0:00:05.0 Laura Carlson: Hello, and welcome to Ten Things Your Tax Professional Wishes You Knew, and this is presented by network attorney James Richard or Rick Yandle. My name is Laura Carlson, and I am the senior attorney advocate here at ARAG. Rick is a Charlotte native and graduated UNC Charlotte in 1984 with a Bachelor of Science in Accounting. After passing the CPA exam, Rick became a North Carolina licensed CPA. After some years in the industry, including assignments in Central America, in North Africa, Rick went into private practice as a CPA and established a successful tax practice in Charlotte. While running his CPA practice and raising a family in Charlotte, Rick obtained a law degree from Concord Law School in California and passed the California bar exam and was admitted in 2006. In 2019, Rick was admitted to the North Carolina bar. Rick now practices federal tax controversy nationwide, and is admitted to bars of the US Tax Court and the US Court of Federal Claims. Rick is active with the tax courts low income tax clinic calendar call program, and frequently represents low-income taxpayers pro bono during calendar call, as well as participates in the ABA military pro bono and adopt a base projects. With all that, I will pass it off to you, Rick.
0:01:37.1 Rick Yandle: Thank you, and thank you for that introduction. We're gonna briefly go over the top ten, or ten things your tax professional wishes you knew. I do nothing but tax and have all my life, I kind of understand the perspective is the preparer. If you need a tax return prepared, and you don't wanna do it yourself, if it's more involved than what you feel comfortable with, you need a preparer. The preparer could be, there's no requirement, there's no credentialing requirement for a preparer. When I was in college, I did some on the side, bought some books and paid some school expenses, doing tax returns on the side. You don't have to be credentialed, I think that if your return is complex enough, that you're not comfortable doing it, with all the software tools that are available today, maybe you don't need a college kid, maybe you need to go up a few notches from that. There are enrolled agents, these are licensed or enrolled and managed by the IRS, there's not a State Licensing Board, but there are requirements that the IRS imposes.
0:02:53.5 Rick Yandle: A lot of former IRS employees come out of the IRS service and go this route, and that's a credential, and they can talk to the IRS on your behalf with a power of attorney form. Enrolled agents can execute a IRS power of attorney form, that's a good route for tax preparation. CPAs, a lot of CPAs in the tax area do tax returns, not all, but that's probably, you're really at the top level for tax preparation. In the tax world, we refer to that as tax compliance, that's filing the returns and getting into compliance with your filing requirements. Attorneys generally do not prepare returns, some do, I don't. The problem is, I'm a defense attorney, tax controversy within... Among other attorneys I say I'm a tax controversy attorney, outside of the legal world, no one knows what that means, but I'm a tax defense attorney. I defend audits, I defend IRS collection actions. I do IRS criminal investigation defense, that requires an attorney.
0:04:16.1 Rick Yandle: If you have a criminal investigation, by all means, you need a tax attorney. If I prepare a return, and that return is disclosed, that becomes a waiver of the attorney-client privilege, so it's a bright line in the sand for me, I just do not prepare returns. Now, I'm not gonna advise you on how to prepare your returns. And if you took my advice and did it, that would be a waiver of the privilege also. So I don't do tax planning, I don't do tax advice, unless it's in the context of a defense, advising on something that you've already done and how we're gonna handle it. Don't call me on how to claim your kids, or what... If you claim your kids or how to structure a transaction, I'm a defense attorney, I'm not going there. Other attorneys, there are tax attorneys that do tax planning, and CPAs do tax planning, also, I should roll this back. Preparer, planning and defense. A lot of times people will come to me wanting tax planning for future transactions, and again, I don't do it, because it could be a waiver of the privilege. A lot of just basic return preparers don't really do the planning, it's just not how they make their living, it's not part of their structure. But CPAs generally, if they have a tax compliance practice, tax planning is part of that practice, and they have software tools and platforms to run the numbers on different scenarios, and particularly with different entities and such.
0:06:00.8 Rick Yandle: And they can give you the reports and go over it on screen and go through the different analysis, they're set up for that, they have that. If you don't do that, if you don't have those tools, and it's not part of your routine, you really don't need to be doing it, it's too complex. From a business point of view, you can't make any money out of it, because you're inventing the wheel on everything you touch, you're far better off to refer that to someone who does tax planning and runs those scenarios. And the answer to a lot of the questions that are asked is you gotta run the numbers and people say, "Well, is it better do this, or better to do that?" I don't know, but even if I did, I wouldn't... First of all, I wouldn't tell you, but also you really don't know until you run those numbers, and the CPA firms have the software and the tools to run those numbers.
0:07:00.1 Rick Yandle: That's the lay of the land as far as the players go. The CPAs, we refer to a lot of CPAs for work. CPAs never refer back to us, 'cause they wanna handle the work, but that's okay. The CPAs can represent to the IRS with the power of attorney, that's fine. In theory, they can litigate in tax court, they have to take a special exam and be admitted, and it's a tough deal, but it's possible. There are some CPAs that can litigate in tax court, but even if they do that, the attorney-client privilege is not there. And certainly if there's a criminal matter that's not where you wanna be. Okay, so other important thing that I wish that a lot of people... That taxpayers realized was the importance of filing returns, even if they're not required. A lot of times, I am on the phone, "Well, did you file this way?" "Well, no, I didn't. I wasn't required to file a return because when I ran those numbers, my business would have had a loss, and I understand that if it's a loss, you don't have to file, so I didn't file."
0:08:16.2 Rick Yandle: Well, first off, the IRS doesn't clairvoyantly know that you had a loss. And that's not the requirement, the requirement is, if you have gross receipts from any source that in excess of the exemption amount, and there's a... I forgot what the actual number is, but it's a pretty low, like $9000 or so, a very low amount. That's what triggers the filing requirement. Now the penalty for late filing is based on the amount you owe. So it may be that you file a late return after someone tells you to, and there's no... It's filed late but the penalty, 25%, 50%, 25% is zero, because there was no tax due. But there may be other consequences to not having filed that return not the least of which is the start of the running of statutes of limitations on assessments, and that can be a big deal for state returns, and we'll talk about that.
0:09:14.3 Rick Yandle: Also, if you're not filing a return, someone else may be filing return using your ID, and you have no idea. Someone may be claiming your dependents. If you're off the radar, you're not getting notices, the statutes of limitations on audit adjustments never starts to run until you file. It's just such a bad idea to be a non-filer. The best tax return you can ever file is a zero return where you owe anything... Excuse me, where you owe nothing, you don't owe anything, it's all zeros. You sign at the bottom. I've disclosed all my income. You betcha. You sign it, and you file it, statutes of limitations starts to run and life goes on. Nothing good comes from being a non-filer, so always file the returns. Alright, and similarly the importance of state returns, particularly when you're moving between states, the part-year final return and non-resident return.
0:10:28.0 Rick Yandle: I don't know that anybody that moves out of a state on New Year's Eve. I've never seen that, but when you move from one state, a lot of times, what people will do, is just they do their federal. And then on the state, they file the state where they were in for most of the year, maybe they didn't have a W-2 in the new state or something like that, and then the next year they file a full-year return for their new state, really a bad idea. And this is where the value of your tax preparer, or CPA, or competent EA, a qualified preparer, the benefit really comes into place on the state returns when there's a residency issue. You need to file for the state that you're leaving, you gotta file that part-year return, and there'll be a block on there for the residency dates, and the date that you ended your residency, and that's how you feed the beast, the computer system that's gonna be chugging along, demanding these other returns and assessing full-year tax for years, long after you've moved. The way you stop that, the way you flip that switch in the system is to file a part-year return on the last year in that state, that cuts it cold.
0:11:49.2 Rick Yandle: Now there may be some other lagging W-2s or something, you can deal with it, but that's how you end that residency, as far as the Department of Revenue computer system goes. Similarly, you really, if there's any risk at all that a state may consider you still to be a resident, you need to file a non-resident return in any states of question. People get upset a lot of times... I'll put it this way, the way you tell a state that you are not a resident of that state, the way you tell them, is not that you get on the phone and call and explain while you moved, and when you moved, and how bad the move was, that's not how you tell a state. The way you tell a state that you are a non-resident is by filing a non-resident tax return. It will probably be all zeros.
0:12:43.9 Rick Yandle: But again, that's the best return to ever file. If you're not familiar, the way a non-resident state returns work there's different versions, but typically there's one column of numbers that are the federal numbers, then it breaks it down into two columns, one income and expenses relating to that state, and then income and expenses related to all other states or everywhere else, and your column for that state will be all zeros, so it says zero non-resident return. Sometimes we will refer to that as a protective non-resident return. And rich people, rich kids, complex... I would't say complex people but people with complex tax matters with exposure in multiple states, 'cause they have was some minor investment, they sold a car in a state or for some reason, they file protective non-resident returns in these risk states all the time.
0:13:45.9 Rick Yandle: You can rest assure, I mean, I won't talk about political events, but I suspect that the Trump kids have non-resident returns in all states to get that contained and the statute of limitations is running. If you don't file the non-resident return, again, the statute of limitations never starts to run, and the statute limitations is your friend. The state that you're leaving from, you gotta get that final year filed. And a lot of times, we want you to file non-resident returns in addition for the part year when you leave, if you left in August, let's say, so you're doing a part of year return up to August, and then a separate non-resident return for September through December to get that boxed and contained. So you don't have an asserted residence issue, and then the next year, if you left a storage room back home, you hadn't transferred your driver's license yet, I don't know, your Tinder profile says you're there, I don't know, something like that, you gotta have... If there's any risk, if someone could say, "Hey, we think you have significant connections to this state," now you're playing defense. The way you do that is, you file that non-resident return and that starts the statute of limitations from running, or it keeps it running. Excuse me, it starts the statute of limitations, and it prevents it from tolling in effect.
0:15:28.1 Rick Yandle: So always file the return, always file the federal returns, always file the state returns. Again, nothing if you're a non-filler in these regards, you're really just creating a mess, it's a lot harder to try strain this up, if you can strain it out. A lot of times people will leave a state, have a new state, it's not real clear that you've abandoned your prior state, you may have left some contacts back there, maybe you still have social events, your bowling league, your swim team, your stuff in the other states. People say, "Well, no, I can only be taxed in one state for state purposes, I can only be taxed by one of the states." It's not true, you can very well end up being double taxed, it happens all the time. What did I just say? Well, what happen is the old state, when they assess this tax, some people say, "Okay, they're gonna assess the tax, fine, I'll take a tax credit for the tax paid to my new state." That's typically how it works. If one state says, "I'm a resident," it's like, "Okay, I'm a resident, I'm taxed on my worldwide income, nationwide income, I'm taxed, but I get to take a tax credit for the state where I did pay tax," if you're saying I'm a non-resident. But you don't, it doesn't work that way.
0:16:57.2 Rick Yandle: First off, the statute of limitations on claiming the credit will have expired by the time... And that's by design, the states, and I say that, everything to back it up, but I would certainly believe that. One, you just can't get around to it, but why would they get around to it, the state that you're... The asserting state will get far more taxable income if they wait until the statute of limitations on taking a credit for tax paid to the other state has expired. So beating the horse. My point is file the taxes. Alright, great, it looks like I have landscaping people coming. The other issue is how substitute for returns work, SFRs. I'm trying to be close for the microphone here. An SFR is a substitute for return. What happens is, and this is more at the federal level, but it works analogously at the state level. If you don't file a return after about three or four years, the IRS system will do the math, and based on the math, if it looks like there can be tax liability, they will generate what's called a substitute for return SFR. SFR, and I give the spiel two or three times a day. Here's how SFRs work.
0:18:24.4 Rick Yandle: SFRs have three main characteristics. One within bankruptcy court, two, within the IRS. Most people, at the time of calling, they're not really thinking about bankruptcy, but it could become an issue further down the road, and you would like for your liability to be discharged. If you have to file a bankruptcy. You would want your tax liabilities to be discharged as well. I'm talking about Chapter Seven, but there are a lot of ifs, ands, and buts that have to happen for that tax liability to be dischargeable. I'll come back to that, but the two characteristics within the IRS are: First off, the SFR is a provisional return. What that means is this is the tax return until such time as you file your own tax return to replace it. You don't have to, once an SFR is posted, that is the tax return and you can accept it. Say, "Fine, I'll pay and accept it, I'll pay it, get a payment plan," or whatever, and not file your own return.
0:19:28.7 Rick Yandle: However, you can file your own return to replace the SFR. It takes forever to process and may take a year to process, but you can do that. The SFR is a provisional return. The other attribute within the IRS of the SFR, the substitute for return, is that it is a protective return. And by that, I mean, it protects the interest of the treasury. The SFR is not designed to be the correct return, quite the contrary, it's designed to be the worst possible case, it's the maximum potential tax loss to the treasury, so the collection process can begin. If you don't like that, file your own return; you can do it, it's a provisional return. People call up, and they're upset and say, "They filed a return for me, and they didn't give me my kids, they didn't give me my house mortgage, and they said I was single, well I'm married."
0:20:33.6 Rick Yandle: First off, there's no such thing as a joint SFR, SFRs are always separate, just like W-2s are never joint, the W-2s, the 1099s, go-to, that's the SFR. So, they generate the SFR, and you can file your own to replace it. Coming back to the bankruptcy issue, if there's an SFR and then you file your own return to replace it, that's great, you only owe the lower amount. But it's not dischargeable anymore, for bankruptcy purposes, once an SFR, always an SFR. And that can be heartbreaking, you got all these liabilities out there and some of them, if you filed returns, they can be dischargeable in Chapter Seven; but the ones that started out as an SFR, even though you later filed your own, your own balance is still not dischargeable. So once an SFR, always an SFR for bankruptcy purposes.
0:21:32.5 Rick Yandle: And that circles back to file the return, always file the return. And these could be SFRs from audit adjustments that you don't know about. You didn't file the return, or audit adjustments for unreported income that may not be yours. There could be a spurious 1099-K from PayPal, it's happening all the time, people get fraudulent... There are fraudulent PayPal accounts opened up with a taxpayer's social and the fraudster gets the proceeds for the credit card sales, but the victim gets a 1099-K for the PayPal receipts. If you filed a return, and there's a mechanism for the adjustment and you can dispute it. If you didn't file the return, you really got a problem, you're really going uphill. Okay. This is how the SFRs work. Okay, again harping on the issue of always filing the return, you can file in a minute, you can use reasonable estimates, it's far better to file and amend, file and then amend later with additional information, than it is to simply not file. In complex corporate environments, that's a very common process, there could be complex matters that you, believe it or not, you're just not going to get it resolved even by the extended due date.
0:23:02.6 Rick Yandle: So, you have to file, and once these others are resolved, you can amend if it's material. Complex corporations, you may have a second, third, fourth amended return. Not having every last receipt or every perfect little thing, not having that is not an excuse for not filing, it's an excuse in the behavioral context, but as far as penalties it is not an excuse, there will be late filing penalties for that. File and amend. A lot of people have a fear of filing and I give this spiel a lot of times, is sometimes people have a fear of flying. And you can explain to them day in and day out how flying is safe, all the numbers, the statistics, it's very very safe, far safer than driving into the airport, but it doesn't matter they're gonna find some excuse why they're not gonna fly. Some people have fear of filing and it's the same thing, there is always an excuse, they're waiting for one last receipt, they're waiting for something paper, they gotta know this, and it's a behavioral issue.
0:24:16.3 Rick Yandle: You can file and amend, you can use reasonable estimates, you are accountable for the reasonableness of your estimates, but if you're really trying to get it done, I can assure you, you can come up with a reasonable estimate, "What was your mortgage interest?" "It was the same as last year with rounding error." I mean, come on. When in doubt, in corporate environments, we had the term SALY, S-A-L-Y, it's on work papers, back when we had work papers. It was everywhere, S-A-L-Y, "Where does this number come from?" "SALY, Same As Last Year." Reasonable estimate, move on, file, amend later.
0:25:01.0 Rick Yandle: Okay. Penalties, we'll talk about penalties a little bit. There's a late filing penalty and a late payment penalty, they each are 25%, there is some carve out for the overlap, but pretty much at the end of the day, you're gonna owe 50% more in late filing penalty and interest if you file late or pay late. About 50% more in penalty, and then interest will accrue. It's pretty common to end up with double the amount that you owed. There's a 10 year statute of limitations on collections, 10 years of interest, plus the penalty and interest, people call me and say, "I filed this return, it was only $10,000, but now they say I owe $20,000 on it." "How long ago was it?" "It was eight years ago." That might be about right. But the penalty for late filing accrues 10 times faster than the penalty for late payment. So, if you have a return and you can't pay, you're far better off filing anyway than get into a payment plan or some kind of resolutions. There are tons of options for dealing with an unpaid balance, tons of them.
0:26:25.2 Rick Yandle: For filers. Now, if you're a non-filer and you have outstanding returns, these things are available, but if you are a filer and you have compliance history, and you have a big balance and you can't pay it, by all means file and avoid the 25% late filing penalty. You're still gonna have the late payment penalty, but if you don't file, you're gonna have both, the 25% late filing penalty and the 25% late payment penalty. But the late payment penalty takes about five years to max out to get to that 25%, the late filing penalty maxes out in five months. So again, a lot of people realize that they should have filed and added their balance to an existing installment agreement or something like that.
0:27:17.1 Rick Yandle: Okay. There are other penalties. Well, let me go... One thing I do wanna say about the filing of the returns. Even at the federal level, you gotta file even if there's zero returns. And in the domestic area it's especially important. I've had people come and say, "Yeah, I'm an innocent spouse. My husband or soon to be ex-husband, he filed these joint returns but I didn't sign them. I didn't. He just did them. He filed them. I'm an innocent spouse." And the problem is that, well, the first question that IRS ask is, "Did you file married filing separate returns?" "Well, no." Then, well, there's a concept of tacit assent. If one partner in a marriage files the return, compares the return, files it, and the other one doesn't dispute it, there's a presumption that the non-disputing and not-filing spouse has tacitly assented to the joint return. So if there's any dispute over this, then the spouse that's wanting to disavow a joint return, you need to file your own married filing separate return. Even if the married filing joint return is filed, the married filing separate return may be rejected but your claim is preserved. So you need to file those protective returns.
0:29:01.7 Rick Yandle: I can't remember, go through here. Give me a second. Okay, let me talk briefly about the other penalties. Well, the late payment penalties that we talked about, those can possibly qualify for what's called a first-time abatement of penalty. FTA, First-time Abatement. There is such a thing as first-time abatement based on history of prior compliance. And history of prior compliance in this context is a three-year lookback period of compliance without a disqualifying penalty. Now, one thing that has to happen in then these three year of lookback periods, you have to file the returns. Again, file the returns. If you have unfiled returns in those lookback periods, it's not insurmountable; you may, if you can show that you didn't have a filing requirement, but you're really going uphill on that. And if there is any penalty on there, even then though it was paid, there was a penalty. That's a disqualifying penalty. And there used to be some de minimis levels, but IRS removed the de minimis. So even if it's a dollar of penalty in a prior year, in the three-year lookback period, you're out of luck. Now, you might get that dollar back if it's three-year lookback period, is without penalty. But that only applies to late filing and late payment. There may be a few others but very few.
0:30:44.7 Rick Yandle: The other penalties that come into play and the one that would come a lot, is the penalty on an audit. There is a 20% negligence standard penalty on audit adjustments. They refer to it as a substantial understatement, but the threshold is like $3000 or something. If there's $3000 of additional tax, there's going to be a flat 20%... Don't call me on the exact number; I don't know what the cut-off is, but it's around there. The IRS will assert a flat 20% negligence standard substantial understatement penalty. Sometimes it's called an accuracy penalty. And the standard of culpability there is negligence. I get calls a lot, they said, "Look, this was just a mistake. I didn't mean to leave this W-2 off my return. It was just a mistake. Surely, I can get this penalty off?"
0:31:43.5 Rick Yandle: Well, negligence, that's what a mistake is. I mean, it's hard to get out of that and just as a mistake, and you say it was a mistake, that kind of implies negligence. And I usually have to say, "Look, from the IRS's point of view, they assumed that this omission was negligent and it was just a mistake." If the IRS had reason to believe that it was intentional, they would have asserted the 75% civil fraud penalty, and/or a $5000 frivolous return penalty, and/or a criminal referral if the dollar amount and other factors warrant it. But they didn't do any of that. What they asserted was the 20% negligent penalty. And it's hard to get out of that. You really have to show that the omission was due to flood, fire, destruction of records, incarceration, incapacitation, something of that nature, something beyond which you could reasonably have expected to overcome. Yeah, just it was a mistake and missed it, that is the negligence.
0:32:56.8 Rick Yandle: We have had some success on those issues with language barriers, people for whom the US taxes... That the US tax system is not the native system, and English is not their native language, and forms and instructions were not available in their native language. Yeah, those are barriers that an individual may not reasonably be expected to overcome. And we've had success with that with language barriers. But just the omission, it's there; that is the negligence. The other penalties that come up a lot are the foreign transaction penalties. Somehow I became a foreign transaction guy, I probably should have said this in the introduction, but I was in international accounting, project accounting before practicing. I was in El Salvador during the Civil War, and I was evacuated. I was on CNN when they evacuated the Americans out of El Salvador. And then I landed on a project in Morocco, and the first Gulf War broke out and we had to evacuate. They came to me and said, "You have evacuation experience, you're in charge of evacuating your staff."
0:34:21.2 Rick Yandle: And I say, I have experience in running away, you give me way too much credit for my involvement in that prior evacuation, but I had more experience than anyone else, so I was in charge and we evacuated. But then I came back to the US, ended up in the corporate tax department because I had evacuated, somehow I became the go-to guy on foreign transactions, but nonetheless, I've dealt extensively with foreign transactions, but mainly more so as I was a practicing CPA. Typically, I need to tell you to go to your preparer. People call me and ask, "What do I need to do with this. I'm inheriting some money from overseas," or, "I'm doing this." Go to a preparer, don't prepare the return yourself. There's enough money in this proposed transaction to pay for proper advice, to go to a CPA, competent CPA and get competent advice on disclosing these international transactions.
0:35:13.7 Rick Yandle: And where I'm going with this is these are serious matters. The penalties on omitting foreign transactions are in the range of $10,000 per omission, and that can add up really quick. And the purpose of these penalties is a serious matter. Most of these transactions do not have income tax associated with them. They're disclosure transactions only. And the reason they're there, largely is for law enforcement, these are Homeland Security structures. Homeland Security uses the IRS's structure for law enforcement, for anti-money laundering, anti-terrorism, anti-human trafficking, law enforcement in those areas. They're serious matters, and I get frustrated sometimes. I get people that call me and they got a $250,000 from a nation, country and they're not really sure why, but they thought they did this and they were trying to appeal, and they got a $10,000 penalty per omission, we're trying to appeal it, and they're not taking it seriously. They think, "Oh well, there's no tax and we looked it up. I shouldn't have to pay a penalty." I said, "Look, you don't understand the serious nature of what this is there to enforce."
0:36:45.5 Rick Yandle: You're gonna come speak to an appeals officer, like some surfer dude, and I don't know what happened, you're not getting out of the penalty. You gotta take these matters as serious as they are and it's tough to get out of these $10,000 penalties. We've had some success with it, but don't think that you're gonna do it just for asking because all you have are bunch of I don't knows. I don't always get the full story when someone comes to me and maybe there is more in the background that they don't wanna know or not supposed to know. I had one person telling me that they're getting a gift from a distant relative, but it's coming from his corporation. So, well, "What's the problem?" "Well, it's coming from the Virginia Islands." No, oh dear. There are no Virginia Islands. I think you mean the Virgin Islands. Where do you start? These are serious civil penalties $10,000 and can very well roll over into criminal penalties. We're gonna talk about criminal risk later, but those penalties, you're not getting off with the first time abatement. There is no first time abatement for omitting a foreign disclosure, nor is their first time abatement for the negligence penalty, you have to show reasonable cause.
0:38:15.6 Rick Yandle: Okay, alright. Our next issue. Okay, payment resolution options. There are plenty of payment resolution options. Well, there are plenty of options for the filer. For the non-filer, the options are not there. And again that's why you need to file the return, a lot of times people have some new years with some new balances or an audit adjustment, and we gotta get into some kind of payment plan or hardship status or the offer in compromise, everyone talks about. There're things we can do, but you gotta go back and file those prior returns, you gotta be in filing compliance. If you're a non-filer and you got gaps in your filing compliance, you're not eligible for these resolutions until you get into compliance.
0:39:11.8 Rick Yandle: So you're right back to number two on my list, the importance of filing returns, even if not required, you need to get those filed. As far as resolution options, there are plenty. The starting point of this is only amounts up to $50,000, you can get into a installment agreement online, well, except the website doesn't work half the time, but conceivably online or mailing in a one page form, for the asking $50,000 over 72 months. So it's about to $500-$600 a month, something like that. That's available for the asking, up to $50,000, no liens, if it's by direct debit. That takes care of a lot of cases, if it's over $50,000, there is an option to get into a payment plan, it goes up to a quarter million, 250,000, it just has to pay off within CSED. CSED is the collection statute expiration date, CSED, CHARLIE-SAM-ECHO-DELTA, CSED. And that's a buzz word, if you're dealing with problems, you gotta get those CSEDs.
0:40:33.7 Rick Yandle: Essentially, it's 120 months from assessment, so if these are late filed returns the CSED didn't start until you filed the return, but you can go up to a quarter million. And for a new balance, 120 months, whatever that comes up to be a couple of thousand, I think a month or something like that. No questions asked, there will be a lien filed, but, so what? There's a lien anyway. There is a statute or a lien anyway. What's gonna be filed is a Notice of Federal Tax Lien. It's not part of your credit report anymore, and you owed it anyway. The lien is not that big of a deal. People do get upset about the liens. People think that they're gonna foreclose on the lien. First of the all the IRS doesn't foreclose on liens, the Department of Justice does, and they do a... Another leaf blower. The Department of Justice forecloses not IRS, and they foreclose on about 200 liens a year, and the vast majority of those are some other criminal element to it, not just back tax. So the fact that there's a lien there really doesn't mean that much.
0:41:51.6 Rick Yandle: So up to quarter million overseas set 120 months. If you can't afford those payments, there are options to apply for a lower payment, there's a financial application process, it's a big job, it's like a mortgage application, a material misstatement on this, it results in a tax loss to the treasury due to expiring CSED, can be a felony, so it's a serious matter. It's a big job. But if you qualify for it and you do the paperwork. We don't prepare those financial statements, we send you to an accountant or send the tax payer to an accountant to prepare the IRS financial statements to apply. We'll handle the submission, the correspondence, and the appeals, But the preparation of statements is an accounting function. But if you qualify based on the financial statements, you could may have what's called a Partial Pay Installment Agreement, PPIA. PPIA basically, for example, you owe 100,000 and there's two years of statute of limitations left, CSED, then your payment is the ability to pay is $10 a month, that's fine. You make 10 a month payments as a Partial Pay Installment Agreement.
0:43:12.6 Rick Yandle: The financial statement does, if people say, they like to say, "It determines your ability to pay." It is more accurately IRS's ability to collect after allowing for allowable expenses. I have people that say, "Look, I have this form here, but I got two kids in college and I got my daughter's wedding coming up and just my boat is killing me, we're gonna put all this on those form." No, that's not how it works. It's essentially like a Chapter 13 bankruptcy, the actual scenario, you gotta regroup. Recalibrate. But if you're living relatively lean on the more typical fact pattern and just simply... Financially say that you can't afford to pay that. That is an option. Hardship Status, also an option, similar. Basically, it's like a partial payment installment agreement, but the payment is zero and the statute of limitations runs CSED, after the CSED expires, the IRS writes off the balance. Those are our options.
0:44:18.3 Rick Yandle: Everyone asks about offering compromise, pennies on the dollars, take a settlement, people ask me, "Will you call up to see if they'll take less." No, that is not how an offer in compromise works. Offer in compromise is a big deal. It can take one or two years to complete. I think the IRS likes to say they accept about 20%, but that's nonsense. I think those statistics are... They accept what they consider to be processable, but the first hurdle is, is it processable, it has its own whole thing, but if I had to guess, I would say less than 2% of Offer in Compromises that are submitted get accepted, and when they do, they generally default and you're right back to square one. They are generally installment agreement... They are a lump sum payment, a liquidation of assets, a lump sum payment, and payments for 24 months. There's a five-month option, but it takes third-party money like a rich uncle or something to do that. And there's a five-year probationary period, so you got these payments that you have to make for two years, and this five-year probationary period, if there's one misstep in those five years, one audit adjustment that you can't pay, audit in your way and you can't pay the balance, one late filed return, one non-filed return.
0:46:00.2 Rick Yandle: One misstep is a technical default of that offer in compromise, and all those compromised balances come back on, and you have told the CSED during that period, it can be heartbreaking when that happens. It took you two years to get it. You were in it for a couple of years and it came back on, and actually, the application period CSED tolls, the interim period may not, but nonetheless, you've told CSED for two years and you're right back where you are, where you were. I'm not a fan of Offer in Compromises, been involved in some of them. There's such an expectation gap between the taxpayer and the reality. The TV commercials paint an unrealistic expectation.
0:46:55.9 Rick Yandle: The firms that do this, the Optima tax relief and... I don't mean to disparage them, there are plenty of capable people out there, the problem... Well, I don't disparage their fees, for sure, it is a lot of work to do an offer in compromise, they charge fees of $4000, $6000 and those are reasonable fees for the amount of work, I don't disparage that, sometimes I wince a little that some people are coming out of those engagements with an expectation that's not realistic. Most people are not gonna qualify for an offer in compromise. When we talk about an offer in compromise, we always want the taxpayer to have a bankruptcy consultation first, and if they say, "No, we make too much money for a bankruptcy and we wanna keep our properties and stuff." Well, then if you're not a candidate for a Chapter 7 bankruptcy for financial reasons, you're not a candidate for an offer in compromise.
0:48:02.7 Rick Yandle: An offer in compromise in IRS is essentially a Chapter 7 liquidation of assets, but only for tax balances, and you're still left holding the bag on the other debts and you get no protection, and they're not allowable expenses for IRS analysis, you're expected to just default on these non-secured debts for an offer in compromise, but there's no protection. They're unsecured, so maybe how much protection do you need? But yeah, most people get a far better deal with a Chapter 7, and I end up referring people who come to me wanting offer in compromises, I refer them to bankruptcy attorneys, and we can run some reports to get filed bankruptcy eligibility dates and such.
0:48:50.4 Rick Yandle: Now, if it's a case where they're not eligible for a bankruptcy because they already filed one, and not enough years have gone, but their tax balances were not discharged because they started out as SFRs or their newly filed returns, they have to do some date math involved, but basically, they have to be two or three years old, the balances have to be two or three years old to qualify for Chapter 7 discharge, and you have to have the returns filed, so what happens is they were non-filers to file bankruptcy, they had to file all these back returns, but they're new returns, so they're not dischargeable. So in situations like that, maybe be an offer in compromise, maybe a route, even though they're not eligible for bankruptcy. Okay, but the gist of all that is, there are payment resolutions available. Don't be a non-filer or have your client be a non-filer because they're afraid if they file, the IRS is gonna come after them and they're gonna be... The IRS is gonna come take their house and dog and stuff like that, and sky is gonna fall. That's not the case.
0:50:03.0 Rick Yandle: You can resolve these issues, but you do have to file returns. If you're calling me and wanting to know how you can remain being a non-filer, I'm not your guy. There are other people out there that will have a talk with you about that, but that is not me. Okay, audit risks. Alright, here's the deal about audit risks and audit processes. Your tax payer, you or your taxpayer have a obligation to file a complete and accurate return, that's it. You don't have an obligation to file a perfect return, you can file and amend, you need to file a complete and accurate return. You do not have an obligation to file a return that is consistent with anyone else's return. Every return stands alone. If you've gotten a K-1 from an entity and you believe the K-1 is incorrect, you can't get a corrected K-1? File the return as you believe it should be, you're gonna get a notice and you're gonna have to work the issue, but what you don't wanna do or I would not recommend is filling... Just rolling over and go, "Well if I gotta file consistent with what they said." And then maybe try to file an amended return or try to dispute it, no, you've lost all your avenues to appeals and into rights.
0:51:37.7 Rick Yandle: If you get a K-1 that you disagree with, and I'm not talking about fraud, the fraudulent one obviously, you wouldn't include it on the return, but if it's a business dispute with a business K-1, file what you believe it should be. You will probably get an adjustment but you'll have an appeal right, you have a right to tax court, if you have a tax court case docketed and calendared, you have a subpoena, you can subpoena the books and records of the K-1 issuer. You have rights, you don't have to just roll over and do exactly what comes your way, and I get this alot also within domestic situations, someone will say, "Yeah, I want to file my return, my kid is independent, but my ex-husband claimed him, well what can I do?" File a complete and accurate return. File your return. Now, when it's e-filed, there could be a screening for duplicate socials and it may get rejected and you may have to file a paper return, but a rejected e-file is not a rejected return. People tell me this all the time, "IRS rejected my return." Really? And that's pretty unusual. Usually they'll just audit the return, they rejected it? Was it in a not conforming form? What happened? And they said, "Well, no the e-file," And they said, "Social's already used." That's not a rejected return, that's rejected e-file, you may have to file paper.
0:53:05.6 Rick Yandle: And again, I don't prepare returns, but I understand the software is evolving, and now there's a box to re-submit for the exception of a screened social on a dependent, you can do that. There's also a re-submission process, if you file and it is rejected, an e-file is rejected, there's like a three-week, I think it is, perfection period where you can mail a hard copy and it still would be considered timely if you file with in that time, but what you can't do is sit on it for eight months and then file if you've argued about it. And I've heard people say that, say "That's still a late return. Well, but we tried filing it, it was rejected." You can perfect it by refiling timely within the perfection period. But if you file a return that is different from what's being reported like on W-2 or 1099, you'll get a notice. There are really three types of "audits". One is the math error correction, which is that they're generous, the IRS is being generous to itself with that terminology.
0:54:13.9 Rick Yandle: To make an audit adjustment they have to give you all these appeal rights and due process rights. To correct the math error, it's really not feasible to afford all those rights to correct every single math error. So what they do is they send a notice, it's called a CP11, where they'll say, "We corrected your return. We corrected the math error," and you don't get an appeal right, but buried in it is a option that if you send a letter saying you disagree and you don't have to say why, you just say, "I disagree," the IRS is required to reverse that Math error adjustment, and then at its discretion, send a audit notice, not a full audit but a single issue audit notice on that issue.
0:55:02.7 Rick Yandle: Sometimes they do reverse it as a requested. Yeah, with COVID and stuff, nothing is happening timely, but yeah, they do reverse it. Pre-COVID send it in timely and they reverse it, and I'm trying to recall an issue where or a time where we requested a reversal, they reversed it and then the IRS followed up with the quote audit adjustment that afforded all of the appeal rights. Usually, it gets left on the vine, it's just not worth the IRS's... The IRS has limited resources. They have to prioritize, they can't audit everything, it's like the cop on the side of the road, can't pull over all the speeders, have to prioritize. Pretty good chance that they will not be an audit adjustment for the additional details, but that's the way the process is designed to work. You get the math error you request it to be reversed. Just single statement, "I disagree," and that's it.
0:56:05.1 Rick Yandle: Another type of issue is the automated underreporter unit. Let me see if I can get in my next one... Here we go. There's my guy. Automated underreporter unit notices. This is kind of a junior varsity audit. It is an audit. And if I was under our audit coverage, we do a lot of these. When you file your tax return, your forms and schedules are taken at face value, you don't have to prove anything, attach an explanation, prove evidence, anything like that. It's taken at face value. It's a high volume operation, and less is more. It's just the forms. All returns go through a automated underreporter screening process for missed W-2s, 1099s, etcetera. And if there's something missing, then this automated underreporter unit notice pops out and it's a robo audit and similar to the return, if you can respond to the AUR notice with a previously admitted form, corrected form or previously admitted, those two are taken at face value, you don't have to prove, anything, you don't have to attach anything, you just have to respond with the previously admitted form. And that's 90% of the automated underreporter unit notices.
0:57:36.2 Rick Yandle: When I was a CPA and I was doing this, I have to work these notices and I draft these beautiful narratives and eloquent citing law and public policy concerns and stuff like that, and later I realized no one read that crap. It's a high volume operation, keyword there is automated, responding with the forms, that's the automated underreporter unit. Now, let's say it was a bad K-1, You gotta bad K-1 you don't agree with. Well, this is how you would speak, you'll get an AUR notice, and you really can't do much about those in the AUR unit level, you just have to wait until you get the next stage which is the statutory notice of deficiency just like you appeal to tax court. And then you file tax court petition. They give you subpoena rights and then you subpoena the issuer. That's really how you have to do those.
0:58:32.3 Rick Yandle: So that's how the automated underreporter unit, that's another type of audit. Let me go back to the prior thing about the single issue though. A lot of times dependence come up, I said, "Someone so and so took the kids," and so you get an audit notice on a dependent. A lot of people have this idea that a dependent, it's a token, either one person gets it or the other, and if he took it, I can't, if I took it he can't. It's not like that. There is an initial screening process to try to eliminate duplicate use of security numbers, social security numbers, doesn't mean someone that your ex-spouse took, is the person who used it, could be an identity theft in halfway across the country. You don't know where that other number was used, could be a transposed number on another taxpayer. All the system knows is that that social security number has been used and it kicks out, but what will happen is, if you have to file a paper return, I may just process, or you may get a audit notice later for additional information. The other user of the social security number may get a similar notice or may not, and every return stands alone. If you get that notice, then you have an obligation to meet your burden of proof that you're entitled to that claim.
0:59:54.0 Rick Yandle: You may meet to burden of proof you may not. And whoever is examining your return does not see the other spouse or other person. There is no grand reconciliation of where they determine which spouse gets the social. Does not work like that at all. It may be that both of you meet the burden of proof, maybe one, maybe the other, vice versa, or what happens frequently is that neither of you can meet the burden of proof and neither of you give it, so it's in your interest to work collaboratively and figure out what you're doing, 'cause you can end up with neither of you getting that dependent, that happens all the time, but it is your burden of proof, and I got this poor lady who just does not understand, "But I can prove that my ex-husband was... He was out of the country, he couldn't have... He doesn't get it." And it's a 16-year-old kid. I said, "I think he's been living with his girlfriend, I don't know, he's been emancipated... " The point is your return stands alone, you have to show that your return meets the requirements. So, stands alone.
1:01:07.2 Rick Yandle: The other type of audit, there's the Math error adjustment single issue, robo audit, campus audits are, well, usually the dependence issue is the campus audit. These are not items of income, but these are usually expense items, you've claimed charitable contributions that are half of your gross wages, those types of things, business losses with no sales. That happens all the time. Those come out of the correspondence exam unit, that can be frustrating because it's a high volume environment and you don't have one auditor it's whoever has your return works it. And then the other is the field audit, local field audit, where you come in and he works everything, he can look at the other years to see if they have the same fact pattern. But my point on this, and I know we're running out of time here, but my point here is you have rights, file a complete and accurate return. If you think that there's something you don't agree with something else does. I have to tell people all the time, I don't care what's on someone else's return. That's not my client. Let's not waste my time, your time talking about someone else's return, your return stands alone.
1:02:27.1 Rick Yandle: So don't be afraid to follow up what you believe is a complete and accurate return. You have plenty of opportunities to defend it if it gets called up. Also one last thing about audits, there's the concept of DIF score, you may wanna be familiar with, every return that's filed is assigned a score it's called a DIF score, D-I-F, Discriminate Inventory Function score. The IRS cannot audit everything, it's like I said the cop at the side of the road can't pull everyone, has to prioritize. The IRS prioritizes audits, field audits, and the campus audits based on DIF score, this DIF score it's a predictive score, like a credit score, it predicts the likelihood that upon examination it will yield overstated deductions or understated income, and it's pretty good. It's not perfect. It's pretty good.
1:03:20.8 Rick Yandle: So some people say. "Well, I get audited every year," that's 'cause you file the same return every year, it has the same DIF score every year, you don't learn. But it does stand alone, and it is just for one year, a DIF score is a single-year analysis, if it's assigned to an examiner, the examiner can look at the surrounding years for similar issues, but that's an expansion of the DIF score, and occasionally there are audits that are at least we called TCMP, Taxpayer Compliance Measurement Program audits, now they're called National Research Program audits. These are audits selected at random, and they are for the purpose of statistically analyzing, for updating the DIF score, is their statistical audits. So there is no de minimis threshold on those. They gotta make every little adjustment because of the things... 'Cause the implication to the DIF scores.
1:04:18.8 Rick Yandle: We decline those. We just say, "No, thank you." From my point of view, we're not the treasuries statisticians, we're busy. You're busy. My client is busy. We're not gonna become statisticians for the government, just write it up with what you have, and we'll deal with it in appeals, 'cause appeals is busy too, and they'll just work the big stuff and move on, and if you don't like it there we'll petition tax court but we'll petition tax court to get to appeals, but we'll litigate it if we need to, but we're not gonna spend weeks being the governments statisticians. If you get one of those, call me, we'll walk you through that process. You don't need to deal with that.
1:05:08.5 Rick Yandle: Lastly, lets see here. Other risk, don't be afraid, criminal. Okay, I joke a lot and not everyone appreciates my humor. Yeah, I'm in the South, what I can say. But this is not funny, people do go to federal prison over tax matters, and it's tragic when it happens. Maybe they deserved it. Most of them do. But it's tragic. Lives are disrupted, lives to turned around. Yeah, most of the people that are incarcerated have families, spouses, children. This is not where you wanna be. It is a thing. It takes more generally than an omission, a failure to act, to end up incarcerated. It takes affirmative acts, not filing can get you there. It usually easily takes a little bit more. But, first, I like this slide, this is at a recent conference. IRS has the civil side and the criminal side, CI, Criminal Investigator, used to be CID Criminal Investigator Division, now it's just CI. And they investigate. Every federal agency, social security, Smithsonian, every federal agency has a criminal investigative unit. If you're forging paintings or something, Smithsonian may send out their art criminal investigators.
1:06:52.2 Rick Yandle: But the IRS has their CI, and it's the biggest one, federal agency investigative units, other than the FBI. But I circled this, and it's hard to read on the slide, but it says 7%, this is IRS civil 7%. What this is saying is that, and this is from CI. This is CI's numbers, presented at a recent conference. Only about 7% of the criminal investigative cases came from the civil side. Now, the IRS opens about 2000 criminal cases a year, criminal investigations a year. That may seem like a lot, but it's really not. Nationwide, annually, 2000 cases, and they're after deterrence. But of those cases, only 7% came from the civil side, meaning an exam, where the examiner wrote up a civil referral, or an IRS collection unit, where there where false statements on a collection statement. All those combined only made up 7% of the Criminal Investigative cases. Most of these cases, of the Criminal Investigative cases came from other federal agencies, either the FBI, Secret Service, Alcohol, Tobacco, Firearms and Homeland security and other agencies as they're building cases.
1:08:28.3 Rick Yandle: Generally, heavy federal cases of that nature also have tax crimes in them. That may not be the original intent, but like I said in terms of original intent is to make money and tax. Making money doesn't bother pay taxes on the criminal activity. So, the Criminal investigation gets dragged in on those cases. You don't need to... My point on this is filing, getting into compliance. The odds of a criminal referral from your exam are... I don't wanna say... I hate to use the word slim. They're there, and it can't happen, and it's tragic when it does, and it's life disrupting when it does. But it's not that likely. Really the ones where these get referrals, there's a lot of bad acts going on, it's not just laziness, I didn't have my act together. It takes more than that. The way federal prosecution works, tax prosecution works, the IRS, they have a Criminal Investigative Division. They will refer and depending on the investigation, they will refer to the Department of Justice, or CI can just close out the case.
1:09:48.6 Rick Yandle: And they close out, well, about 30% get closed out without referral to DOJ. But the other 70%, I think it's more like 60%, they do refer the cases to Department of Justice. And Department of Justice gets it, they have a tax division that further analyzes it, and the Department of Justice will decide, to decline, and that's a win if you get your case declined. If you get the IRS level, if you get it not referred, that's a win, that's a criminal defense win if it's not referred. If it goes to DOJ, DOJ tax section just has to decline, and that's a win. Allow me to walk through the steps here, but about 60% get referred to DOJ. From that point on, it's about 90% of each step of the way to conviction and incarceration. There's about 90%, the DOJ accepts about 90% of was referred, and declines about 10%. So, if it's a referral to DOJ, odds are you're gonna be incarcerated, your client is gonna be incarcerated. So the heavy defense effort is at the CI level, and don't think your client's gonna talk their way out of it at the CI level. We'll talk about that separately.
1:11:05.0 Rick Yandle: So anyway, it goes to DOJ, 90%, they'll refer a grand jury and grand jury indites 90%. About 90% conviction rate, of indited defendants. Incarceration, about 90% are incarcerated for about, I think it's 8 to 12 months or more. So you really wanna defend this at the CI level. Don't be in the 7% that of civil cases that get referred to CI. And if your case is in CI, talk to someone, experience the CI, give me a call, we'll talk. What I wanna say on the CI, that you don't see single count federal tax, criminal indictments. Indictment process is based on accounts, accounts and tax loss to the treasury. So, the fence is to minimize, re-calculate what is the proper tax loss that hopefully is below the threshold, and to limit the number of counts involve particularly. And where it goes sideways, is people start lying to the investigators and building up as obstruction cases counts. So that's what I have on that, I ran over on time a little bit. Let's see, here we go. That's me, again, I'm Rick Yandle, yandletaxlaw.com. I should have considered my Southern accent before I put that together, but that's what it is. Feel free to reach out. I'll be glad to help. My numbers on there. That's what I got.
1:12:44.9 Laura Carlson: Alright. Well, Rick, thank you so much for joining us today and giving us all the great info, and for everyone watching. Thank you for tuning in and have a good day.
1:12:57.7 Rick Yandle: Thank You.
1:13:00.0 Laura Carlson: Thanks.