How to Prepare for an IRS Audit – Videos 1-3
Video 1 Transcript
John: All right, let’s get going. There is my qualifications, attorney, accountant, real estate investor, in my case mainly low-income houses and mobile home parks and no I’m not a socialist. Sorry, I know that around here, that’s a popular thing.
Okay, let’s talk about audits. What are we seeing an audit? Guys, socialism is expensive. The government is not just broke, it is the brokest government in the history of our race. We are not able to borrow more money because the money to borrow doesn’t exist. That’s how much we spend, more than exists. That’s why we print, there are implications.
Now I am a firm believer in taking advantage of human stupidity, and it is around in such abundance we’ll have many opportunities. To start with, negative interest rates. Why is that relevant to IRS audits?
We’re going to hit negative interest rates. We all agree? They’re already in Switzerland, the Nordic countries and Japan. The government is under a lot of pressure to collect. They’re not making money, they’re spending more than they can bring in. The IRS is under immense pressure to collect. The economy is probably headed for a downturn. We haven’t officially hit a recession. A lot can argue that we haven’t left one either.
They’re going to be strapped for revenue. They’re getting aggressive and we’re seeing it in a lot of things the IRS does. Audits are not increasing. Why? Congress cut their budget? Why did they do that? I know, because they’re evil republicans and they’re heartless and they hate you. They want to put you in ovens.
No, that’s not really my interpretation. The Lois Lerner issue with audits of conservative organizations, the IRS pretty much told the congress to get lost. Congress said, we control the purse strings and if you don’t respond to us in a truthful and complete manner, we’re going to cut your budget. The IRS said, you wouldn’t dare. They dared. The IRS has had its budget cut. Morale is very low.
Talking to various auditors, lawyers, appeals agents, they’re embarrassed by the Lerner thing. They know it’s not right, and they’re ashamed. They have enough decency to feel shame. The morale is also low because of the budget cuts. When people retire in government, they don’t necessarily get replaced. This is where inefficiency helps us. When the IRS has its budget cut, people attrition out.
Do they necessarily replace them, even if they’re important? No. There is one class of person at the IRS that makes about a thousand times, and that number is a correct number. About a thousand times what they’re paid. Auditors. Everybody else supports the auditors. In a rational business when you have to make cuts, who do you cut. The auditors or the support?
Participants: The support.
John: In government, which one do you cut? Auditors.
The actual percentage of audits is down, and they’re compensating for it. There are two things they’re doing to compensate. They’re digging up laws that were never intended to be used in the manner that they are now being used and becoming more aggressive. I’m going to give you some examples of that.
They are also doing more correspondence audits, you get a paper in the mail and it says, send us all your receipts for February 2009. Then they’re going to prorate based on, let’s say you’re missing 20% of your deductions for February of 2009. We’re going to assume that all of 2009 is 20% loan attributed.
They’re taking some shortcuts, first of all. Audits have normally been something that start with a limited scope that is increasing. One of the goals if you get audited, is to keep the limited areas that they’re auditing from metastasizing.
In other words, if you can nail them good and hard, and perform on whatever area they’re auditing, the odds of the audit spreading are very low. They’ll commit their resources everywhere, which is somewhat rational and therefore surprising.
I’ll give you a good example. My cheapest audit ever occurred this year. Cheapest meaning what did I bill for the audit? I billed $1,300 for a complete audit, it surprised me greatly, and it wasn’t an engineer I was dealing with. All right, caveat for the engineers and software people in the room. Given the demographics here, that’s probably a high number. I love you and I hate you. I love that you’re process oriented and detail oriented. I hate that you take details and don’t apply the concept of materiality to them oftentimes.
An engineer is a person who will take my $350 an hour rate, and argue over a $20 balance sheet item for that hour and then be upset when I actually bill them for it. They’ll say, it’s not worth it, and I’ll say, I know. I don’t know why you wanted to argue about the $20, but you took my time. I think it should be free.
My client was an engineer, he does follow process as well. I spent about an hour showing him how to compile his records. In this case, they wanted the receipts. It was one of those types of audits, they pick three items on a schedule C, he had a side business assigning properties. He finds a deal, signs up a contract, sells the contract. He’s functionally an unlicensed realtor, very common technique, especially in areas where people want to make active income versus passive income.
They looked at three areas, he documented them to the nth degree. He had almost all the receipts, he laid a gorgeous spreadsheet and even showed which receipts he was missing, which in his case was less than 1%. I go into the audit, I’d spent about an hour and a half with him. About a half-hour explaining what he needed to do, about an hour reviewing what he did do, went into the audit.
I know it’s heresy out here. I profile agents hardcore, and I’m usually right. It’s statistics. I will look at age, I will look at demographic group, I will look at gender, I will look at ethnicity and determine what is the likelihood of an agent taking a certain position. By the way, I’m far more often right than not. So, it does work. Like it or not, it does work. This agent was a cat lady. How did I know that? I walked into her cube at the IRS, and there were cat posters.
There were also– She likes hockey. Columbus has a really good hockey team, and there were pictures of her hugging all the hockey players one at a time. They obviously knew she was an IRS agent because their expression was unusually happy.
Why is this relevant? She took 15 minutes to go through this very well constructed report that the engineer put together showing that he had receipts for everything. What was her assumption, he had it for these three categories. He probably has it for the others. She did one of these, looked at it, she found amusing that he highlighted in red where he didn’t have receipts and said, I’m sure this audit will be fine.
What’s that? It’s her way of saying there is going to be a change. Then we proceeded to flirt for about an hour and 45 minutes. First of all, she’s not the type of person I would normally go for in terms of flirting. Wasn’t even hot by IRS standards, and trust me, that is not a high standard.
Just not my type. I was about an hour and 45 minutes discussing cats and hockey and all the various permutations of how you could combine those two things. I billed the client for the time flirting. Why? It took my time. Why did I choose to stay? What happens when you walk out early on somebody who gave you what you wanted. Somebody who clearly was lonely, who clearly wanted to chat, who clearly wanted a little bit of flirting, who wanted some attention.
That’s the human element because most IRS agents are in fact human. They try to screen it out. It’s just hard. That’s why it was such a short audit. We did get a letter within two or three days that said, the audit’s over you owe nothing. There’s the upside. A lot of these artists are shorter and more restricted in terms of scope. If you have your feces in order, and you keep good records. I can’t emphasize that enough.
Entrepreneurs are often good at doing, and often retably horrid at recording what they did. The admin part. We’re going to talk about that some. You need to have a good set of an income statement and a balance sheet by property, not just by company, but by property. You need to be able to trace that to the transactions that gave rise to the income statement balance sheet. If you have software that downloads receipts and such, converts it to PDF, whatever. That’s great. I use my children. That didn’t sound right.
I employ my children. We pay the kids to scan receipts. What I do is when I travel, first of all, everything is paid with a credit card, debit card or check. In business, the only thing I pay cash for are tips at the hotel. You leave the typically lady who cleans the room, a buck or two. That’s the only thing I do in cash. Everything else is done credit card, debit card, etc.
Why? There are a number of reasons. A, you don’t want to attract suspicion. Rightly or wrongly, and I’ll argue wrongly, the government is very suspicious if you deal in cash. It means you’re a drug dealer or a terrorist. That’s not true, that’s not what they really think. That’s their excuse. They want control. They’re banning cash. They got rid of– I think, wasn’t it recently? Didn’t the EU say no more 500 euro notes? Do you think that’s really about terrorism? No, it’s about controlling you. Cash they can’t track.
They’re very suspicious of it. Unfortunately, in the context of business and audits, give them what they want to see. We’re going to talk about that a number of times. If it’s possible, let them see what they want to see, because they’re less likely to dig if it looks right on the surface. The problem with spending cash in a business is the inability to document it. I pay Jose, the contractor, $600. I have him sign a receipt, let’s say. The IRS audits, and what’ll they say? “You could have made this receipt up.” Let’s talk to Jose. In other words, let’s substantiate the receipt. Now, when you got to Jose, the contractor, and you say, “Jose. We’re going to go talk to the IRS.”
That’s right. Up there, we’re going to go talk to ICE. Right? Let’s have an immigration discussion. No, that doesn’t go well, and it attracts attention. Please, on your business, debit card, credit card, or check. I understand what I’m saying guys, I do business. Good contractors are hard to come by. Good contractors are hard to come by, and they all have a shelf life and expiration date. It’s like a magazine of bullets. Now, for those of you in California, bullets go through guns. Guns are things we use to shoot people. It’s a tool. Some people need killing.
If you go to other states, you might see what these look like.
In any event, a contractor is like a magazine and you don’t know how many rounds are in it. You just know one day you’re going to pull the trigger and hear that click. They all have an expiration date. Why do I say that? I know what I’m telling you. It’s so important to have good contractors. What happens when you don’t pay them cash? Some of them leave. You have a business decision to make, where is risk the highest?
Article You May Also Like: How to Use a Self-Directed IRA to Invest in Real Estate
Video 2 Transcript
John: Now, going back to the audits. What do you do if you get audited? First of all, well, this will date me. For those of you 35 and older, take a lude. Right? Calm, calm, na, na, na, be the ball, it’s all good. It’s only about money, it may not be a lot of money. In this country, we have a fear of the IRS and they promote it. You notice around April 15th, they did it this year again. They announced all the people they’re nailing for tax avoidance. There’s a reason for that.
The chances of you being a tax criminal are less than the chances of you being eaten by a shark statistically, unless what? How do you become a tax criminal? Lie, don’t report income that exists or manufacture. I don’t mean get aggressive, I mean manufacture from whole cloth deductions. If you don’t fall into one of those two categories, you didn’t lie to the IRS, don’t worry about it.
It’s just about money. If we can beat them on the few items they tend to look at, then the audit will probably go away. I win my audits typically. By the way, I do audits across the country including Appeals and Tax Court representation. I win most of my audits. In the last five years, I’ve only had one client pay money to the IRS. Now that was a little bit of luck, because if you have a lousy case, I’m going to tell you. I’m this crazy thing that is an honest lawyer. What a lot of lawyers will do if you have a bad tax case because of your fear, they’ll say, “We’ll fight the IRS.” Knowing they’re going to lose, but they get to bill you.
If I think you’re going to lose, I will tell you. You don’t want to necessarily hear that and it upsets you, and I’ll tell you why I think you’re going to lose. I’ll talk you into paying me less to settle.
Participant: Does the getting the W9 apply to both full-time real estate investors and passive income investors?
John: Does the W9 apply to real state investors? That was a generic restatement of the question. Yes, rentals – it has to be a trader business and the IRS considers for these purposes most rental activity to be a trader business. If you’ve got rentals and there are contractors involved, there should also be 1099s involved.
By the way, here’s something I would not do. Tim, I know you don’t want to pay taxes and I want to keep you as a contractor, so I’m going to pay you $599, I’m going to pay your spouse $599, I’m going to pay your kid $599, et cetera. What’s the problem with that? That’s fraud, and you’re a co-conspirator. Don’t do that.
Back to the audit, what do you do if you get audited? Gather up the records, don’t procrastinate, don’t put it off, get representation, don’t appear in front of those people, and hit the records hard enough that you can make the initial issue go away. What happens if you get a bad auditor? They do exist. What do I look for when I profile?
Participant: Cat women.
John: I don’t look for that. It’s just sort of a surprise when it occurs, the cat women. The first thing I look at is how old are they. Before the late ’90s, the IRS was different, there were a bunch of reforms put in by a Republican Congress that changed the IRS and gave taxpayers a lot more rights and the IRS less power. The people who were around before those reforms, some of them did not get the memo, some of them have a different attitude, they still remember the old days and they kind of operate on that.
Most of them got the memo but we do get a few. If the agent belongs to a demographic group that is overall very liberal, it catches my attention. Why? Because I’ve seen agents come into a room where they consider you to be the rich fat cat and they’re a social justice warrior and the law means nothing and their opinion means everything. I’ve had it. I had one, we went to Tax Court on an issue . We went all the way to Tax Court, we were in front of the judge and the IRS decided they didn’t want to fight and settled for zero, meaning, me and my client owed zero.
My client got audited for the very same thing the next year, exact person, he even got the same letter with the dates and the numbers different. We presented to the IRS auditor who was from a demographic group that goes heavily left and was older, old enough to have remembered the old IRS, she is the worst one I ever dealt with, it’s not real typical, she’s the worst one.
I said, “Look, we went to Tax Court, they didn’t want to fight, here’s the name of the IRS lawyer, here’s the name of the appeals agent, here’s the name of the research specialist who did all this and decided they didn’t want to take this case, would you please call them?”
“What you’re doing is illegal.”
“What you’re doing is illegal.”
“Well, okay, call the Police, I’ll wait.”
No, because the first thing you do when someone threatens like that, you have to immediately call them out. Immediately. The military teaches there are three ways to deal with an ambush. You could stand there and get shot in the face, you can turn around and run and get shot in the back, or you counter charge and wipe them out. You hose it down, expend a ton of ammo, make a big mess, and make sure you’re not the dead guy. That’s how you deal with someone aggressive like that. You go straight at them.
I sent a letter, what I told the client was this. I said, “Look, she’s irrational. She’s decided you’re a bad person and she’s going to make trouble no matter what. Now I can have a fight with her, I can put 40 hours into this and we’ll fight, it’s not going to change the result at all. It’s just not going to happen. Here’s what I suggest. Let us end the audit as fast as possible and I’m going to provide a catalyst for that.
“Just so you know, don’t be alarmed. She’s going to put on the notice of deficiency, she’s going to put a huge number. Don’t worry about it, it won’t stand. Just like we won in Tax Court before, I don’t think we’re going to have to go that far this time. That number won’t stand, so don’t panic. I’m trying to save you money. Dealing with this woman is a waste of time.”
This is how we ended the audit. I wrote a letter and I CC-ed her supervisor. The letter said, “It is not your job to judge. We don’t care about your opinion, your job is to decide if my client, A, reported all of his income and, B, his deductions are legitimate. For example…” and I put this in writing, “If my client were a crack dealer, you should call the cops if you feel the need, but we’re not really interested in your opinion on crack dealers.
“The question you need to answer is did the crack dealer report all the little green pieces of paper he got in exchange for dime bags, A, and B, are guns, bling, and bad music tax-deductible expenses for a crack dealer?” The audit ended very quickly. She put a huge number on there. We went to appeals and immediately got it settled, and that was the end of it. Sometimes that happens, you deal with it. You do have a lot more rights when dealing with the IRS than when you’re dealing with any other bureaucracy.
There’s something called the Tax Court. They’re easy to get to, they’re knowledgeable and they don’t tolerate nonsense. I wish we had that for all the bureaucratic agencies, in EPA court, the Department of Labor court, etc. If an audit doesn’t go well and you have not hired me, naughty, naughty, don’t do what’s called a protest. Write down, protest bad. The protest gets you to the appeals agents. I’m going to talk about a better way to get an appeals agent. Appeals agents are better educated than the lower level auditors. They have a lot of power to settle. They are supposed to settle.
The government cannot fight every case. They don’t have nearly enough lawyers. The IRS will thump its chest, “We’ve got 5,000 lawyers.” There are 300 million of us. They just don’t have the time to take everything. But remember, we never lie, never, never lie to the IRS, then you convert a money issue into an orange jumpsuit issue. Don’t ever lie.
If you don’t know the answer to something for sure, you say, “I’m going to find out. I’m not going to answer now because my memory is not so good on this, but I will find out,” and then you follow up. You never lie, ever. You don’t say anything that could be a lie. If you just really don’t remember, they will convert faulty memory into a lie. Google Scooter Libby, Bush’s chief of staff. His bad memory got him a felony conviction. Now that was political, but it does happen to normal people.
Lesson two, and then I’ll come back to appeals. Don’t ever answer a question that was not asked. First of all, you probably shouldn’t have contact with the IRS. It’s extraordinarily rare that my clients do, we don’t normally permit it, but this is not the confessional. You think carefully about what was asked and you answer only that question and you answer it literally.
Now back to appeals agents, we like them. We like them because they settle, because they have more knowledge, they’re more reasonable, they don’t want to go to court. If there’s a way to settle, they’re going to. If there’s a way to settle, they’re going to. There are two ways to get an appeals agent. The first one is you write what’s called a protest letter. It takes about a year and you get terrible results.
Why? They’re not motivated. They don’t have a time deadline. They don’t have pressure to settle. We’ve noticed the results that when we go to the appeals agents through a protest don’t work. We skip the protest, we go straight to Tax Court. When we go to Tax Court, an appeals agent from the very same office is going to contact you. They now have a deadline, the tax court date is usually 9 to 12 months away. A lot of the time the settlement doesn’t occur until right before the trial, very common. The closer to the trial you get, two things happen, one good and one bad.
The closer to the trial you get, the more nervous you get, the longer your stress level lasts, but the better the settlement. The closer we get to the trial, the better the settlement because we’re running the clock on him. When the IRS says, “Would you like to extend the case?” The answer is no, because they will try to buy time so they can go fishing. Don’t give them that time. Now, I don’t like to create an adversarial relationship with IRS lawyers unless I have to. I like most of the IRS lawyers I’ve dealt with, most of them are quality people.
I don’t like their job, it’s why I don’t do it. I do blue lightsaber, not red lightsaber, they’re dark side, but they’re nice dark side. They actually have intelligence and integrity, they really do. I don’t like to alienate them, so how do I do it with a client when the IRS says, “Would you like to extend?” Tim, would you like to extend this case? I told the nice man at the IRS I would ask my client if he wants to extend the case, would you like to extend the case, Tim?
John: Shockingly, he said, no. Usually, and it’s true, Tim, does this make you nervous? Wouldn’t you just like to get this done with?
John: That’s what we tell the lawyer. Now they know what I’m saying. It’s the classic, you went to the current salesman, you go to the manager, that’s how you do it. You get better settlements with those appeals agents through the tax court, plus it cuts a year off the process. Because if you go and get a protest, it adds a year to the process before you go to tax court, and then what happens when you go to tax court, you get another appeals agent. Why not just cut it short? They are very busy.
How do you get a settlement from the IRS? A, be correct. Keep good records and be correct. B, run the clock. I will contact, I talk to the client, I have to judge the client and how much risk tolerance they have, so I might give a different answer. Same exact situation, a different answer for her than I do for him based on how much risk and stress can they tolerate.
I will contact the IRS appeals office, ideally once, and I will verify it both through a phone call and a fax, so I can prove in court I did both and then I wait for them to contact me. I don’t follow up and I don’t push, why? It’s to my benefit to run the clock. If they’re the ones running it, I have no moral culpability. I generally will not pester them and try to get ahold of them unless what? The client’s a nervous Nellie and pushes it. I’ll tell them ahead of time, “I don’t recommend this.” “I just want this over.” “Okay, be careful what you ask for.”
Understand how bureaucrats think. Bureaucrats are not rewarded for performance, they’re not rewarded for doing something well or correct, they’re rewarded for not screwing up. As long as you don’t screw up, you advance on a certain schedule, there’s politics involved, but you don’t screw up. You either don’t screw up or you have someone to blame it on. How do we get– Think about it from the perspective of an IRS lawyer. Are they rewarded for winning a case? Is it a penalty to lose? If I can inject some gray, I can make them uncertain about their case, if it’s not a slam dunk.
By the way, if it’s a slam dunk, that’s where I tell you, “Don’t pay me to research this or go to trial, that’s a bad use of your money.” If it’s a slam dunk for the IRS, I tell you, “You’re going to lose, let’s get it done ahead of time without a lot of hours.” If we do it ahead of time, oftentimes they’ll drop penalties. They’ll compromise to avoid the trial. Even if you have a bad case, it’s worth going to appeals to get them to drop the penalties, and they will do it very often.
My job is to insert enough gray that the IRS lawyer does not want to go to court, they would rather settle. It’s easier, it’s quicker, and they don’t have any personal risk. That’s what we’re seeing in audits.
Video 3 Transcript
John: Audits, what do you do? Let’s talk about this. They’re not as bad as you think. There are fewer things from base audits because of IRS budget cuts. Why did the IRS get a budget cut? Congress has a little bit of tolerance despite King Barack passing laws without their assistance. See the constitution is curious language, “Congress shall make the laws”, we seem to have forgotten that part.
What happened was when the IRS did the targeting of the Conservatives, the Congress asked questions, IRS refused to answer them. Congress said, “All we can do is cut your funding to teach you a lesson”. They did. They deserved it. I have no pity, no sympathy, none. That’s an out-of-control bureaucracy. As a result of budget cuts there are fewer audits, which is in the main item it’s good because I don’t really care for that whole system than having money on it.
What triggers audits? First of all, forms not matching. If you get a 1099 and it’s not right you need to do one or two things. You need to report the full 1099 amount and then deduct it somewhere else. We need to get the 1099 corrected. If things don’t match, the W2 that you got doesn’t match what’s on the return, another big one is 1098. Loan statements? If that doesn’t match what you put on the return there’s going to be an issue. Other reasons, expenses are too high at a given category.
We don’t know what the too high number is. For example, you’re a flipper you make a $100,000 year and you write off $50,000 a year on meals and entertainment. That sounds high, but we don’t know exactly what those thresholds are. We just know that if certain expenses are too high. Sometimes expenses, there’s a judgement call where you put them. For example, if you have a really high repair expense on a rental that can make an audit more likely.
What’s one way to ameliorate that without lying, we don’t want to be dishonest, right? Maybe some of that’s maintenance. Take a look at the invoices. Was some of that lawn cutting, or some of it just painting? Maybe because there was a separate category. Cleaning and maintenance. To keep you repair expense from being too high could be shift something. That’s one way to do it.
What else causes audits? Loses, too many years in a row. Although, they tend to understand that with rentals it happens because of depreciation.
When one client had a rental audit, I said, “Why did you audit her? She only has four rentals and it doesn’t make a ton of income”. They said, “Well, the first year she didn’t show any rental income”. That seemed odd to us. I said, “Did you look and see when she bought the rentals?” “No”. December. Audit ended immediately. They just looked at it briefly and you know, “We’re good,” once they understood why. It always pays to ask why?
I don’t want to over-complicate this, but if you have separate businesses there’s a benefit. Remember I mentioned before I’ve got the law practice, the book sales, and the real estate. What do I like about that? Each one of them buys a box of cigars. If they audit one company, did they give the other two, probably not. The cigars I think are legit. They’re not minors as if they knocked it out, I still got some elsewhere. The audit rates are lower on entities than on your personal.
Schedule C in particular is highly audited. LLC is taxed as partnerships as corporations or C corporations are audited with much less frequency than schedule C, especially if it’s high in schedule C.
What do you do if you get an audit? There are different kinds of audits. The first thing you do, take a look and stay calm, it’s all good.
If you think you did something criminal you need a specific type of lawyer. I don’t do criminal cases. That’s so specialized for tax law, that’s the kind of guy you need. You don’t talk to anybody. If you’ve done something criminal I’m not condoning you, I’m just telling you what to do. Well if you’re accused of it, because a lot people get railroaded.
10 years ago if you said, “John, if you committed a crime would you be open with the FBI investigator?” I’d say, “Yes”. I still had trust. I don’t anymore. I think you’re insane if you trust those people. For them it’s about careerism. They want to convict you to get a raise. If they ruin your life they don’t care. There are still some honest ones left, but there are enough dishonest ones that you cannot be trusting of these people. If you’re ever approached for anything possibly criminal, you don’t say anything, accept that.
Now there’s a case that says you have to affirmatively, you can’t just be silent. You have to tell them, “I’m being silent”. “You need to talk to my lawyer”. I hope none of you find yourselves in that position. Unfortunately it’s becoming more common.What do you have to do to commit a tax crime versus just owe them money?
John: Thank you, lie. What does that mean? You don’t report income. It has to be intentional. If it was honest, truly, an honest mistake, that’s one thing, but if you knew, or you create adoptions that don’t exist, those are the two things that get you put into prison. Don’t do that. It’s not worth it. I would rather not make money than make money and lie about it. That is, by the way, what’s happening for you Ayn Rand fans.
A lot of people are starting to go golf, and they’ve never read the book, they don’t know what that means. It’s just that when the government makes it hard to do business and takes half your money if you do make money, a lot of people say, “You know what? I’m going to the beach. Sayonara.”
Now let’s assume you have a normal audit. You get a letter in the mail. The first question is, is it person to person or is it just through the mail? More and more of them are through the mail.
When you receive a letter, stay calm, it’s just money, first of all. It’s just money. If you did things the right way, you’re going to be fine. They might nickel and dime you here and there. It depends on the type of agent we’ll get. We’ll talk about that. If you did things wrong, you may even have a chance to repair it. Often times I can get you a lot of time with an IRS agent to come up with records to prove things if you don’t have them.
Of course, you always have the decision of, is it easier to just pay the tax. What’s your time worth? What’s your stress worth? It depends on the size. The first thing is calm. The IRS is one of the few bureaucracies that does have some accountability. Why? Tax court. There’s a specialized court of very knowledgeable judges that know the bureaucracy and know the rules inside and out. We need that for all the other bureaucracies. There should be an EPA court. There should be a Department of Labor court, etc.
There should be an OSHA court because those judges hold those people accountable. You get a letter. Don’t procrastinate. The clock has started. The date on the letter is not absolute. We can offer to move it 60, 90, sometimes more time. It just depends on the situation. What kind of agent did we get? How significant and serious is the situation? How many records do they need? Don’t procrastinate. Don’t put it aside. Get it started immediately.
What happens when an audit says you owe a lot of money? This is very, very, very important if you ever run into this situation. The IRS issues a special letter called a Notice of Deficiency. We just call it a NOD in the industry. You must not ever miss that letter. That letter has a 90-day period to get you into tax court. It’s stamped on the upper right-hand corner of the first or second page. That is a ticket.
The tax court is great because you don’t have to pay the tax to go there. In other words, you say, “I don’t agree with this”. You file in tax court. The filing fee is $60. The real fee is me. Some of the stuff I do so much that I’ve got templates. It’s not that hard to do. The NOD, you cannot miss it. It comes certified. The day you get, you put it in– You scan it. You put it in DropBox. You talk to me. We can’t miss the deadline. If you miss the deadline by five minutes, you lose.
Now the only way you can go to court is pay all the tax and sue in Federal District Court. You’ve got to pay the tax and the penalties, sue for a refund, and district court is more complex than tax court. Plus, you don’t know what the judges are going to do. They don’t understand the tax law. Sometimes it hurts you. Sometimes it helps you. It can be very random. They don’t really understand the code the way the tax court judges do. You really want to go to tax court if you can.
What happens when we file in tax court? We then get assigned to an appeals agent? This is important. There are two ways to get an appeals agent. Once you lose the audit, you file a protest, or you go to tax court. Here’s my experience when you file a protest. We wait forever, sometimes years to get an appeal, and the agent is not motivated. Now the appeals agents are a cut above the lower agents.
The lower agents are not as well educated, not as sharp. The appeals agents are experienced and have more training. If it’s an appeals agent who knows there’s a tax court case pending, they have been trained to settle. They have been trained to settle.
The IRS can growl all it wants. “Ughrr”. I love the game. I call the game Me Tarzan, you Jane. They try to tell you how tough they are. “We have 1,000 lawyers”. Okay, there are 300 million of us. Good luck.
Those guys are so busy, they can’t try every case. They just can’t. The appeals agents, if it’s not through a protest but through tax court, have an incentive to settle, that’s what they’re trained to do. I get way better settlements and the settlement gets better the closer we get to the court date. A lot of the time I don’t see the IRS lawyers until we’re right before the date. I’ll give you some examples in a minute.
The bottom-line is, the client is usually involved other than providing the records being very, very careful that everything is accurate, we don’t want to see anything false. I have, unfortunately this is embarrassing in it’s way to admit, I have never been through a full tax court trial because they always settle with me. The settlement was good enough I told my client, “You really should take this, this is good.” It’s frustrating because I really want to go all the way.
Learn More About Using a SDIRA to Invest: How to Use a Self-Directed IRA to Invest in Real Estate