00:24:00.540 | - Let's even just define what they are for people.

00:24:02.520 | It's the file the IRS has on you.

00:24:04.880 | So if the IRS has a file on you,

00:24:06.520 | why wouldn't you wanna see it?

00:24:08.120 | It's publicly available.

00:24:09.360 | They make it electronic.

00:24:10.920 | You can literally just create an account with the IRS,

00:24:13.320 | log in, and then there's multiple types of transcripts.

00:24:15.640 | So you've got your account transcript,

00:24:17.400 | which is gonna show the base level of your account.

00:24:20.000 | It's gonna say what payments have you made to the IRS,

00:24:22.320 | for which tax year has your return actually been filed?

00:24:25.960 | Has your amended return been received?

00:24:28.040 | So it's very much those base level things,

00:24:30.860 | which like if I'd filed an amended return,

00:24:33.480 | the first thing I'd be looking to see,

00:24:35.160 | did the IRS receive it?

00:24:37.080 | If they didn't receive it, you could wait two years

00:24:39.520 | and then be like, where's my refund?

00:24:41.400 | And then they'll say, well, we didn't get it.

00:24:42.760 | Now you're outside the statute of limitations.

00:24:45.000 | - And how quickly are those kinds of things updated?

00:24:48.240 | Like if I file my return today,

00:24:50.600 | how soon will it show that it's been filed?

00:24:52.400 | - Usually at least a couple of weeks.

00:24:53.640 | It still takes a little time.

00:24:55.360 | So a couple of weeks if you did it electronically.

00:24:57.280 | Now, if you mailed it, it could be like six months,

00:24:59.980 | nine months.

00:25:01.020 | I would say after waiting a couple of months,

00:25:02.420 | if it's not there, I would be very concerned.

00:25:04.380 | And usually you always wanna have proof

00:25:05.880 | that you already submitted.

00:25:07.220 | But yeah, so that's the account transcript.

00:25:09.480 | So I look to that for like if you made a payment

00:25:11.540 | and sometimes they receive it, they cash it,

00:25:13.980 | but they don't credit it to your account, right?

00:25:16.300 | So did it also get credited to my account?

00:25:18.600 | So all of those details.

00:25:21.460 | Then when you go to the wage and income transcript,

00:25:23.300 | that's the one that would avoid most of the problems.

00:25:25.380 | So that's the one where if a K-1 was filed

00:25:28.000 | with your social on it, if a 1099 was filed,

00:25:31.000 | every document with your name and social

00:25:33.040 | is gonna be on there.

00:25:34.280 | And that's the one that...

00:25:36.140 | The problem is if you check too early,

00:25:37.960 | you won't have all the information.

00:25:39.340 | So it populates by the following year.

00:25:42.080 | So for example, right now we're in 2024.

00:25:43.960 | If you want your 2024 wage and income transcripts,

00:25:46.920 | you'll obviously need to wait till next year

00:25:49.400 | because things like your W-2,

00:25:50.960 | all of that stuff hasn't even been filed with the IRS.

00:25:53.440 | And then takes time to populate.

00:25:55.040 | Usually a safe time to check

00:25:56.540 | is gonna be June of the following year.

00:25:58.560 | - So that means that in order to check,

00:26:01.040 | you would have to by default file an extension

00:26:04.260 | and not file in April.

00:26:07.440 | - Yeah, so what I recommend is

00:26:10.020 | we wanna do one of two things.

00:26:11.920 | If you wanna file early because you wanna refund,

00:26:13.960 | usually is the reason, the only reason.

00:26:16.560 | Then extend.

00:26:17.920 | So for example, extend in February, file by April.

00:26:21.040 | But then if you notice a problem,

00:26:22.520 | you wanna check in June or September,

00:26:24.140 | whenever before the final deadline.

00:26:26.560 | You can file a superseded return.

00:26:28.240 | And so the reason we like superseded returns

00:26:30.640 | is one, they process faster.

00:26:33.040 | And then two, you don't have that page.

00:26:35.640 | You know you have on an amended return,

00:26:36.840 | you have that page of original change, difference.

00:26:41.360 | Like you're highlighting the problems

00:26:43.120 | that were there instead.

00:26:45.000 | It's just literally submitting a new original return.

00:26:47.800 | - Okay, and so it's not ending up on someone's desk

00:26:50.640 | like an amended return would.

00:26:52.920 | - Yeah, but the only reason you can do a superseded return

00:26:55.200 | is if it's timely.

00:26:56.200 | So if you never extended in the first place,

00:26:58.740 | then you'd have to do an amended return

00:27:00.700 | if you're filing after April.

00:27:01.980 | But if you extended and then filed,

00:27:03.760 | you're still technically timely until October 15th.

00:27:06.740 | - I think one takeaway for everyone listening,

00:27:08.980 | W2 employee, business owner, even if you file in April,

00:27:13.280 | there's no extra cost or risk

00:27:15.560 | to just also filing for an extension.

00:27:18.100 | - Yeah, and you just have to file the extension

00:27:19.940 | before you actually file the return.

00:27:21.280 | So file the extension, then file the return,

00:27:24.220 | and then May, June, check your IRS transcripts.

00:27:27.980 | If anything's off, file a superseded return,

00:27:30.980 | and you're in a way better position

00:27:32.580 | than if you filed an amended return.

00:27:34.580 | And if nothing's off, then you're fine.

00:27:36.540 | You already filed, you're done.

00:27:37.980 | - That's what I would do.

00:27:38.800 | And I mean, eventually,

00:27:39.640 | hopefully the IRS will start publishing transcripts earlier,

00:27:42.540 | but right now it's, you know, they don't.

00:27:44.660 | So it's like either you do that work yourself,

00:27:47.480 | even though we could say in fairness,

00:27:49.100 | you shouldn't have to, right?

00:27:50.100 | Like, I think there's always this argument of like,

00:27:51.660 | why should I have to do that?

00:27:53.180 | But if you're gonna be the one holding the bag,

00:27:54.860 | you probably should just do it.

00:27:56.380 | 'Cause the alternative right now,

00:27:57.900 | based on the way the IRS operates,

00:27:59.260 | is they give it a good two to three years

00:28:01.200 | and then send you a notice with penalties.

00:28:03.140 | - Yeah, and if they, what happens on the flip side?

00:28:05.980 | Let's say in my case,

00:28:07.660 | I filed an amended return years later,

00:28:10.420 | then they took another year and a half to pay me.

00:28:12.500 | Do they have to pay me penalties and interest?

00:28:14.800 | - Not penalties. (laughs)

00:28:16.460 | There is some interest, but it's not,

00:28:19.060 | it's not for the time that passed.

00:28:20.860 | It's for once you file your claim for refund,

00:28:24.740 | then the clock starts.

00:28:26.240 | They have, I think it's like 45 days to process it.

00:28:28.460 | And if they go wildly outside of that,

00:28:30.060 | then they can pay you interest.

00:28:31.100 | Yeah, they will pay you interest.

00:28:32.900 | - Okay.

00:28:33.740 | - But the risk you run, I mean, what to me,

00:28:35.520 | what's always very scary

00:28:36.360 | is being outside the statute of limitations, right?

00:28:38.100 | So with refund requests,

00:28:39.660 | which is what an amended return is,

00:28:41.060 | if it has a refund on it, you have to have specificity.

00:28:44.620 | So what I see people do,

00:28:45.860 | especially with not great preparers,

00:28:47.580 | is you file the amended return,

00:28:49.220 | you don't put enough detail,

00:28:51.180 | you blow the statute of limitations.

00:28:53.260 | If they were able to process

00:28:54.900 | that specific amended return, it'd be fine.

00:28:57.980 | But if they say, "Hey, this amended return

00:29:00.020 | "doesn't have specificity, we're rejecting it."

00:29:02.480 | Now you're past the statute of limitations,

00:29:04.060 | you can no longer ask for the money back.

00:29:05.780 | - And what is the statute of limitations?

00:29:07.680 | - It's the later of three years from a timely filing

00:29:10.520 | or two years from payment.

00:29:12.260 | - Okay.

00:29:13.980 | And so, does that fit into your favor

00:29:17.340 | in a way that filing earlier gives the IRS less time

00:29:22.340 | to come back, 'cause it works both ways, right?

00:29:25.340 | If they wanted to come after you

00:29:27.020 | and you filed right on April 15th,

00:29:29.060 | they'd have less time than if you wait

00:29:31.860 | and file on October 15th.

00:29:33.700 | - Yeah, so that is one consideration

00:29:35.700 | that by extending and then filing later,

00:29:37.740 | you are extending the statute of limitations for them.

00:29:40.460 | I haven't seen any correlation

00:29:41.700 | between them like auditing those people less

00:29:44.980 | or being less likely to pursue.

00:29:46.760 | - My argument would be if you're banking

00:29:49.980 | on the statute of limitations

00:29:51.340 | to allow you to do something you shouldn't do,

00:29:53.060 | you probably shouldn't have done it in the first place.

00:29:55.100 | - Yeah.

00:29:55.940 | - Is there anything else you do personally

00:29:59.840 | with your taxes like the IRS transcripts

00:30:02.420 | that you think people listening might benefit from hearing?

00:30:05.860 | - I personally extend, I always want simplicity

00:30:10.420 | in everything, right?

00:30:11.700 | So not that we don't wanna maximize the tax benefit, I do,

00:30:15.940 | and I care a lot about that as well,

00:30:17.260 | but I will say there's, I care a lot about

00:30:20.500 | not just minimizing my taxes,

00:30:23.860 | but also minimizing penalties, interests,

00:30:25.860 | and honestly problems, right?

00:30:27.220 | The more busy you get, especially in business,

00:30:30.060 | but honestly in any area,

00:30:31.180 | like I know how painful it is to work with the IRS.

00:30:34.340 | Like even if I got audited today,

00:30:36.440 | I would be stressed about it.

00:30:37.860 | Now I'd be in the driver's seat,

00:30:39.700 | so I'm not gonna like crazy worry,

00:30:41.780 | but it would stress me out because I know

00:30:44.140 | just the time that it takes, just the time it takes

00:30:48.920 | would be honestly a huge loss in money to me, right?

00:30:52.180 | Huge loss in energy, effort, everything.

00:30:54.520 | So everything I do is built around that,

00:30:57.900 | and obviously transcripts is one of them.

00:30:59.660 | I like to actually extend so that I have a clean,

00:31:03.100 | I want one return submitted, that's it.

00:31:06.260 | And then everything I do is clean.

00:31:09.880 | So it's like, if I think I'm gonna assume

00:31:12.460 | the IRS is looking at my return,

00:31:14.420 | if there's anything that doesn't look good,

00:31:17.740 | I would prefer to not make it stand out, right?

00:31:21.340 | So whether it, without misrepresenting.

00:31:23.620 | So if someone were to look at it and you labeled,

00:31:27.320 | I don't know, meals as, I don't know, something not meals,

00:31:32.260 | then I think that's misrepresenting,

00:31:34.040 | but you could also do certain labels

00:31:36.320 | that just don't pull out attention, right?

00:31:38.680 | So I might not label gifts, gifts.

00:31:40.760 | I may label it a part of something else

00:31:43.760 | that represents what it is.

00:31:45.380 | So for example, I actually have a good client

00:31:47.500 | that I've been working with.

00:31:48.800 | They're under audit and they're about to file.

00:31:51.280 | So whenever you're under current audit,

00:31:53.640 | they're gonna look at the return

00:31:54.680 | and then decide, do I wanna audit this return?

00:31:56.640 | And so things like clearing out any schedule Cs

00:31:59.400 | with a loss on them.

00:32:00.240 | I don't care if you truly had a loss.

00:32:02.960 | If we can remove,

00:32:04.240 | I would rather not take the deduction at that point,

00:32:06.780 | knowing that it's gonna be under scrutiny

00:32:08.840 | if the deduction is small,

00:32:10.360 | rather than highlight the fact that we've got something

00:32:13.200 | that looks really interesting to look into.

00:32:15.360 | So those are the kind of decisions,

00:32:16.640 | sometimes it's aesthetic as well.

00:32:18.360 | - I was just thinking about how you look

00:32:20.320 | at the IRS transcripts and you're probably comparing them

00:32:23.640 | to your set of documents you've received.

00:32:27.000 | How often are the documents, the W-2s, the 1099s,

00:32:31.080 | actually incorrect themselves?

00:32:33.000 | - It happens all the time, especially 1099s.

00:32:36.720 | So W-2s are usually accurate

00:32:38.440 | 'cause they have to match up with the rest

00:32:39.880 | of the IRS's records on actual withholdings

00:32:41.980 | from the employer.

00:32:43.200 | But 1099s, I will see all the time.

00:32:45.600 | I log in to someone's account and it's a 1099-C,

00:32:49.680 | it very often incorrect.

00:32:51.320 | It's just like issued in the wrong year.

00:32:53.440 | It's something the client wasn't even aware of.

00:32:57.960 | Yeah, or just, I mean, for regular 1099s,

00:33:01.700 | you have to remember, it's just another human

00:33:03.200 | issuing it on the other side.

00:33:04.600 | I was talking to someone that the bookkeeper

00:33:07.520 | added a zero to the 1099.

00:33:09.240 | And it's like, whoever's filing those 1099s,

00:33:12.120 | a lot of times it's the administrative assistant, right?

00:33:14.320 | And if you were paid $2,500

00:33:16.280 | and that administrative assistant makes it $250,000,

00:33:20.000 | like that is what the IRS will have on file

00:33:21.800 | and they'll automatically add it to your return.

00:33:23.560 | - And what about ones from banks and brokerage firms

00:33:26.920 | showing mortgage interest or interest

00:33:29.520 | from your savings account or brokerage transactions?

00:33:32.480 | - If they're incorrect, there's like not even much

00:33:34.320 | you can do about it a lot of times,

00:33:35.880 | but I don't tend to see huge errors on those.

00:33:37.940 | Those tend to be correct, yeah.

00:33:40.000 | - And when you find something that's not on an IRS

00:33:42.520 | transcript, but you have, you got a 1099, the IRS didn't,

00:33:46.860 | is that a cause for concern?

00:33:49.560 | Is that, do you try to look into why?

00:33:51.720 | Or you just kind of accept that they might've missed it

00:33:54.920 | and you're gonna include it no matter what?

00:33:56.560 | - It probably wasn't the IRS missing it.

00:33:58.280 | It was probably the employer not filing it with the IRS.

00:34:01.800 | - Okay.

00:34:02.640 | - Yeah, so that's what I would assume.

00:34:03.600 | And then, you know, you'd look at it and say,

00:34:05.280 | well, did I receive the income?

00:34:06.280 | If I received the income, you're supposed to,

00:34:07.480 | you still report it, yeah.

00:34:09.480 | - Yeah, of course.

00:34:10.640 | Okay, anything else that people should be thinking

00:34:15.640 | about high level?

00:34:17.760 | I wanna hear if we're missing any things

00:34:20.160 | about how to think about filing and taxes.

00:34:22.620 | - High level, I think people tend to rely too much

00:34:25.040 | on their expert, you know,

00:34:27.320 | especially when their expert's not an expert.

00:34:29.440 | And so to me, I always view it as like,

00:34:31.240 | you're the one holding the bag, it's your tax return,

00:34:33.120 | you're literally signing under penalties of perjury.

00:34:35.360 | The IRS cares about you, not your preparer.

00:34:37.280 | So doing, that's why I like to put out so much information

00:34:40.760 | because it's actually just something you need to understand

00:34:43.320 | even if it's something you're not that interested in.

00:34:46.120 | - I was talking to someone at a conference

00:34:47.940 | and she was looking to, she was interviewing for a job

00:34:51.400 | at Intuit working on TurboTax.

00:34:53.040 | And she's like, oh, you think about this a lot.

00:34:54.720 | What do you think of TurboTax?

00:34:56.440 | And I was like, look, it can help you fill out the forms

00:35:00.160 | and they might have some policy where they're like,

00:35:02.760 | we will defend you, but at the end of the day,

00:35:04.760 | if you use the tool wrong,

00:35:05.880 | you're gonna fill out the forms wrong

00:35:07.220 | and that's not on them.

00:35:09.360 | What's your take on when someone could rely

00:35:12.840 | on a tool like that versus need a preparer

00:35:16.100 | versus just fill out the form themselves

00:35:18.480 | without needing any software?

00:35:20.140 | - Yeah, I think it's an assessment,

00:35:22.840 | ideally an unbiased assessment of your own skills, right?

00:35:26.160 | Some people just have no business preparing their return.

00:35:30.520 | Even if it's on the simpler side,

00:35:31.960 | they will find a way to mess it up,

00:35:33.520 | just not their thing, being timely.

00:35:35.680 | I mean, there's benefits to a preparer

00:35:37.440 | beyond the actual knowledge, right?

00:35:39.840 | A lot of times it's like peace of mind,

00:35:41.280 | it's just timeliness, like it's actually

00:35:43.440 | just gonna get done.

00:35:45.020 | So assessing your own skills.

00:35:46.240 | And then at that point, I mean, TurboTax is great

00:35:48.380 | for whenever you've got clear tax documents

00:35:51.220 | that just need to be input, it will do it perfectly, right?

00:35:54.480 | But I've seen people misuse it.

00:35:56.620 | Like we had an IRS audit where they,

00:36:00.240 | I don't know how they did this,

00:36:01.080 | but they used TurboTax and they input

00:36:03.480 | their Schedule C stuff on both Schedule C and Schedule E.

00:36:07.400 | And I think they don't know how to read the output

00:36:09.800 | and they're the preparer.

00:36:11.240 | So I think when it's W2 stuff, like TurboTax is great

00:36:16.240 | and if anything, they're better than hiring someone

00:36:18.440 | who doesn't care about their return

00:36:21.100 | as much as you care about your return.

00:36:23.180 | But once you start going into business

00:36:25.060 | or if you're taking any specific tax positions,

00:36:27.420 | I would just find someone that knows what they're doing.

00:36:30.820 | - All right, and because it's October

00:36:32.940 | and this will come out before the end of the year,

00:36:35.020 | I'm gonna share some of the things

00:36:36.300 | that I try to do before the end of the year

00:36:38.220 | and you can let me know if there's anything else.

00:36:40.380 | One, which is not often possible,

00:36:44.140 | but accelerating or deferring income or expenses

00:36:48.180 | and I would say this is sometimes possible

00:36:50.800 | where if you've decided, okay, this year I'm gonna itemize

00:36:54.920 | or I'm gonna take the standard deduction,

00:36:56.740 | you might be able to make an extra property tax payment.

00:37:00.800 | Now, right now with the current limits,

00:37:03.120 | there's $10,000 of state and local taxes,

00:37:05.440 | but if you were not at that limit,

00:37:07.400 | maybe you wanted to kind of make extra tax payments

00:37:10.920 | or mortgage payments in one year

00:37:12.400 | and then the next year switch it off, switch off.

00:37:15.060 | So that's one.

00:37:15.920 | Or if your company offers the ability to get paid a bonus

00:37:20.260 | and defer it for a few years.

00:37:21.980 | So thinking about whether there's any income or expenses

00:37:24.860 | that you can move around, that was one.

00:37:26.820 | Making charitable donations with the caveat

00:37:30.980 | that I think everyone should be donating to charity

00:37:34.940 | with appreciated assets, right?

00:37:37.020 | If you're making any donations to charity with cash,

00:37:40.920 | you're effectively leaving money on the table

00:37:43.500 | if you own any appreciated assets.

00:37:45.540 | So if you own any stock that you bought

00:37:47.680 | for less than it's worth today,

00:37:49.420 | those are the things you should be donating.

00:37:51.500 | And if that's not simple,

00:37:54.620 | because the places you donate don't take stock,

00:37:56.980 | you can pretty inexpensively set up a donor advised fund.

00:38:00.340 | People that listen to the show for a while know

00:38:02.100 | that Daffy has been a partner,

00:38:04.040 | it's where we use our donor advised fund.

00:38:06.000 | There are other options,

00:38:07.180 | not many are as simple and good in my opinion.

00:38:10.620 | For any equities, if you hold any stocks

00:38:14.380 | that are actually not at a gain, but are at a loss,

00:38:17.620 | you can harvest those losses.

00:38:19.300 | Now you can't buy the exact same thing,

00:38:21.740 | so you wouldn't wanna sell your Google stock

00:38:24.940 | and then rebuy it unless you wait 30 days.

00:38:27.260 | But if you held a S&P 500 index fund and it was down,

00:38:31.540 | and you wanted to buy a different index fund, you could.

00:38:34.960 | If you're holding stock options,

00:38:38.820 | so specifically ISOs, depending on how many you exercise,

00:38:44.100 | it may affect your taxes, but sometimes,

00:38:46.900 | and this is one where I would say,

00:38:47.980 | work with a professional for sure,

00:38:49.820 | there might be a number of ISOs you could exercise

00:38:52.540 | that wouldn't put you into AMT

00:38:54.940 | and cause your taxes to increase.

00:38:56.940 | And so if you're trying to exercise some ISOs,

00:38:59.140 | that's possible.

00:39:00.140 | A common one is if you have an FSA,

00:39:03.700 | make sure you use it all,

00:39:05.120 | because if you don't use it all, then you lose it.

00:39:08.900 | So FSAs, the employer is gonna keep the money

00:39:12.500 | if you don't use it by the end of the year.

00:39:14.580 | And I would say even if there's absolutely nothing you need,

00:39:17.920 | there are places online where you can buy things

00:39:20.760 | and donate them.

00:39:21.600 | So if you, there are medical supplies

00:39:24.500 | that many shelters need, at a minimum,

00:39:26.940 | buy some of those things and donate them

00:39:28.900 | even if you don't have expenses.

00:39:31.460 | And then there are HSAs, retirement accounts, 529s,

00:39:36.460 | all things that have annual limits.

00:39:38.980 | So if you wanted to contribute to those,

00:39:40.820 | make sure you do that before the end of the year.

00:39:43.460 | If you wanna give any gifts,

00:39:44.820 | so if you're trying to gift money to your children

00:39:46.900 | or family members, those gift exemption limits

00:39:50.540 | reset each calendar year.

00:39:52.340 | And then if you own a business,

00:39:54.300 | think about whether there are any business expenses

00:39:57.660 | that you wanna get done before the end of the year.

00:40:00.800 | Sometimes you might want them this year,

00:40:02.180 | sometimes you might actually want them next year.

00:40:03.860 | But I have been able sometimes to ask vendors,

00:40:07.420 | "Hey, could we pay for this thing a little early right now?"

00:40:12.420 | Or maybe you have, you know, net 30, net 60, net 90,

00:40:15.320 | but you wanna pay for it right away

00:40:16.880 | so that you can have the expense in that calendar year.

00:40:20.140 | And like, did I leave any glaring thing off that checklist?

00:40:24.300 | No, that was great.

00:40:25.180 | I think the one that I like to talk about a lot

00:40:27.380 | is for business owners,

00:40:28.580 | just because I actually see no one talking about it.

00:40:31.660 | If you have a business, you want to,

00:40:34.860 | and especially if it's an S-Corp,

00:40:36.260 | so specifically for S-Corps,

00:40:37.860 | but really for any type of business,

00:40:39.120 | checking your tax basis.

00:40:41.180 | So I know it doesn't sound like super exciting

00:40:43.100 | like some of those, but it's a timing difference.

00:40:45.420 | And so there's a situation where basically

00:40:47.860 | if you take out the money in December from your business,

00:40:50.140 | you'll pay quite literally a voluntary tax,

00:40:53.140 | capital gains, because you accessed that money

00:40:55.780 | versus had you just waited until January

00:40:57.380 | to take the money out, there would have been no tax.

00:40:58.860 | So there's a timing difference,

00:41:00.020 | especially with S-Corps that have lots of depreciation

00:41:04.460 | and third-party debt, where if you take the money out,

00:41:07.380 | you quite literally create an extra layer of tax

00:41:10.020 | just for fun.

00:41:10.860 | Wow, okay.

00:41:11.700 | So that's one that I would say go check with your CPAs on.

00:41:15.140 | And then the only other one completely untax related

00:41:17.700 | is that if you have credit cards

00:41:19.540 | that have all these annual credits,

00:41:20.680 | like an airline credit or a hotel credit,

00:41:22.500 | make sure you use those before the end of the year as well,

00:41:24.420 | because those often reset.

00:41:26.380 | Some of them are on the card member year.

00:41:29.300 | Some of them are on the calendar year.

00:41:32.460 | I'm gonna put together a list of all the things

00:41:34.660 | I just mentioned and a few other ones

00:41:36.760 | that I find in the newsletter.

00:41:38.980 | So allthehacks.com/email,

00:41:41.340 | and that'll come out sometime before the end of the year.

00:41:44.460 | But when you just said S-Corps,

00:41:47.540 | I wanted to ask about a couple business things.

00:41:50.060 | Specifically, you've said S-Corps aren't as awesome

00:41:53.040 | as people might think they are,

00:41:54.860 | and that people thinking they should just set up an LLC

00:41:57.220 | to save money on taxes probably might be mistaken.

00:42:00.900 | And I've had a couple friends say,

00:42:02.060 | "Oh, yeah, yeah, I run everything through my LLC,

00:42:03.900 | "so I save money."

00:42:05.220 | And I'm curious what you think about that.

00:42:07.460 | - Yeah, well, I mean, the tax law is the tax law, right?

00:42:09.660 | It doesn't say like, if an LLC, it's treated this other way.

00:42:12.800 | It's based on the tax entities.

00:42:15.340 | An LLC is a legal entity, not a tax entity.

00:42:17.840 | So just forming an LLC does nothing.

00:42:19.980 | It doesn't make a business deduction a business deduction.

00:42:22.780 | A business deduction is either already a business deduction,

00:42:25.740 | or it's just not.

00:42:27.240 | And running it through your LLC is,

00:42:29.540 | it's kind of that procedure versus substance.

00:42:31.420 | It's the procedure, and it's not what's controlling.

00:42:33.660 | So the substance is like, what did you spend it on,

00:42:35.540 | and do you actually have a business?

00:42:37.100 | So that alone, I would just, I like to keep things simple.

00:42:40.120 | If you don't have legal liability,

00:42:41.780 | and you're not doing anything other than sole prop treatment,

00:42:44.100 | you probably don't need the LLC, or at least recognize

00:42:46.460 | it's not providing a tax benefit.

00:42:48.540 | And then, S-Corps are, they work really well for businesses,

00:42:53.540 | like service industry, whenever there's not much equipment,

00:42:57.660 | and not much third-party debt.

00:42:59.420 | They work really well.

00:43:00.260 | And then the minute you have more of a business

00:43:02.360 | with lots of vehicles, and usually those vehicles

00:43:05.700 | are financed, right, or real estate,

00:43:07.580 | all of those typically need to stay out of an S-Corp.

00:43:10.780 | - Okay, I feel better, 'cause I was like,

00:43:11.900 | I saw you talking about S-Corps,

00:43:13.340 | I was like, oh, I have an S-Corp,

00:43:14.520 | but don't have a bunch of vehicles,

00:43:16.460 | don't have a bunch of third-party debt,

00:43:17.780 | and don't have real estate.

00:43:18.700 | So maybe I'm in the clear.

00:43:19.860 | - Yeah.

00:43:21.220 | - Anything people should think about

00:43:24.420 | with a little bit longer horizon than the end of the year,

00:43:27.340 | given that I know the current situation,

00:43:30.300 | I mean, obviously we have no idea what's gonna happen

00:43:32.060 | with an election that, as of right now, is in days,

00:43:35.860 | but the Tax Cut Job Act is expiring.

00:43:38.700 | Are there any things people should be keeping on their radar

00:43:41.300 | in the next kind of 14 months as things to consider?

00:43:45.300 | - I mean, yeah, a lot of stuff is gonna expire.

00:43:47.620 | So even like the qualified business income deduction,

00:43:50.120 | I mean, there's lots of things that we've gotten used to,

00:43:51.740 | lower tax brackets, all of that is set to expire.

00:43:55.140 | And I mean, who knows at this point what's gonna happen.

00:43:57.340 | So I mean, planning for it, maybe sometimes you think,

00:44:00.460 | oh, well, I wanna push up my income for this year

00:44:02.980 | or for next year before QBI expires, right?

00:44:05.840 | And so it could make a bit of a different decision

00:44:08.300 | if you account for the expiration.

00:44:10.180 | - Yeah.

00:44:11.000 | The other one that will probably be relevant

00:44:12.300 | to a very, very small number of listeners,

00:44:15.900 | but I do know some listeners that meet this requirement,

00:44:18.920 | is that the estate planning,

00:44:21.860 | kind of the gift tax limitations are going to be changing.

00:44:25.460 | And so I believe it's something like 13.6 million

00:44:29.420 | per person in a married couple

00:44:31.700 | is gonna come down to about seven, I think.

00:44:35.040 | I don't know the exact numbers,

00:44:36.340 | but if you're sitting on tens of millions of dollars

00:44:39.780 | that you one day would like to give away to your heirs,

00:44:44.780 | now would be a really good time

00:44:46.460 | to figure out the estate planning to do that.

00:44:48.660 | - Yeah, if you're gonna be over the new threshold

00:44:51.140 | once it expires, you'd basically wanna figure it out now

00:44:53.340 | because there's no clawback.

00:44:55.260 | Like if you use up the full, whatever, 23,

00:44:58.660 | whatever million it's at now between a married couple,

00:45:02.180 | if you use that up by usually some type of like contribution

00:45:04.860 | to an irrevocable trust, then there's no clawback.

00:45:07.460 | So you'd want to hurry up and probably use it up

00:45:09.580 | 'cause almost in every scenario,

00:45:11.380 | we're expecting it to go down.

00:45:13.100 | - Yes, but similar to where we started this conversation

00:45:16.220 | with everything you see on social media,

00:45:18.620 | I've seen a lot of people being like,

00:45:19.960 | oh, you should set up this trust

00:45:21.140 | so you can give money to your children

00:45:22.620 | and not have to pay taxes.

00:45:23.880 | And I'm like, that is true.

00:45:25.700 | However, if the amount of money in your lifetime

00:45:28.620 | you're going to give to your children is less than,

00:45:32.380 | even let's call it just really conservatively,

00:45:35.180 | less than $5 million,

00:45:37.020 | then you don't have to worry about any of this, right?

00:45:39.700 | Like sure, that limit could come down

00:45:41.300 | even more in the future,

00:45:42.860 | but right now it's over $20 million.

00:45:45.620 | So I don't want people to think,

00:45:47.660 | oh, mosh, I might leave $500,000 to my kids.

00:45:50.400 | Do I need to set up a complicated trust?

00:45:52.100 | And the answer is no, you do not.

00:45:54.120 | - Yeah, no, it would definitely hurt you to do that.

00:45:55.960 | I mean, 'cause there's also costs of administering it.

00:45:58.080 | Even knowledgeable people, I just saw a post the other day

00:46:00.440 | and someone's like saying how revocable trust

00:46:02.720 | helps you get step up in basis.

00:46:04.160 | Like they're just making step up

00:46:05.560 | because you already get step up in basis.

00:46:08.080 | So most of the tax benefits are already built in

00:46:11.040 | and really it just comes down to estate tax

00:46:13.800 | 'cause income tax gets worse when you go the trust route.

00:46:16.960 | It either stays the same or it gets worse

00:46:18.460 | depending on what type of trust you choose

00:46:20.340 | and then it's only that estate tax.

00:46:22.060 | And then like we just said, the thresholds are huge.

00:46:23.960 | So if you don't have an estate tax problem,

00:46:26.020 | you don't wanna pay to fix a problem you don't have.

00:46:28.140 | - Now, the only thing we spent a lot of time

00:46:30.600 | at this conference talking about different trusts

00:46:32.580 | and all this crazy stuff,

00:46:33.740 | but for avoiding capital gains,

00:46:37.340 | you can potentially end up in better situations

00:46:39.860 | with some charitable remainder trusts

00:46:41.620 | and those kinds of things.

00:46:42.660 | So if you're about to have a massive sale of a company

00:46:46.420 | or sell stock that you bought at a really low basis,

00:46:48.860 | like let's say you worked at NVIDIA the last five years,

00:46:51.460 | there's a world where you might not be crossing

00:46:53.700 | that 10, 20 million threshold,

00:46:55.900 | but you might save money setting up a trust for that purpose.

00:47:00.900 | I'm not the expert.

00:47:02.420 | We did an episode a while ago on trust.

00:47:04.820 | You absolutely want to work with an expert

00:47:06.940 | in this circumstance.

00:47:08.900 | But outside of a few of those small scenarios,

00:47:11.580 | I would say, if you're not over these thresholds,

00:47:15.780 | then you're making yourself and your life more complicated.

00:47:19.180 | That said, a revocable living trust,

00:47:23.180 | a will and like basic estate planning documents,

00:47:25.900 | you should definitely set all of those things up.

00:47:28.660 | I'm strongly in favor of those,

00:47:30.600 | but more complicated irrevocable trusts

00:47:33.060 | are probably for very specific scenarios

00:47:35.900 | that are not common to most people.

00:47:37.620 | - Yeah, it always goes back to like,

00:47:39.020 | what are you trying to accomplish

00:47:40.100 | and does it actually get you there?

00:47:41.420 | And people talk about trusts a lot,

00:47:43.280 | but the reality is they're really complex.

00:47:44.920 | Like anybody that does regular domestic tax

00:47:47.980 | and just happens to like name drop random trusts,

00:47:50.660 | they're probably not super familiar usually on social media.

00:47:54.180 | When you think of like charitable remainder trusts,

00:47:55.820 | it's because your purpose is different.

00:47:57.620 | It's not to keep the most dollars possible.

00:48:00.060 | It's actually with a strong purpose for charity, right?

00:48:04.220 | So then of course there are tax benefits for that.

00:48:07.340 | - Yeah, so if you're trying to pursue anything wild

00:48:11.660 | and crazy, talk to someone.

00:48:14.220 | Where can people find everything that you've published

00:48:17.440 | and where can they go deeper on all of your stuff?

00:48:19.920 | - I'm just searching my name on YouTube and then Instagram.

00:48:22.280 | Those are my main platforms and YouTube.

00:48:24.440 | I've actually got a video coming out today,

00:48:25.880 | but I'm trying to do every couple of weeks now,

00:48:27.680 | I'm doing a nice long form that I'm literally

00:48:29.920 | just going through court cases on a specific niche topic.

00:48:32.920 | - Yeah, I proposed for anyone interested,

00:48:34.760 | I proposed that you go deep on the credit card stuff.

00:48:37.200 | And if so, and you do it by the time this comes out,

00:48:40.080 | look in the show notes and I will link to that.

00:48:42.280 | And you can go get a little bit of a deeper dive there.

00:48:45.460 | - It's on my list, so let me see what I can do.

00:48:48.220 | - Awesome, thank you so much for being here.

00:48:50.300 | - Of course, thank you.

Tax Expert Tells ALL: Tax Myths Debunked, Audit Red Flags & IRS Transcripts

Chapters