Failed to File Taxes for Many Years? Here’s How to Escape the IRS

You knew you’ve got to file returns, but you had too many irons in the fire to manage it. And you let it slide.

In this episode, Mike Pine and Kevin Schneider provide ways and means from the tax code for you to get the work done and escape the long arm of the IRS.

In this episode, we discuss

• The danger of late tax filing and procrastination, the implication of the statute of limitations, and the excuse of not being able to afford tax payment. 
• The option of paper filing with certified receipts for confirmation of IRS receipt.
• Exploration of the preference for computer-based tax processing over human handling, emphasizing the importance of timely filing.
• Insights into installment agreements for back taxes, highlighting the impact on future refunds and the need for careful tax planning.
• Cautionary tales about clients under installment agreements missing out on refunds due to overpaying taxes.
• How to deal with incomplete details for filing back tax returns and the IRS's acceptance of reasonable estimates.
• How to prove deductible expenses when records are lost, including using bank statements and credit card statements.
• The significance of maintaining separate bank accounts for personal and business transactions to streamline expense verification.
• Discussion on the obligation to file 1099s for payments exceeding $600 and the potential consequences of not reporting income.
• Anecdote about Al Capone's imprisonment for tax-related charges rather than the more severe crimes he committed.
• Encouragement to report all income to avoid legal repercussions and the importance of tax mitigation strategies.
• The need for proactive tax filing, understanding IRS processes, and seeking assistance when required.

To Learn More

You can reach out to Mike or Kevin on their website Pine and Company CPAs - Investment Tax Strategy | Ongoing Tax Monitoring | Tax Filing (pinecocpas.com)

They would love to help you find the way of victory in your tax filing because they love to see people use the tax code responsibly as well as find financial freedom through it.

To access the bonus tax content mentioned in the episode, go to https://www.hiddenmoney.com/bonus

To start using the tax code as a tool to grow your wealth, schedule a call with Pine & Co. CPAs: https://www.pinecocpas.com/consultation

 

TRANSCRIPT

Mike Pine: [00:00:00] Welcome to this episode of the Hidden Money podcast, where Kevin and I are excited to talk to you about the best stuff in the world, taxes. 

Actually, taxes aren't the best stuff in the world- mitigating taxes and paying only the legal amount you're obligated to pay and not a penny more. That's fun stuff.

Kevin Schneider: Agreed. Filing taxes is a necessary evil- paying your taxes does not have to be. So, that's what we want to talk about today, is a little bit of pitfalls to avoid when we're filing our taxes. 

Now, you could be a DIYer out there just doing your own tax return- this would be some good information, but even if you have a CPA that you already work with on the tax side, this is still good information because you could be in some back tax issues, you could have some issues with some forms coming your way... and we're just going to talk about that today.

Mike Pine: I would say the No.1 pitfall to avoid when it comes to taxes is don't procrastinate. If you [00:01:00] procrastinate, things just snowball. You get more and more overwhelmed and the IRS isn't going to go away. We've got this client now, God bless him. He's a very successful real estate person, incredibly successful, but he has this

brain block when it comes to taxes... kind of like I had with my third year of Calculus in college. 

Like, it's just something that you don't want to deal with, so you just don't deal with it. Let me tell you this. People don't go to jail for not paying their taxes. People go to jail for not filing their tax returns.

We've got this client and he hasn't filed his tax return in about five years. 

One year, and I think 2018 or 19, he actually owes a lot of money. He had a big sale of a nice complex that he sold and passed it down to all of his investors, but he himself was too busy. The guy is really busy- that's just how it is being an entrepreneur,

and he is incredibly busy and incredibly successful, but he still has not filed. He engaged us and we were working with an attorney [00:02:00] because he owes enough tax that he hasn't filed a tax return on. He is facing going to jail. All he needs to do to stop that from happening is file his tax return. It doesn't even need to necessarily pay the taxes to avoid going to jail.

He just needs to file a tax return, and we only need maybe two or three hours of his work to get us so we can file a tax return, and he keeps finding reasons not to deal with it because he doesn't want to. I get it. They're scary. It's overwhelming, but procrastinating and not dealing with the problem is the biggest pitfall to avoid.

Deal with the taxes. Don't put your head in the sand. But more importantly, if you can recognize the power that taxes have in your life, if you use them to your advantage, you can leverage the tax code to grow your financial freedom. You can't do that if you just ignore them and put your head in the sand.

Kevin Schneider: Yeah. And as an entrepreneur, like this specific case you're discussing, you have no time to do taxes, but if you go to prison, you're going to have a lot of [00:03:00] time.

And so, we got to put this in perspective. Yeah, filing a tax returns, no fun. And when you are dealing with large syndications and large self employed people like this, there's a lot of moving parts to even get a tax return on paper, but at least getting something filed and on paper is a start. Then we got the statute of limitations. If you wait to file a tax return, let's say you haven't filed 2018 and 2019... well, the statute of limitations hasn't started for you yet. And all that means is there's a statute of limitations the IRS has, up to three years after filing a tax return, to audit you.

So, if you filed your 2018 return timely, you would have had a three year clock from the date of that filing for the IRS to pull you for audit. Now, they can go past that statute of limitations for fraud and things like this, but generally they're not going to go outside that statute of limitation.

But in 2018, if you haven't filed 2018 until 2023, your clock is starting in 2023. Now, if you file 2018, 2019, 2020, 2021... if you [00:04:00] file four years of tax returns in one tax year, you're going to have, probably, five or six tax returns on the clock for IRS audit. So, you're just going to have this... not a big risk, sitting out there... well, you could, but there's a lot out there because now, if they go on audit 2018, because they're under the statute of limitations,

they might just find some errors and be like- 'Oh, we're going to expand this to 2019, 2020, 2021, 2022.' --They're just going to expand it because they can.

Mike Pine: Every open statute year they'll expand it to.

Kevin Schneider: Yeah. So it hurts you more so than just the actual logistics of filing and penalties and things like this. 

It actually has that hidden risk of you could get audited five, six tax years at once.

Mike Pine: Yup.

Kevin Schneider: And That is stressful and expensive.

Mike Pine: Very expensive. 

Now, I hear this over and over again. I don't want to file my taxes because I can't afford to pay it. And there's some real legitimate, there's a lot of times where people are reinvesting and growing their business and they don't [00:05:00] have cash and they've spent it on growing the business.

They're not necessarily going out and wasting money. They're growing their business. They're providing jobs and they're worried... 'Well, I can't file my taxes because I can't afford to pay them.' 

 Is that a good thought process? Kevin, is that logical to you?

Kevin Schneider: No, no,

even if you do not have the money to pay your tax, and this happens quite a bit, and it's not always at the fault of our clients. I mean, there is a such thing called phantom income. Like, you are being taxed on something that you never received cash for, and that could create tax problems.

And if you don't file that tax return, and you have this balance sitting out there, the penalties are going to keep piling because you're going to have this something called a late-filing penalty. A late-filing penalty is going to hurt you because it's based on the amount of tax owed. So, if you have a big tax due sitting out there, and you're not under an instalment agreement, and then you file your tax return late, the late-filing penalty is going to eat you alive.

I think it's up to, like, 25%. I'd have to look, but they cap it at some [00:06:00] point. But if you owe $100,000 to the IRS, you could be tipping them $25,000.

At least file your tax return, and then you could pay penalties and interest on the balance, but you're not paying that big chunk, that big late-filing penalty.

You can get always get under instalment and then in the instalment method. You're just going to come to an agreement with the IRS saying. ' I'm going to pay my balance. I agree I owe you. I don't have the cash for it. I'm going to pay you over, let's say, 72 months.' --They're going to charge you the interest and all that good stuff, but it can be auto debited. At least you're working with them,

and then, they're going to work with you as well.

Mike Pine: Yeah, so let me just break that down a little bit. There are multiple kinds of penalties that you pay if you don't file a tax return. Like Kevin mentioned, there's the late-filing and that penalty stops once you file a tax return, but it'll keep occurring every single month until you hit a really high cap if you don't file your tax return, but you can make that go away by filing a tax return.

Then you also have late payment that won't go away until you pay. Even under an instalment [00:07:00] agreement, you're still going to pay penalties and interest, late payment and interest on what you haven't paid, but you can avoid having to pay late-filing. So, you can cut your penalties in almost half.

You need to file the tax return. You definitely should file it. I've heard other excuses to say, Well, I don't have all of the records. '--The IRS understands that happens and they say, Well, make your best estimate, do the best job you can at reporting the income you've made so you can stay in compliance with the IRS.

'--So that's not a good excuse. There are times like this specific client that we were just talking about, we're going to file an estimated tax term. We know he has a big gain, but we also know he has deductions and roll-forwards or carry forwards of losses. We're going to go ahead and file worst-case scenario so we have shown the IRS we are not trying to hide from you. We're being transparent. We're going to attach a statement. If we can get this last information that says- we know we owe taxes on this. We think we have more deductions, but we're going ahead and file to be on the up and up with the IRS.

And then, we're going to go back and amend as [00:08:00] we rebuild those records from all those years ago.

Kevin Schneider: Yeah, that's a good plan, and 

the kind of kicker with all this too is- let's say you're in a refund position and you haven't filed for four or five years. There's no late-filing penalty. The IRS would almost rather you not file a tax return if you have a refund, but there's not going to be any penalties if you have a refund coming back to you.

If you've overpaid your tax, the only thing that you're hurting is yourself by not getting your money back. We always want to look at that too, and I'm guessing in this instance, this guy owes tax. It sounds like he has sizable gains, but in the instance that you are in a refund position, those big penalties go away, but your money's just sitting with the IRS, and if you don't file a tax return, the time limit could expire on that.

Mike Pine: Yeah. It's funny. If you owe taxes, the IRS wants to keep your statute of limitations open, but If you are in a refund situation, this commonly happens with people who are paid via W2. They're normally, they're withholding taxes or more than they're actually going to owe. And they just don't file a tax return.

Things get really [00:09:00] busy or hectic or catastrophes happen in their life and they just don't file. What the IRS will do in a lot of cases is they'll go ahead and say, 'Alright, we're going to prepare and file your tax return for you. '--And they'll always pick up all the income that was reported to you and assume you have zero deductions,

and then they file a tax return on your behalf. They have to send you a few letters. Those get lost or you don't notice them- you could completely miss this out, and if they file that tax return, that starts the statute of limitations, and if you wait three years before you realize, 'Oh! The IRS owes me $40,000.

Let me finally pay a CPA to file it for you.' --It can be too late. We've had so many times clients come in and say, 'Man, I haven't filed in five years. I know I pay more than enough taxes. Let's go ahead and get my refunds.' --And we have to be the bearers of bad news- 'Sorry. The IRS already filed that return for you.'

--Statute of limitations is closed and yet the IRS kept your $40,000 in taxes. So, you just got to stay on top of these things or pay someone to stay on top of them for you.

Kevin Schneider: Yeah, and it is a two way street. You could pay a CPA to do [00:10:00] it, but if you don't respond or give us information, we can't make up a tax return. So, we have professional guidelines where we have to do due diligence and it is a two-way street with clients, and that's issues we run into, 

like in your case you've mentioned. We want to file these tax returns- we're in down season, we should be able to pump these tax returns out rather quickly... and we can't get the information. Yeah, it is definitely a problem for some people, but like you mentioned, just staying on top of it would save you a ton. And I even see, whenever you sell stock, you'll get that 1099-B,

and if you don't report a 1099-B... the IRS is notorious for this too... If you don't get a 1099-B from Fidelity or Charles Schwab, or whoever you sold that stock with, if you never got it or you just didn't report it, and you have some non-covered transactions on there- non-covered transactions mean the IRS is not aware of the basis.

So, there's covered transactions with stock and then there's non-covered transactions with stock. Covered transactions- the IRS has the basis information for. They know what the brokerage is going to report your sales price on a share [00:11:00] basis. They're going to report your cost basis and your gain. The IRS already knows your gain.

But on those non-covered transactions, they don't know the basis. So, they're going to pick up that sales price. Let's say you sold some stock for $100,000, but your cost basis is actually $150,000. Well, you had a $50,000 loss, but it's a non-covered transaction. If you don't report that 1099, the IRS is going to send you a friendly letter saying you owe tax on $100,000.

We're going to assume this non-covered transaction has zero basis and that all of this is gain, and then, they're going to freak out. They send us the letter and be like- Oh, I owe all this tax. What's happening? --We're like- What's the basis? -- The IRS is always going to err on their side. If they don't have information, they're going to file a tax return very conservatively on your behalf.

They're going to assume that if you don't report stock sales with the correct basis or on the uncovered transactions, that there's no basis that's just how it works and so making sure your documents are proper, making sure you're accounting for everything that you invest in, making sure [00:12:00] you have all this documented, it's going to complete that holistic tax return.

Mike Pine: Yeah. This reminds me of a story, an actual client experience I had probably about 15 years ago. I was new in my own practice, got a client that came in and said, 'I haven't filed my taxes in, like, 15 years. I'm pretty sure that I don't owe any money, but I finally have the time and the resources- I want to pay someone to get this fixed.'

-- And 10 years prior, he had sold some stock and it was the exact situation you said. He sold it for a loss, but it was a lot of stock. It was like a few hundred thousand dollars and he sold it for a loss. We knew he paid more than that, but he did not have his old brokerage statements. I think it was with E-Trade back in those days, and for some reason we couldn't get those brokerage statements.

So we filed it, put what our estimated cost basis was, and he got audited, and we spent over a year contacting E-Trade, trying to get bank statements from where he transferred money into his brokerage account like 10 years prior, and this was back [00:13:00] before things were really as digitized as they are now.

We could not find it, and the IRS was saying if we could not substantiate he paid something for that stock, then we're going to say he has zero basis and he has money on it, but we knew he had a loss, and we fought it and fought it. It was a smaller stock, so it wasn't publicly listed at the time. We couldn't go back and find historical expenses or historical price of the stock,

and ultimately, we had to go to the IRS, a supervisor, and appeal and eventually they said, 'Okay we'll give.' --They let him get away with some of it, but they didn't give him the loss forward because he couldn't establish it. He had a... I think it was $50,000 or $60,000... loss carryforward.

That should have been able to be used $3,000 a year until it was all used up because we didn't have the documentation supporting it. The IRS said, 'No, we're not going to give that to you.' -- So record keeping is another important thing- avoid not keeping records.

In today's world, we have digital files, we have digital Dropboxes and Onedrives and [00:14:00] iClouds.

There's no reason you can't save these things in multiple places so you don't lose them. So save them. Again, statute of limitations- three years- that's in, most cases, all you're required to hold on to your tax records for. But there are times, like especially, that capital loss carryforward. We had a client who had a $300,000 capital loss carryforward

and he reported it for 20 years and used $3,000 a year for 20 years. That year he got audited. They said, 'Show us the transaction. Prove to us that you had that capital loss.' --I said, 'That was over 20 years ago. Statute of limitations are closed on that year. You accepted his tax return saying he had this capital loss for 20 years.

Why are you arguing it now?' -- They said, 'It's the burden of the taxpayer to prove that he actually had that loss, and since you can't establish it, we're going to take away those capital losses and he can't continue to carry it forward.' --Well, I thought there were more avenues we could have tried to follow,

but at that point in the client was just like, 'It's not worth it. I'm over IRS for months.' --and the [00:15:00] client didn't want to fight it anymore.

So, we agreed with the IRS, even though it was terrible and an injustice, but keep records for all large transactions indefinitely. My dad called me up this weekend, Kevin, and said, 'Hey, I've got, like, 20 years of tax returns in boxes.

Can I get rid of all this?' --I tried to talk my dad into getting a scanner and digitizing it. He wouldn't. He said, 'But I really don't need this.

The statute of limitations are closed.' --I told him that story and he said, 'Okay, I'm going to go rent a storage place for a locker for all these boxes.' --It's bad, too bad, but...

Kevin Schneider: 20 

years' tax returns...

Mike Pine: He's probably not going to need it,

but something like that comes up, he's going to wish he'd kept the records. 

Kevin Schneider: Yeah, once those are gone...

Ain't it funny how you file these tax returns with the IRS and they don't have a record of what you file with them? It's like there's so many times you're like they don't have the tax returns or back data. It's so sloppy. You file all these tax returns,

and 10 years later, they probably purge all their files too. They can't hold every taxpayer's tax [00:16:00] return on file.

So, it's so funny when you go into an audit, the document request list- that's what they do at the front end that when you get pulled for an audit- they're going to give you a DRL, and that document request list is just going to say, 'I need your prior tax returns.

I need your W2s, your 1099s, gather all this information.' --And it's just like, ' You have this!' --It's so infuriating. I have filed my tax returns. The W2s get sent to you. The 1099s get sent to you. Pull it yourself, but they don't, and more than likely, don't have it, and so, it's just so weird, and I don't know, it's frustrating work with the government, but that's what the game we have to play.

Mike Pine: Their systems are so antiquated. They've got computer systems and mainframes designed and built in the late '60s and '70s central to their operations at the IRS. I think that was even before DOS came out. It's like prior to Cobalt. I don't know what language they're using and how they're keeping those computers up and running, but that's what they got.

I was talking to an IRS agent last year. I just asked him, 'What does your computer look like?' [00:17:00] --He said, 'I have a 15 inch computer screen and it's one of those... it's only green. It's one of those big, deep CRTs I can't read half the time because some of the screens blocked out, doesn't work, but I've got the newest monitor of anyone on my floor.'

Kevin Schneider: Nice..

Mike Pine: Sure would love to work for the IRS. I do feel bad for these guys. They're trying to do their best with very, most of them are. Being understaffed, under resourced, I get that, but at the same time, come on, be just, be reasonable.

Kevin Schneider: If we're doing our job, we're hurting their revenue. So, as long as they have poor equipment, I guess that means they're not getting overpaid, but I know some people are paying them. But even if 

let's say, you don't receive these 1099s and stuff, what would you do?

Well, you can go the IRS, you can log into your own account and you can pull what's called a transcript, a wage and income transcript. So, don't let that either deter you from filing a tax return if you don't have all the data. Wouldn't we do this on [00:18:00] some, kind of, our big clients, is because they may get

twenty 1099s, they may get five 1099-Bs and ten K-1s and all these forms coming in. And these business owners are very scattered and so they probably got all the 1099s sent to them at some point, but they didn't download it, sent it to us. And so, what we do is as a due diligence, and it does take time and this is an additional service, but we actually get power of attorney.

We log in on their behalf and then we pull the wage and income transcript and we tick and tie what we received to what the IRS is expecting, and that prevents IRS notices because In the big scheme of things, if you do not report your 1099 or a W2 that was missed or a K-1 that was missed and the IRS has record of it, you're going to get a letter.

So, we want to prevent those, and so, just a little bit more work on the back end saying we know what the IRS is wanting, this is what we have, and we can reconcile the two, and that can go to any taxpayer, anyone listening. You could go [00:19:00] on www.irs.gov and go to your account, and you could pull a wage and income transcript and you could see what the IRS has on file for you.

You can see your prior tax returns. You can see a tax return transcript. You've got to pay to actually get your tax return, but they'll let you see at least the transcript of what was filed that year.

Mike Pine: They have improved that system, and the last couple years I went to that, I think it's called Verify Me or ID and it did take a good half hour for me to get it set up. I had to resend in my driver's license, like 10 times, or upload it where they could verify me, but once I got that created- don't lose that password by the way...

once I got that created, this year, I was late in filing my taxes. I always end up filing mine the last minute of the tax deadline day. Thankfully, Kevin was in the office to help.

Kevin Schneider: Not late. You're timely

 I was at the office, a meeting canceled, and Kevin was pushing me, 'Get your tax return filed.'

Mike Pine: -- I didn't have my records. I had a bunch of stuff at my house on my home computer- I did not have those. 

It took me less than five minutes to log on the IRS, [00:20:00] download my transcripts, get everything that was reported in my income, and I was able to prepare my tax return from that. I would say 90%- correct me if I'm wrong, Kevin- 90% of the IRS correspondence or nasty grams that our clients get are the AURs- automatic underreporting notices.

And like Kevin said, if a bank gave you $21 in interest and reported that on 1099, if you happen to miss that or fat-key it, but usually it's missed, they will send you a notice. It's guaranteed. The computers check those amounts and look and compare them. They're pretty good at that. Unless you're 100% confident

you have all your records that are reported to you, I would recommend this as a best practice for every taxpayer. Pull your transcript and provide that to your CPA, or pay your CPA to pull it, because that will save, again, 90%- you think that's a fair estimate, 90% of the letters our clients get are AURs? 

Kevin Schneider: Yeah. OhThey don't have the quantity of employees to be able to be looking at all these tax returns on a manual basis. It's all just[00:21:00] automated net letters, and they're wrong most of the time, but that's the point of them is they're automated, sent out to the taxpayer and then we reconcile it. 

Sometimes, we make mistakes.

We're human. Taxpayers provide us information that's wrong... that happens... and then you just get it correct. 

Mike Pine: If every one of our clients provided that, I think we could eliminate 90% of the nasty grams our clients get from the IRS. So, if you haven't prepared to return for a few years, and you've got this shadow hanging or this cloud hanging over you, and your shoulders are feeling the burden and the weight, what would you say the first step any person in that situation should do, Kevin?

Kevin Schneider: If they haven't filed in several years, I would sit down with a CPA, sit down with an EA, an enrolled agent, somebody qualified. I wouldn't trust, I don't think I would trust the shopping malls, the Walmart, Jackson Hewitts, they're not going to have, probably, the experience to handle something like that but I would sit [00:22:00] down with someone qualified and be honest, don't hide anything.

It's like an attorney. You just wanted to share everything. Now, we don't have that client privilege that attorneys have but we need to know what the damage is so we could best advise you, and so, be honest with a professional, sit down and just get a game plan. Here are my years that I haven't filed.

Here's why I haven't filed, and just be honest- I was lazy, I didn't want to. Or at a death in the family. Because did you know that the IRS is not total heartless cold monsters? If there is a reasonable reason why you did not file a tax return, there is penalty relief. If you get into a car wreck and you're laid up in a hospital for a year.

Yeah, that's pretty reasonable that you weren't thinking about taxes. You're trying to just survive. So, be honest of why you didn't file. There's always relief for hurricanes and all this kind of stuff, and the IRS automatically pushes those filing limits by or further back. But that's what I would do is just [00:23:00] sitting down at a conference table or virtually, these days, and just going through the dirty laundry saying, 'Here's my income for this year.'

--Then get a plan to pull transcripts, get a plan to gather those deductions up, and then filing them one by one in order. Typically you want to file in order. If you haven't filed for four years, you don't want to start, scatter-filing tax returns in random order.

You could have carry-forwards. You could have other things that you want to push forward, because, let's say, you have a refund in the very first year. We may just want to apply that to the next year we file to prevent more penalties.

So, we can keep floating refunds over and it'll save you a ton in penalties by doing that.

So, the professional will walk you in on that, but that's where I would start.

Mike Pine: I think that's a good plan, but I think there's a lot of people that really don't have the money to pay a professional to do all that. A CPA. We are expensive- more expensive than most CPA firms, but any CPA is going to charge... or EA, a reasonable amount of money, and if you don't have that money, and that's what's preventing you, [00:24:00] there's the taxpayer advocacy's office.

It's a department of the treasury department in the IRS, and they are there to serve you. You don't have to be poor to use them, but they're there for you if you need them. If you don't want to, or you cannot afford to hire a professional, then I would say instead of going to meeting with CPA or EA, follow Kevin's advice, call the taxpayer advocacy's office, make an appointment...

I don't think they're doing zooms yet... but you can make an appointment of telephone appointment or an in-person appointment, and go and share all the data that Kevin mentioned, be honest with them. Taxpayer advocates- they're pretty awesome, the advocacy group. I've worked with some that are really amazing and they can pull strings.

They can go over to the office across the hall with the revenue officers and say, 'Hey, here's the deal. Come on, let's cut this guy a break and let's just get this guy compliant.' -- I've seen them do some many wonders. They're not my first choice to go to, but again, they're good resource, the taxpayer advocacy office.

Kevin Schneider: Yeah, that's very good, very good option, and it's no [00:25:00] charge. 

You've got to just get through your mind that the taxpayer advocacy is a separate department from the IRS. They are independent of the IRS, so they are acting on your behalf. 

You're not going to the IRS for help, but they're going to fight for you

which is needed sometimes.

Mike Pine: So again though, like Kevin mentioned, you should file your returns in order in most cases. Again, the case that we were talking about with our current client, we know he only has tax in that one year, and we know how hard it is to get documentation. So, we're going to file it out of order and then go back and correct it.

Like Kevin said, you might have a refund that can prevent and eliminate any penalties from one year to the next. You might have carry forward losses that if you don't do the first year before the second year, you were not going to get credit for them. So, in a perfect world, if you can, you file them in order.

And as long as it's taking the IRS to process things, especially this time of the year when we can't file electronically- we have to file [00:26:00] paper, it's nice to stagger them if you can. Talk with your tax professional if that makes sense, because if you file one, one week, and then the next year, the second week, if that first one hasn't been processed by the IRS, they might not give you credit for the things that are carrying forward on it.

It might completely mess up the IRS's calculations. So, try to do them in order, try to get them processed in a perfect world. In some cases it doesn't make sense to do that, but generally that's the rule of thumb I would follow.

Kevin Schneider: Yeah, and you may have to pay profile 

depending on how far back you're going, so this may be a paper filing deal where you got to get signatures. I would send it certified receipts so that you can confirm that the IRS received your paper filing. When they do paper filing, an agent's actually going to have to put their hands on it, which is another bad reason to file late is because we want computers looking at this only.

We don't want a human being to actually put fingers on your tax return, so when you pay per file, that's just is what it is. They're going to have to process it, put it in the system themselves. But it's better than nothing, [00:27:00] and when we were talking earlier, if you can't pay your tax and you get on an instalment agreement... instalment agreements are great.

Just know if you're under an instalment agreement for back tax, and then you're going to start filing timely, in the future, tax planning for you is going to be very important because if you're ever due a refund in future years, you're not going to see that money until your instalment agreement is paid off.

When you get on an instalment agreement, you're getting into an agreement with the IRS stating that you're basically forfeiting all your future refunds to go towards your balance. They're not going to refund you money when you owe them money. So, we want to make sure we're not overpaying a gross amount of tax in your future years

if you're under an instalment. We want to make sure that your W2 withholdings are proper. We don't want these large refunds because you're just downpaying your instalment agreement. Now, that could be a good plan- getting out of IRS debt's not always a bad thing, but we don't want to accidentally have a big refund because we did a really [00:28:00] good job tax planning, but we didn't know that there was an instalment agreement sitting back there and you'd never got your money.

It's going to go pay off that balance.

Mike Pine: We had client that owed a pretty big instalment agreement, 

and he was paying it faithfully, and he'd gotten another job halfway through the year, so his W2 was way over withhold between the two jobs, and he was counting on that refund to help fund another part of his business. He knew he'd been overpaid and he was counting on it.

We didn't get him as a client until the year was over and we had to be the bearer of bad news. Yeah, you overpaid by $60,000, but we can't get that for you, and he hired us. He's like, 'Please try to argue with them.' --And I told him up front, 'We're not going to get anywhere with this. Let's not waste your money.'

--and he still insisted. We tried and banged our heads and asked for manager's conference. You can't get it if you owe money with the IRS on instalment agreement, or not file tax returns, is a really good chance you're not going to get your refunds. In that guy's case, if he would have come to us halfway through the previous year and told us what's going on, we would have said, [00:29:00] 'Let's amend your W4, let's lower your withholding so you're only paying the taxes you owe this year. 

You can keep your money because if you give it to the IRS, it's not going to get refunded, but if we let you keep it, then you can use it for the growth of your business.' -- Perfect. Great point you make Kevin.

So let's just go back onto this topic where a lot of people are paralyzed because they don't have all the details they need to file their tax return, and that's what's preventing them from filing back tax returns. As I mentioned earlier, the IRS allows reasonable estimates.

They actually say, 'Do your best job at trying to figure out how much you made, how much, what your expenses are.' -- They let you give estimates of expenses, just have to back it up. So, what are some ways you can, besides pulling a transcript... let's say if you have expense items that you know were deductible, but you had a flood, all your records got ruined.

What do you recommend, Kevin?

Kevin Schneider: Hopefully, we could prove it out with a bank statement online. That's always where I would start first. I don't know many of any [00:30:00] of my clients that keep receipts. I do have some, actually, but keeping receipts is really hard, especially in a business where you're making a lot of purchases and it's just a paper trail. IRS doesn't require receipts-

they're good, but what works just as good is a bank statement, proving out that purchase or a credit card statement, and we can actually prove that expense. Now, the argument could be if you commingle, which just means you have a business and you got your personal bank account. You're running both your business and your personal life out of one bank account.

That's where it gets a little hairy because let's say, you own a rental property and you don't have records of your backup of your expenses. Well, the IRS is going to say, prove it. You're going to bring them your personal bank statement, and you're going to mark home depot, all these line items in your personal bank statement.

Now, hopefully they're in different locations. We could prove this home depot's near your rental property or something like that, but we're not going to be able to definitely prove that [00:31:00] this expense is related to the rental property, and not that Home Depot purchase wasn't you buying a new fridge for your own house.

So, having a separate bank account for your businesses and your personal is recommended just from an accounting standpoint and approving of an expense standpoint, because then, if you run all your income and all your expenses to your business through one bank account separate from your personal, then we know everything in that bank account is either income or deductible expense, and we're going to have a lot better time arguing that with the IRS in the event of an audit. 

So, I would highly recommend we get away from commingling just for clarity purposes, but that's where I would start if someone's house flooded and they're under audit, then we got to start pulling bank statements.

We got to start proving some of this, and that's basically all they got.

Mike Pine: Yeah. So I mean at that point you just have to find any available record you can to try to establish those details, like Kevin said. If you set up separate accounts or even a separate credit card for all your business purchases, it makes it so much [00:32:00] easier. It's a great rule of thumb. We've gotten clients that are self employed, and we asked, 'How much did you make?

Let us see.' --And he's like, 'Well, I made this much, but a lot of the people I work for didn't send me a 1099.' -- They should have, and the law is if you pay anyone $600, more than $600, you got to file a 1099 to the IRS to say that you paid them that amount, but that doesn't happen a lot, and the penalties are small for not filing those and that's probably why people don't do it. They're like, 'It's only cost me $150 if I don't file these two 1099s, I'm not going to do it.' -- If someone hasn't filed a 1099 for you on the money they paid you, that does not mean you can't, you shouldn't report it. The IRS says any income from any source is reportable,

and I've seen more people get in trouble. This is considered fraud. If you intentionally don't report income because someone didn't send you a 1099, the IRS can claim that's fraud. Suddenly, you don't have statute of limitations. That can cause all kinds of problems and if they can [00:33:00] prove that you committed fraud according to their definition of it, your penalties can be massive-

massive for fraudulent on top of all the other penalties you can get. So, report all income from any sources whether or not they filed 1099s. That's a good point too to think about if you're paying people. You're paying a guy down the street to mow your lawn every week or every couple of weeks.

If you pay them more than $600 in a year, and you're not paying them through some service like credit cards that are going to report it to IRS already, you're required to file a 1099 by January 31st of the following year. It's cheap and easy to do, can avoid penalties. If you want to run for office one day, it can keep you from getting in trouble like we've seen in the past. 

So, file 1099s for anyone that you paid over $600, unless it's a corporation, unless you pay them by credit card and some of those cash transfer apps that do report... you should file those 1099s.

Kevin Schneider: Yeah. And going back to what you were stating about, reporting all your income that goes for any [00:34:00] type of income. Now, if you sell a used car, more than likely, that's not income to you because you paid more for what you sold it for. So, that's not what we're talking about, but even illegal activities, if you have any illegal income,

like drugs- you're selling drugs, you are... who knows what you're doing- the IRS actually requires you to report all sorts of ,income and it needs to go into other income and go into a line item, and you have to pay tax on that. 

Now, it's how you get caught in this is, let's say John Smith, the drug dealer makes a few hundred thousand dollars selling drugs.

He does not report that income, but he does have a side job. He's a W2. He has some legit income as well, but on the side, he's making this big business. Well, let's say he gets audited for his 1040 and the IRS is saying, 'Hey, we just want to look at your W2. We want to look at your itemized deductions that you're reporting.'

-- They just do a random audit, and so, John Smith, the drug dealer is getting audited. One of the document request [00:35:00] lists could be a bank statement. They're like, 'Give us the bank statements for the tax year you're under audit.' -- They're going to get a tax, a bank statement if there's large chunks of money coming in and out- let's say he's depositing $15,000 here, $20,000 here, withdrawing some... I don't know,

I don't know anything about illegal laundering, illegal activities. They're probably not doing this- they're probably off the paper trail somehow, but at the end of the day, if you are depositing large chunks of money, the IRS is going to open that bank statement and go, ' John Smith, what's this $30,000 deposit you made?' -- What are you going to say? I mean, that's how you get busted for this stuff, and then they're going to say, 'Oh, you're selling drugs. Okay, well, you got to report it.' --So, if you had that $30,000, maybe on your tax return, and be like, 'Oh, that $30,000- I just did some side work. I never even got a 1099 for it.'

I at least paid my tax. They're going to be happy. I would think... now, I don't know, I'm not an attorney. Do not take anything I'm saying as legal advice. I'm just saying I would rather report my income no matter what it is in the event that I'm audited, I am at least paying my tax.[00:36:00] 

Mike Pine: Yeah, perfect example of that is Al Capone. They were never able to convict Al Capone for any of the crimes that he actually did to make money, but they did get him in jail for not reporting his income and filing it on his tax returns. That's what Al Capone went to jail for. Not all the murdering, not all the crime.

He went to jail for not reporting and filing his tax returns. So, don't go to jail, report your income, but more importantly, report your income happily with a big smile on your face because you know you've already followed tax mitigation strategies so you're not overpaying your taxes. There's so much cool stuff in the tax code that if you follow these incentives, you will lower your tax, maybe even eliminate your tax, but report all your income.

Kevin Schneider: Absolutely. Absolutely. Report everything, and then on these, like you mentioned on the backend, do everything possible to reduce your taxes. So, be safe out there, but also don't be foolish. We want to be aggressive but we know where to be.

Mike Pine: Sage [00:37:00] advice.

Kevin Schneider: Well, good discussion today, Mike. And, as we're in the middle of filing season here, hopefully, this information is helping relieve some of that stress you may feel filing your tax return. There's always options out there, and hopefully, we gave you some good options today. If you haven't filed your taxes, if you don't have all the information, just be proactive.

The IRS isn't going away. They've been around for quite a while, and I would imagine they're going to be around quite a while in the future. So, do not ignore it and if you need help, reach out, because there's always qualified CPAs and EAs out there willing to help. That's why we have jobs is we're not scared of the IRS.

We know how to work with them, and so, at the very least, do that, but happy filing season, everybody, and we'll catch you on the next one.

Mike Pine: Happy Tax Day.

 

Disclaimer: The content of this podcast is not legal advice and is meant for educational purposes only.