- Navigating tax advice on the internet can be tricky. So today we're digging into what most people get wrong about taxes and tax law, the myths that keep spreading wildly on social media and how to avoid costly mistakes when you file. I'm joined by Jasmine DeLucci, a seasoned tax pro who became an enrolled agent while she was still in high school.

She knows this stuff inside and out, and we're gonna dive into the strategies and tactics to help you save money and take control of your taxes. I'm Chris Hutchins. If you enjoy this episode, please share with a friend or leave a comment or review. And if you wanna keep upgrading your life, money, and travel, click follow or subscribe.

Jasmine, what do you think is wrong with so much of the tax advice you see on the internet? - I think a lot of my criticisms keep coming back to, people just look at the statute and then they make up in their mind what the law is. And so, right, 'cause we think, oh, well statute, we've got the law, like that's it, right?

And, but if you've watched any of my content, you know that we've got several layers of law, right? Tax law has statute, treasure regulations, court cases, and then we even have more guidance from that, like revenue rulings, revenue procedures. So I think people that, people don't love when I say this, but it's like people that are really deep in tax law just don't tend to post online.

So what I tend to see is the people that post online tend to have a very surface level of tax law. You know, they'll learn a little bit and they're like, well, shoot, do I wanna work myself to death and make 1/100th of what I could? Or do I just wanna post random thoughts online and make like 100 times more?

So then they butcher that basic stuff and say it wrong. And I think it's genuinely like they don't know. It's not like a malicious intent, but most people just, when you read base level tax law, you get the wrong answer a lot of times. And that's what they're doing.

- Is there an example that we could just use for everyone to understand something that you see posted all the time on the internet that just isn't correct? - Yeah, clothing is a big one. Clothing or fashion accessories or even like haircuts, right? We think of all these personal things.

And so the first thing that's so fun for people to post, there was this one video that I use as an example where this licensed tax preparer is saying like, well, I deduct all my haircuts 'cause they're my brand. And he's like, well, I deduct my blue suits because blue is my brand, right?

And that's your perfect example of, he's saying he's relying on IRC 162, which is our classic ordinary necessary business expenses. So you go there and you say, okay, yeah, well, it says ordinary necessary business expenses. The mistake he's making is he's looking at it and saying, I think it's ordinary necessary to my business.

And so it's literally just like made up in his mind when obviously what we wanna do is go to the tax law. So then what do we do? We look at treasury regulations. For this one specifically, it doesn't help us. So then we go to court cases. The court cases say, that's cute, but you're gonna get a haircut anyways.

They say personal grooming, it's just so, it's so inherently personal, it can't be for business purposes. And then we get that same result for clothing. There's actually a three-part tax court test for clothing. And so the one that everyone violates is, it's like, it can't be suitable for personal use, even if you only use it for business.

So a blue business suit, very suitable for personal use, therefore not deductible. - Now, I remember one time my wife was selling to college campuses and part of their brand for the company was everyone bought like big animal, like almost Halloween costumes. Presumably that's not like a personal use.

So that might've qualified as a business expense, but a suit, a shirt, a haircut, all these things are not. - You obviously wouldn't have purchased that for personal reasons because at the end of the day, tax law, a lot of times they just look to substance, right? We wanna look at the laws, but they're almost always built in a way to go back to substance.

And so why did you really buy it? Well, I mean, you probably bought a blue suit, like, yeah, you're working in it, but like you can use that for whatever and you probably are using it for whatever. And so they just draw a line there to prevent abuse versus, yeah, I mean, something like super unique, there's probably no way she would have gone out and purchased that for any other reason.

- Definitely not. And we're not just gonna talk about business related things in our conversation, but I wanna double click a little here on what would actually happen, right? Like if it got to the point that you had to debate this, is it kind of like innocent until proven guilty?

Or like, do you have to be able to explain that, well, I actually live in the hottest part of the country. I never wear suits outside of when I'm on video in my studio so I actually think this suit is a business expense 'cause I would never wear it for personal reasons.

- Yeah, there's always a practical element to it and I think that's also why people have gotten so comfortable giving whatever advice because first off, they don't do too many IRS audits and then when they do, honestly, IRS auditors aren't super knowledgeable a lot of the time if you're a small business.

So practically speaking, if you just spend too much on clothing, they'll probably just disallow it. Now, if they look into it and they say, well, what were they? And you're like, well, they're suits. It's just like at that lowest level, they're probably just gonna deny it. Now, not to say you couldn't then introduce like, well, I've got my logo plastered all across the front of it and it made it super ugly so I would never wanna wear this thing for personal use.

So there are like arguments you can start to pull out and the way I view it is if you're on bad law, like you wanna be more careful, right? And I think what a lot of people are doing online is they're pretending like it's good law and so then if you get into the argument, like you have to be super careful and you may still be able to get it through if you didn't abuse it so much because it's not gonna be noticed.

Otherwise, you're gonna have problems. - Yeah, and by bad law and good law, you've kind of highlighted before that there's the statutes, there's the treasury regulations and the court cases. Would bad law be where there's a statute but it's been heavily kind of scrutinized or clarified in other ways?

- Yeah, I would say bad law is like, if I do a full research and I look up what the answer is and I'm like, wow, everything's against us. The levels of authority you typically wanna have, we call it like substantial authority. So a 40%, 40% of what's out there is like gives you a good position.

And if for things like you think of haircuts, I've pulled all the court cases. They all say no, like it's just what it is. So then you thinking, well, it's yes, right? A lot of people like to use the example of like Botox or different types of enhancements and stuff.

And it's like, we've got the court cases and they just kind of laugh at the taxpayer every single time. And so when people all see like license preparers recommending it or they'll say, oh, this is a case of first impression. It's like, you're saying that because you haven't looked up all the court cases that actually exist already.

- So I looked at a handful of the most common things on social media and one that I've seen a lot of is around hiring your kids. And this one seems like both I understand it and it also seems a little skeptical. Do you have any thoughts on that?

- A lot of the themes I repeat, one of them is substance. It's like, we know with tax court, we know with tax law, we've got substance of reform. And so whatever form you put it in, it will always go back to like, what were you really doing? I think if you're genuinely working in the business, they're genuinely adding value.

And then you also do wanna keep in mind things like state laws. If you are violating other laws, typically that alone can be a reason the IRS could deny something. I do think to some extent, if you are careful in areas where the substance is light, then you wanna be really strong on procedure, right?

If you're gonna hire your kids, we want procedure to be really strong. Well, what would procedure be? That's all those technical formalities, right? I want an employment contract, I want an hours log, I want a calendar, I wanna know exactly what they're doing. We wanna actually issue a W-2, so we have really strong procedure.

The substance is a little light, they're your kids, we're like a little bit skeptical, but we've got all this proof that actually we've got some substance there. Where people tend to go wrong in these types of areas is they do neither, right? The substance is light because, you know what?

It's my kid and I'm just kind of paying them to take out the trash and I would never actually pay, whatever, $15,000 a year for someone to take out the trash. And then, oh, by the way, I have no employment contract, no proof, nothing. Whereas that might hold in a third party arrangement, right?

If I hired a random person off the street and paid them 20,000 a year, I may be fine with not having an employment contract. I may be fine with not having all these technicalities, but because there's no related party nature, it doesn't get the same scrutiny. - Yeah, that makes sense.

And one of the things that I noticed was interesting was in a lot of these kind of videos talking about all these great tactics, they don't clarify that even if you were doing them by the book, even if they were appropriate, if you just have a W-2 income and you're working at a company, like you can't write off your meals, you can't classify your car as a business expense.

And a lot of these things that I've heard people one-on-one talking to them say, I work at Google and I'm taking a friend out to lunch, I'll just write that off. And I'm like, well, one, I don't know if you could write it off even if you did own the company.

And two, I don't think you can do this as an employee. So are most of these things even relevant to people who don't own businesses? - So ever since the tax reform passed in 2017 that started in 2018, there were some that would apply at the time. There used to be, you have to still get over that itemized threshold, but things like home office, you could take some of those things.

But it was a, actually I had a professor who was a part of drafting all of the tax reform at that time. And they obviously had to fit within a certain budget over 10-year projections. And so because they made so many cuts in other areas, they had to have certain areas where they increased the revenue.

And one of those was basically eliminating all of the deductions for employees. So right now, absolutely not, you get nothing. - What advice do you have for people for how to handle and scrutinize tax advice on the internet? How do you think people should try to figure out what's good and what's not?

- At the end of the day, you want to actually get real professional advice if you're gonna rely on it. So ideally finding someone that you actually trust that can apply it to your situation. And I think social media serves as a great way to introduce the question, not necessarily that they have their answer.

- And when you highlighted there's statutes, there's treasury regulations, there's court cases, all of these things can also be found. So I would encourage people to go look them up. I'm gonna share one example that's particularly relevant to the audience, which is I've often talked about how credit card points are treated as a rebate and they are not taxable.

So I've recently heard some people questioning whether that's true. And the argument being really more on the business side, well, if you're using this to generate a profit, should it reduce your cost basis in whatever you bought or not? And so I looked and there was a revenue ruling that said a purchase incentive, such as credit card reward or points is not treated as income, but as a reduction in the purchase price of what is purchased with the rewards or points.

And then there was this case where they actually decided. And what I thought was interesting was they decided this couple had generated a few hundred thousand dollars in rewards on two credit cards, buying gift cards and then kind of liquidating and reselling them as well as funding money orders.

And the takeaway was when used to directly buy money, which they only included the money orders, you are turning a profit and that would be taxable, but to buy a gift card, which they felt was more of a product, you're kind of okay. And so, yes, I could go online and look all these things up if you wanna get clarity around it.

If you're doing a little bit of this, maybe it's kind of okay to do a little bit of digging, but if you're generating hundreds of thousands of dollars of rewards a year, it might be worth going to read these yourself. - Yeah, or hiring even, reading them yourself, realizing that maybe there's not full clarity and then maybe even hiring someone to give an opinion on it, right?

'Cause there's always, I mean, you're never, I don't view it as like you're ever fully safe, right? Like at the end of the day, you can have an awesome, easy, clear tax position with the IRS, like not something as complicated as the credit card rewards, and you still face issues in audits.

Like the reality is people think, "Oh, I'll just be good, I'll just," you know, but there's just so much bureaucracy. You have to check so many boxes that even safe positions are questioned in an audit. So I just view it as like, you just wanna protect yourself, like risk averse.

So if you're taking a slightly more aggressive position, you can predisclose it on the return on an 8275, and then you're allowed to rely on less authority to take that position and reduce your exposure for IRS penalties. And you quite literally disclose positions that you still have to have a basis for, but you're allowed to, instead of having substantial authority at 40% basis, you're allowed to have, I think it's like 20% basis in your authority.

So you're allowed to rely on less like law. So whenever I have situations where I'm like, "Well, this is something that I feel comfortable with. "We've got support for, "but there is some support on the other side "that I don't love." We can always proactively disclose it. And I've never seen that trigger an audit or do anything like that.

- Okay, so that's basically saying, "Hey, I'm not as sure, "but I wanna let you know that I think I'm sure." - Yeah, saying, "I've got authority for this." You know, but it's something you may disagree with. So I'm just gonna proactively, I'm not trying to hide anything. I'm trying to be really clear about it, tell you the authority that I'm relying on.

And yeah, and it's worked every time I've done it. I've never had an audit result from it, so. - And let's talk a little bit about audits. Almost everyone I know is scared of them, but don't actually understand them. Can you talk a little bit about what happens if you get audited?

- Yeah, the audit process, I've been trying to provide a lot more clarity for it because unless you're just doing it, there's nowhere else you can learn about it. It's just, it's not, to me, it's not common sense. So when you get audited, I mean, that part is what you would expect.

Like an auditor comes in. I do think people assume the auditor is really sophisticated, which if you were a much larger business, like there's different divisions, right? So if you're a very large business, you're gonna probably get someone sophisticated. But most people are under that $10 million gross receipt threshold, in which case they honestly, like these auditors are in the middle of training.

They have so many check boxes to get through. Like they're just paper pushing. And I don't mean that, you know, say it to be mean, but it's just, it's government, right? They've been put into a position where it's like, just check these boxes, like just collect this, check the box, collect this, check the box.

They're not really put in a position or trained to think too much. And so first off, I see people like way over explaining. If anything, I always make it such that I don't want my client to ever even talk to the IRS and there are sometimes they're more insistent than others, but there's never a positive that could come out of it.

And I mean, you probably hear this in like every area of law, right? People think, oh, I'll just explain everything. And like, they'll just know that I'm not guilty, right? But they don't really care. They're there with their specific list of things they need to get through. And so I always try to avoid that.

Honestly, a ton of adverse decisions at the lowest level. Like they're looking for receipts. Missing the receipt, denied. Missing the receipt, denied. That's it. And a lot of times they just try to get everything unless you control it. So they'll ask for literally the back end of your books.

They'll ask for every receipt known to man. And then that's where ideally you have representation coming in being like, okay, well, we're not gonna give you the books because we actually printed everything out for you. And we're not gonna give you 8,000 receipts. So why don't you choose a sample size list of ones that are representative of the things that you're concerned about, right?

So trying to limit that. But even with great representation, I would say at the lowest level, we just have adverse decisions against us. And that's where I think a lot of people think, oh no, I lost. Like it's so expensive to go to the next level. Like what do I do?

To me, like I'm pretty quick to say, okay, if we're just not getting there with this person, then we just go to appeals. And appeals is where you really get someone that is actually, I don't know, like they're more concerned with the substance, like the big picture. So not to say they don't care about it at all, but they're less gonna be like, I need that receipt for this $40 meal.

And they're more like, okay, well, is this person a real estate professional, right? And so then at that point, if you still don't get where you need to go, you can go up higher. You go to IRS counsel before actually heading to tax court. We almost never actually go to tax court.

It's usually, like if you're actually going to tax court, you're probably a very large company because I would say they give more adverse decisions than negotiating with IRS counsel and negotiating with IRS appeals. So if you weren't able to resolve with IRS appeals and counsel, you're probably going to lose in tax court.

- Obviously, it's all subject to audit. But if there's something that looks egregious, do they put scrutiny on that thing that looks egregious? Or as soon as you hit that audit, they're like, we're gonna look at everything. - They pretty much look at everything. - Okay. - Yeah, they may have picked it up for the thing that was egregious, right?

So whenever you have like a massive loss on it, or maybe too much charitable contributions, that might've been the reason it was flagged. Every now and then, an audit might be limited to specific items, but usually they're like, oh, there's a Schedule C, give me all the receipts. There's a Schedule E, give me all the receipts.

You know, you did a rental, give me your material participation log. - And just a personal question, on the receipt side, do you think that credit card transactions justify receipts? Or do you really need like the receipt receipt? - You need the receipt at the lower level, right? So that's, it's everyone's question.

And maybe the IRS, like if the IRS were up with the times, they would change that policy, 'cause it's just ludicrous, but they're not. They're like very behind on technology. Just everything is very slow moving. So, you know, they can barely find enough people to take the jobs that they need.

So no, at the lower level, I mean, I have a lot of IRS appeals, IRS audit cases at appeals, where what happens is people will not have the receipts. Literally the auditor will just deny everything. A lot of times, this is a generalization, but a lot of them will just say, oh, no receipt, nothing.

And they'll just be like, pretend like there's not a business. Like, we'll just recognize the gross income and deny every single deduction known to man. And that's where appeals won't do that. They, there's what we call the Cohen rule, which is it's a, it's formed in tax court, right?

So it's not a law formally, but it's a doctrine created by tax court that basically says, it's to the extent of like, we can see there's a business, we can reasonably estimate the amount of the cost, the like, expense that you had, we can reasonably estimate what it was on, which I would say credit card transactions and bank statements can meet that threshold to some extent.

Then they're, they allow the expenses, but it's intended to be like a fairness doctrine, not so much like an offensive sword against the IRS. So it usually works at appeals and never, I mean, I've never have it really work at the lower auditor level. - And are there common things that flag people for audits?

- Yeah, I definitely, I mean, negative schedule C's, negative schedule E's, large losses will flag. I see a lot of audits by association. So if you're involved in something else that has a problem, so I've seen people with, maybe you have like a conservation easement, conservation easement is under scrutiny and getting audited, the IRS doesn't like those, you know, you're there by association.

I've also seen audits jump from person to person, right? So I, a lot of in the medical area, especially like kickbacks, if you had someone that got audited because he was written a check from the person with the problem, and then they look at your file and they say, oh, this person got a check, that check said ROI, this is a little sketchy.

And then they say, oh, you haven't filed, boom, audit. - What about when you're amending returns after the fact and making changes, does that put you at higher risk? - If you're asking for lots of money back, yeah. That's also one of the ways I'll see people audited. So it's, you think about common sense, right?

You filed your own return wrong. You already got it wrong once. And now you think, whatever, you're owed $200,000. And process-wise at the IRS, it actually, amended returns actually land on someone's desk. So it's not the same as like a superseded return or an original return, which is basically automatically processed.

An amended return is much slower. It takes like honestly nine months up to a year sometimes 'cause it actually just gets stuck on someone's desk. And then if you think about a human, right? A human looking at something, if you're like, yeah, just I'm owed $300,000. We got all of these line items wrong and we changed literally everything.

I mean, it's just so easy to like push it to the audit. - And how long does this whole process take? 'Cause I got a new CPA who reviewed my 2019 return, found a five-figure mistake right before the deadline to amend. We amended it, I feel like over a year ago and we literally just got the refund check.

- Oh, nice. - Now. - That's good, that's good. - But it's 2024, it's almost 2025. It was like an 18-month process. When the IRS does flag things for audits, is that months later, years later? - It just varies. You can, so I know I always say this, but you can check your IRS transcripts.

You can actually see if you've been flagged for an audit. So that'll tell you up to six months before it'll be like forwarded for an audit. So that's one way to check. The amended returns take a long time. Now, honestly, sometimes they get stuck on people's desks. Like they literally just sit there.

So that's where sometimes we'll, we do this only after several months have passed, but you could go through like the IRS tax advocate and kind of check in on it and say, "Yo, like no one's getting back to me on this." 'Cause the IRS doesn't have to process your amended return.

Like in theory, they could kind of sit on it. So usually they don't do that. But there are instances where it's like, "Is anyone gonna get here?" At some point, you don't wanna just wait. - When you do get it wrong, I have one example where a friend of mine got what they thought was a gift from a parent.

But what turns out was that parent had a business entity set up with all the children in the family as owners. And so that gift was actually a distribution from a company. And they never got a 1099 or anything. And like three years later, they found out that the gift they got from their parents was taxable.

But it took like years, and they owed penalties and interest on top of that. That seems like something that was flagged because the business entity submitted something. Maybe they even filed the 1099 with the state, but didn't send it to the children. So that seems like something where it comes back to the transcripts.

I wanna talk about IRS transcripts, 'cause that's actually the reason we're talking today, because a really good friend of mine sent me a video you made about IRS transcripts and was like, "I've never heard about this strategy. "It's amazing. "You have to talk to this person." And so how are you using IRS transcripts to make sure you get things right?

- Yeah, so you wanna check them. So I was gonna say in that instance you just described, there probably was a K1 if you're telling me they're an owner. - Let's even just define what they are for people. It's the file the IRS has on you. So if the IRS has a file on you, why wouldn't you wanna see it?

It's publicly available. They make it electronic. You can literally just create an account with the IRS, log in, and then there's multiple types of transcripts. So you've got your account transcript, which is gonna show the base level of your account. It's gonna say what payments have you made to the IRS, for which tax year has your return actually been filed?

Has your amended return been received? So it's very much those base level things, which like if I'd filed an amended return, the first thing I'd be looking to see, did the IRS receive it? If they didn't receive it, you could wait two years and then be like, where's my refund?

And then they'll say, well, we didn't get it. Now you're outside the statute of limitations. - And how quickly are those kinds of things updated? Like if I file my return today, how soon will it show that it's been filed? - Usually at least a couple of weeks. It still takes a little time.

So a couple of weeks if you did it electronically. Now, if you mailed it, it could be like six months, nine months. I would say after waiting a couple of months, if it's not there, I would be very concerned. And usually you always wanna have proof that you already submitted.

But yeah, so that's the account transcript. So I look to that for like if you made a payment and sometimes they receive it, they cash it, but they don't credit it to your account, right? So did it also get credited to my account? So all of those details. Then when you go to the wage and income transcript, that's the one that would avoid most of the problems.

So that's the one where if a K-1 was filed with your social on it, if a 1099 was filed, every document with your name and social is gonna be on there. And that's the one that... The problem is if you check too early, you won't have all the information.

So it populates by the following year. So for example, right now we're in 2024. If you want your 2024 wage and income transcripts, you'll obviously need to wait till next year because things like your W-2, all of that stuff hasn't even been filed with the IRS. And then takes time to populate.

Usually a safe time to check is gonna be June of the following year. - So that means that in order to check, you would have to by default file an extension and not file in April. - Yeah, so what I recommend is we wanna do one of two things.

If you wanna file early because you wanna refund, usually is the reason, the only reason. Then extend. So for example, extend in February, file by April. But then if you notice a problem, you wanna check in June or September, whenever before the final deadline. You can file a superseded return.

And so the reason we like superseded returns is one, they process faster. And then two, you don't have that page. You know you have on an amended return, you have that page of original change, difference. Like you're highlighting the problems that were there instead. It's just literally submitting a new original return.

- Okay, and so it's not ending up on someone's desk like an amended return would. - Yeah, but the only reason you can do a superseded return is if it's timely. So if you never extended in the first place, then you'd have to do an amended return if you're filing after April.

But if you extended and then filed, you're still technically timely until October 15th. - I think one takeaway for everyone listening, W2 employee, business owner, even if you file in April, there's no extra cost or risk to just also filing for an extension. - Yeah, and you just have to file the extension before you actually file the return.

So file the extension, then file the return, and then May, June, check your IRS transcripts. If anything's off, file a superseded return, and you're in a way better position than if you filed an amended return. And if nothing's off, then you're fine. You already filed, you're done. - That's what I would do.

And I mean, eventually, hopefully the IRS will start publishing transcripts earlier, but right now it's, you know, they don't. So it's like either you do that work yourself, even though we could say in fairness, you shouldn't have to, right? Like, I think there's always this argument of like, why should I have to do that?

But if you're gonna be the one holding the bag, you probably should just do it. 'Cause the alternative right now, based on the way the IRS operates, is they give it a good two to three years and then send you a notice with penalties. - Yeah, and if they, what happens on the flip side?

Let's say in my case, I filed an amended return years later, then they took another year and a half to pay me. Do they have to pay me penalties and interest? - Not penalties. (laughs) There is some interest, but it's not, it's not for the time that passed. It's for once you file your claim for refund, then the clock starts.

They have, I think it's like 45 days to process it. And if they go wildly outside of that, then they can pay you interest. Yeah, they will pay you interest. - Okay. - But the risk you run, I mean, what to me, what's always very scary is being outside the statute of limitations, right?

So with refund requests, which is what an amended return is, if it has a refund on it, you have to have specificity. So what I see people do, especially with not great preparers, is you file the amended return, you don't put enough detail, you blow the statute of limitations.

If they were able to process that specific amended return, it'd be fine. But if they say, "Hey, this amended return "doesn't have specificity, we're rejecting it." Now you're past the statute of limitations, you can no longer ask for the money back. - And what is the statute of limitations?

- It's the later of three years from a timely filing or two years from payment. - Okay. And so, does that fit into your favor in a way that filing earlier gives the IRS less time to come back, 'cause it works both ways, right? If they wanted to come after you and you filed right on April 15th, they'd have less time than if you wait and file on October 15th.

- Yeah, so that is one consideration that by extending and then filing later, you are extending the statute of limitations for them. I haven't seen any correlation between them like auditing those people less or being less likely to pursue. - My argument would be if you're banking on the statute of limitations to allow you to do something you shouldn't do, you probably shouldn't have done it in the first place.

- Yeah. - Is there anything else you do personally with your taxes like the IRS transcripts that you think people listening might benefit from hearing? - I personally extend, I always want simplicity in everything, right? So not that we don't wanna maximize the tax benefit, I do, and I care a lot about that as well, but I will say there's, I care a lot about not just minimizing my taxes, but also minimizing penalties, interests, and honestly problems, right?

The more busy you get, especially in business, but honestly in any area, like I know how painful it is to work with the IRS. Like even if I got audited today, I would be stressed about it. Now I'd be in the driver's seat, so I'm not gonna like crazy worry, but it would stress me out because I know just the time that it takes, just the time it takes would be honestly a huge loss in money to me, right?

Huge loss in energy, effort, everything. So everything I do is built around that, and obviously transcripts is one of them. I like to actually extend so that I have a clean, I want one return submitted, that's it. And then everything I do is clean. So it's like, if I think I'm gonna assume the IRS is looking at my return, if there's anything that doesn't look good, I would prefer to not make it stand out, right?

So whether it, without misrepresenting. So if someone were to look at it and you labeled, I don't know, meals as, I don't know, something not meals, then I think that's misrepresenting, but you could also do certain labels that just don't pull out attention, right? So I might not label gifts, gifts.

I may label it a part of something else that represents what it is. So for example, I actually have a good client that I've been working with. They're under audit and they're about to file. So whenever you're under current audit, they're gonna look at the return and then decide, do I wanna audit this return?

And so things like clearing out any schedule Cs with a loss on them. I don't care if you truly had a loss. If we can remove, I would rather not take the deduction at that point, knowing that it's gonna be under scrutiny if the deduction is small, rather than highlight the fact that we've got something that looks really interesting to look into.

So those are the kind of decisions, sometimes it's aesthetic as well. - I was just thinking about how you look at the IRS transcripts and you're probably comparing them to your set of documents you've received. How often are the documents, the W-2s, the 1099s, actually incorrect themselves? - It happens all the time, especially 1099s.

So W-2s are usually accurate 'cause they have to match up with the rest of the IRS's records on actual withholdings from the employer. But 1099s, I will see all the time. I log in to someone's account and it's a 1099-C, it very often incorrect. It's just like issued in the wrong year.

It's something the client wasn't even aware of. Yeah, or just, I mean, for regular 1099s, you have to remember, it's just another human issuing it on the other side. I was talking to someone that the bookkeeper added a zero to the 1099. And it's like, whoever's filing those 1099s, a lot of times it's the administrative assistant, right?

And if you were paid $2,500 and that administrative assistant makes it $250,000, like that is what the IRS will have on file and they'll automatically add it to your return. - And what about ones from banks and brokerage firms showing mortgage interest or interest from your savings account or brokerage transactions?

- If they're incorrect, there's like not even much you can do about it a lot of times, but I don't tend to see huge errors on those. Those tend to be correct, yeah. - And when you find something that's not on an IRS transcript, but you have, you got a 1099, the IRS didn't, is that a cause for concern?

Is that, do you try to look into why? Or you just kind of accept that they might've missed it and you're gonna include it no matter what? - It probably wasn't the IRS missing it. It was probably the employer not filing it with the IRS. - Okay. - Yeah, so that's what I would assume.

And then, you know, you'd look at it and say, well, did I receive the income? If I received the income, you're supposed to, you still report it, yeah. - Yeah, of course. Okay, anything else that people should be thinking about high level? I wanna hear if we're missing any things about how to think about filing and taxes.

- High level, I think people tend to rely too much on their expert, you know, especially when their expert's not an expert. And so to me, I always view it as like, you're the one holding the bag, it's your tax return, you're literally signing under penalties of perjury. The IRS cares about you, not your preparer.

So doing, that's why I like to put out so much information because it's actually just something you need to understand even if it's something you're not that interested in. - I was talking to someone at a conference and she was looking to, she was interviewing for a job at Intuit working on TurboTax.

And she's like, oh, you think about this a lot. What do you think of TurboTax? And I was like, look, it can help you fill out the forms and they might have some policy where they're like, we will defend you, but at the end of the day, if you use the tool wrong, you're gonna fill out the forms wrong and that's not on them.

What's your take on when someone could rely on a tool like that versus need a preparer versus just fill out the form themselves without needing any software? - Yeah, I think it's an assessment, ideally an unbiased assessment of your own skills, right? Some people just have no business preparing their return.

Even if it's on the simpler side, they will find a way to mess it up, just not their thing, being timely. I mean, there's benefits to a preparer beyond the actual knowledge, right? A lot of times it's like peace of mind, it's just timeliness, like it's actually just gonna get done.

So assessing your own skills. And then at that point, I mean, TurboTax is great for whenever you've got clear tax documents that just need to be input, it will do it perfectly, right? But I've seen people misuse it. Like we had an IRS audit where they, I don't know how they did this, but they used TurboTax and they input their Schedule C stuff on both Schedule C and Schedule E.

And I think they don't know how to read the output and they're the preparer. So I think when it's W2 stuff, like TurboTax is great and if anything, they're better than hiring someone who doesn't care about their return as much as you care about your return. But once you start going into business or if you're taking any specific tax positions, I would just find someone that knows what they're doing.

- All right, and because it's October and this will come out before the end of the year, I'm gonna share some of the things that I try to do before the end of the year and you can let me know if there's anything else. One, which is not often possible, but accelerating or deferring income or expenses and I would say this is sometimes possible where if you've decided, okay, this year I'm gonna itemize or I'm gonna take the standard deduction, you might be able to make an extra property tax payment.

Now, right now with the current limits, there's $10,000 of state and local taxes, but if you were not at that limit, maybe you wanted to kind of make extra tax payments or mortgage payments in one year and then the next year switch it off, switch off. So that's one.

Or if your company offers the ability to get paid a bonus and defer it for a few years. So thinking about whether there's any income or expenses that you can move around, that was one. Making charitable donations with the caveat that I think everyone should be donating to charity with appreciated assets, right?

If you're making any donations to charity with cash, you're effectively leaving money on the table if you own any appreciated assets. So if you own any stock that you bought for less than it's worth today, those are the things you should be donating. And if that's not simple, because the places you donate don't take stock, you can pretty inexpensively set up a donor advised fund.

People that listen to the show for a while know that Daffy has been a partner, it's where we use our donor advised fund. There are other options, not many are as simple and good in my opinion. For any equities, if you hold any stocks that are actually not at a gain, but are at a loss, you can harvest those losses.

Now you can't buy the exact same thing, so you wouldn't wanna sell your Google stock and then rebuy it unless you wait 30 days. But if you held a S&P 500 index fund and it was down, and you wanted to buy a different index fund, you could. If you're holding stock options, so specifically ISOs, depending on how many you exercise, it may affect your taxes, but sometimes, and this is one where I would say, work with a professional for sure, there might be a number of ISOs you could exercise that wouldn't put you into AMT and cause your taxes to increase.

And so if you're trying to exercise some ISOs, that's possible. A common one is if you have an FSA, make sure you use it all, because if you don't use it all, then you lose it. So FSAs, the employer is gonna keep the money if you don't use it by the end of the year.

And I would say even if there's absolutely nothing you need, there are places online where you can buy things and donate them. So if you, there are medical supplies that many shelters need, at a minimum, buy some of those things and donate them even if you don't have expenses.

And then there are HSAs, retirement accounts, 529s, all things that have annual limits. So if you wanted to contribute to those, make sure you do that before the end of the year. If you wanna give any gifts, so if you're trying to gift money to your children or family members, those gift exemption limits reset each calendar year.

And then if you own a business, think about whether there are any business expenses that you wanna get done before the end of the year. Sometimes you might want them this year, sometimes you might actually want them next year. But I have been able sometimes to ask vendors, "Hey, could we pay for this thing a little early right now?" Or maybe you have, you know, net 30, net 60, net 90, but you wanna pay for it right away so that you can have the expense in that calendar year.

And like, did I leave any glaring thing off that checklist? No, that was great. I think the one that I like to talk about a lot is for business owners, just because I actually see no one talking about it. If you have a business, you want to, and especially if it's an S-Corp, so specifically for S-Corps, but really for any type of business, checking your tax basis.

So I know it doesn't sound like super exciting like some of those, but it's a timing difference. And so there's a situation where basically if you take out the money in December from your business, you'll pay quite literally a voluntary tax, capital gains, because you accessed that money versus had you just waited until January to take the money out, there would have been no tax.

So there's a timing difference, especially with S-Corps that have lots of depreciation and third-party debt, where if you take the money out, you quite literally create an extra layer of tax just for fun. Wow, okay. So that's one that I would say go check with your CPAs on. And then the only other one completely untax related is that if you have credit cards that have all these annual credits, like an airline credit or a hotel credit, make sure you use those before the end of the year as well, because those often reset.

Some of them are on the card member year. Some of them are on the calendar year. I'm gonna put together a list of all the things I just mentioned and a few other ones that I find in the newsletter. So allthehacks.com/email, and that'll come out sometime before the end of the year.

But when you just said S-Corps, I wanted to ask about a couple business things. Specifically, you've said S-Corps aren't as awesome as people might think they are, and that people thinking they should just set up an LLC to save money on taxes probably might be mistaken. And I've had a couple friends say, "Oh, yeah, yeah, I run everything through my LLC, "so I save money." And I'm curious what you think about that.

- Yeah, well, I mean, the tax law is the tax law, right? It doesn't say like, if an LLC, it's treated this other way. It's based on the tax entities. An LLC is a legal entity, not a tax entity. So just forming an LLC does nothing. It doesn't make a business deduction a business deduction.

A business deduction is either already a business deduction, or it's just not. And running it through your LLC is, it's kind of that procedure versus substance. It's the procedure, and it's not what's controlling. So the substance is like, what did you spend it on, and do you actually have a business?

So that alone, I would just, I like to keep things simple. If you don't have legal liability, and you're not doing anything other than sole prop treatment, you probably don't need the LLC, or at least recognize it's not providing a tax benefit. And then, S-Corps are, they work really well for businesses, like service industry, whenever there's not much equipment, and not much third-party debt.

They work really well. And then the minute you have more of a business with lots of vehicles, and usually those vehicles are financed, right, or real estate, all of those typically need to stay out of an S-Corp. - Okay, I feel better, 'cause I was like, I saw you talking about S-Corps, I was like, oh, I have an S-Corp, but don't have a bunch of vehicles, don't have a bunch of third-party debt, and don't have real estate.

So maybe I'm in the clear. - Yeah. - Anything people should think about with a little bit longer horizon than the end of the year, given that I know the current situation, I mean, obviously we have no idea what's gonna happen with an election that, as of right now, is in days, but the Tax Cut Job Act is expiring.

Are there any things people should be keeping on their radar in the next kind of 14 months as things to consider? - I mean, yeah, a lot of stuff is gonna expire. So even like the qualified business income deduction, I mean, there's lots of things that we've gotten used to, lower tax brackets, all of that is set to expire.

And I mean, who knows at this point what's gonna happen. So I mean, planning for it, maybe sometimes you think, oh, well, I wanna push up my income for this year or for next year before QBI expires, right? And so it could make a bit of a different decision if you account for the expiration.

- Yeah. The other one that will probably be relevant to a very, very small number of listeners, but I do know some listeners that meet this requirement, is that the estate planning, kind of the gift tax limitations are going to be changing. And so I believe it's something like 13.6 million per person in a married couple is gonna come down to about seven, I think.

I don't know the exact numbers, but if you're sitting on tens of millions of dollars that you one day would like to give away to your heirs, now would be a really good time to figure out the estate planning to do that. - Yeah, if you're gonna be over the new threshold once it expires, you'd basically wanna figure it out now because there's no clawback.

Like if you use up the full, whatever, 23, whatever million it's at now between a married couple, if you use that up by usually some type of like contribution to an irrevocable trust, then there's no clawback. So you'd want to hurry up and probably use it up 'cause almost in every scenario, we're expecting it to go down.

- Yes, but similar to where we started this conversation with everything you see on social media, I've seen a lot of people being like, oh, you should set up this trust so you can give money to your children and not have to pay taxes. And I'm like, that is true.

However, if the amount of money in your lifetime you're going to give to your children is less than, even let's call it just really conservatively, less than $5 million, then you don't have to worry about any of this, right? Like sure, that limit could come down even more in the future, but right now it's over $20 million.

So I don't want people to think, oh, mosh, I might leave $500,000 to my kids. Do I need to set up a complicated trust? And the answer is no, you do not. - Yeah, no, it would definitely hurt you to do that. I mean, 'cause there's also costs of administering it.

Even knowledgeable people, I just saw a post the other day and someone's like saying how revocable trust helps you get step up in basis. Like they're just making step up because you already get step up in basis. So most of the tax benefits are already built in and really it just comes down to estate tax 'cause income tax gets worse when you go the trust route.

It either stays the same or it gets worse depending on what type of trust you choose and then it's only that estate tax. And then like we just said, the thresholds are huge. So if you don't have an estate tax problem, you don't wanna pay to fix a problem you don't have.

- Now, the only thing we spent a lot of time at this conference talking about different trusts and all this crazy stuff, but for avoiding capital gains, you can potentially end up in better situations with some charitable remainder trusts and those kinds of things. So if you're about to have a massive sale of a company or sell stock that you bought at a really low basis, like let's say you worked at NVIDIA the last five years, there's a world where you might not be crossing that 10, 20 million threshold, but you might save money setting up a trust for that purpose.

I'm not the expert. We did an episode a while ago on trust. You absolutely want to work with an expert in this circumstance. But outside of a few of those small scenarios, I would say, if you're not over these thresholds, then you're making yourself and your life more complicated.

That said, a revocable living trust, a will and like basic estate planning documents, you should definitely set all of those things up. I'm strongly in favor of those, but more complicated irrevocable trusts are probably for very specific scenarios that are not common to most people. - Yeah, it always goes back to like, what are you trying to accomplish and does it actually get you there?

And people talk about trusts a lot, but the reality is they're really complex. Like anybody that does regular domestic tax and just happens to like name drop random trusts, they're probably not super familiar usually on social media. When you think of like charitable remainder trusts, it's because your purpose is different.

It's not to keep the most dollars possible. It's actually with a strong purpose for charity, right? So then of course there are tax benefits for that. - Yeah, so if you're trying to pursue anything wild and crazy, talk to someone. Where can people find everything that you've published and where can they go deeper on all of your stuff?

- I'm just searching my name on YouTube and then Instagram. Those are my main platforms and YouTube. I've actually got a video coming out today, but I'm trying to do every couple of weeks now, I'm doing a nice long form that I'm literally just going through court cases on a specific niche topic.

- Yeah, I proposed for anyone interested, I proposed that you go deep on the credit card stuff. And if so, and you do it by the time this comes out, look in the show notes and I will link to that. And you can go get a little bit of a deeper dive there.

- It's on my list, so let me see what I can do. - Awesome, thank you so much for being here. - Of course, thank you.