It's Not About The Money

Tyler: So, Steve, I heard you had
some guests recently at your house.

Steve: I did.

Guests.

Yeah.

Not, not human guests.

The, the kids class at school has
some guinea pigs, and it was our turn

to take them home for the weekend.

Tyler: Oh, class pets.

Steve: class pets.

Yeah, exactly.

Tyler: forgot about

Steve: Um, I have never roomed
with guinea pigs before.

I did not know what to expect.

They, uh, squeak a lot.

They sound like birds sometimes,
which was very surprising to

me.

Tyler: ha, ha

Steve: Um, and this could be because
the kids were holding them improperly

and they're like, put me down.

I do not like this or something.

I don't know entirely,
but you feed them hay and.

Little pellets and vegetables, and you
play with them, and that was about it.

Clean up their poop.

I mean, that was the whole thing.

Tyler: Okay, that sounds kinda fun.

Uh, how long did you have them?

Steve: Uh, just over the weekend.

Sent them

Tyler: Okay, and they

survived, I

Steve: they survived, yes.

Warm, alive.

Tyler: That's cool.

I once had a pet chinchilla.

That's as close as I've
come to having a guinea pig.

Steve: What is a chinchilla?

Tyler: A guinea pig like animal.

It's a rodent.

It's got really fluffy, soft fur.

I hear they make good scarves.

I think they're from the mountains
of Argentina originally, but anyway.

Steve: Lucky for us, the dog was not
interested in eating these guinea pigs,

so that was, that was not a problem.

Tyler: that is lucky.

That could have been

Steve: I was a little concerned

about that.

Tyler: Yeah.

Did the dog even react?

Did they notice?

Did, like, what

Steve: She was very curious.

She was all sniffing around the cage,
and she'd come check out who was,

who was holding a guinea pig, try and
figure out what was going on, but she

didn't seem bothered by them at all.

Tyler: Okay, well, that's good news.

Glad you got them back safe and
sound and there were no, uh, murders,

I guess, in the animal kingdom.

Steve: Yep.

Hello there, dear listener.

I am Steve.

Tyler: And I'm Tyler.

And this is another episode of It's
Not About The Money, where we discuss

a wide range of topics related to
creating and running small businesses.

Oh,

Steve: Tyler and I are both small
business owners like you, and this

podcast is our attempt to make sense
of the world one episode at a time.

So, Tyler, I recently received a letter
in the mail, which normally I like

getting letters in the mail, but this
one said, Internal Revenue Service.

It was addressed to me and my wife,
uh, so I knew right off the bat

it was not good because if it was
just addressed to me and it had the

business name, that might be okay.

It's just like correspondence with,
uh, me as, as the business owner.

But this was, uh, going to be
something about my personal tax return.

So I open it up.

And I have this feeling of dread when it
says, uh, We're proposing changes to your,

whichever year, form 1040 tax return.

This is not a bill.

Proposed amount due.

And there's a very
large, uh, number there.

Tyler: Hold on.

So they were telling you,
you owed a bunch of taxes.

Steve: yeah.

Tyler: Okay.

Steve: That's, that's the right,
right at the very top of the letter.

They just cut right, right to the chase.

Tyler: No small talk, no pleasantries.

Steve: You owe us a bunch of money.

And then they spend another, nine
pages, eight pages explaining how

they arrived at this conclusion,

Tyler: Whoa.

Steve: which, uh, gave a lot of detail.

And once I got to about the third or
fourth page, I knew what they were

talking about and I knew that it was
incorrect and I was going to be able

to prove to them that they were wrong.

But

it wasn't until that point that the panic

Tyler: I was going to say, were
you like in a cold sweat this

whole time reading this thing?

I mean, that can not be
a pleasant experience.

Steve: no, uh, By the time I figured out
what it was and kind of ran through my

head of like, do I have all the records
about this thing and realizing that I did.

Uh, then I, then it was okay.

Tyler: Okay.

But you still have to deal with
this somehow, I assume, right?

Steve: I still have to deal with it.

Yeah.

So I've collected everything.

Now.

I, I have yet to actually write
the letter and send it back to

them, but it underscored to me the
importance of keeping my past records.

So it was related to investments.

Tyler: Okay.

Steve: My prior day job a few years
ago was at a big tech company and

part of my compensation was restricted
stock units, RSUs, and the way those

come across is uh, they report all
of it as ordinary income and it shows

up on your paystub and on your W 2.

And then, uh, I had asked them to
sell enough shares to cover the

taxes and then give me the rest of
the shares in my investment account.

So they report on the paystub and the
W 2, here's all of the income, here's

the taxes, and then this is the amount
of stock that we gave back to Steve.

So then at the end of the year, you get
a statement from the investment company,

the, the, the brokerage, that says, here's
all the stock that you sold this year, um,

and this is the price that you sold it at.

And that statement says that the basis is
zero, meaning that you bought the stock,

bought the stock in air, quotes, uh, for
$0, and then you sold it for however much.

That is incorrect because, uh, my
basis in the stock is the amount of

money that I was taxed on, when I
received it, that was reported on the

W 2, but the, uh, for whatever reason,
I don't know why they do this, but

the brokerage, uh, doesn't carry that
information over to the 1099 form that

they issue you at the end of the year.

So it's very easy to get that form and
say, oh, well, here's, here's some stock

sales and the basis should be zero.

And so therefore I owe a whole bunch
of tax on this stock that got sold.

When really I paid the tax already
through my employer's withholdings.

So that's the root of this
issue that the IRS found.

Tyler: So it was a reporting issue
from the brokerage, it sounds like?

Did I get that right?

Steve: Uh, yes, but, um,

Tyler: Or just a mismatch
between what they reported and

what your employer reported or

something?

Steve: uh, yeah, that's
a better way to say it.

Cause the, the brokerages
all seem to do it this way.

I don't know why it
doesn't make sense to me.

It seems like they should not do it this
way, but this is the way they do it.

And so it causes these problems.

If you don't know to
look for this with RSUs.

The basis reporting, when you
get to doing your tax return,

this could really trip you up.

Yeah,

Tyler: Okay.

So this applies to anybody
who gets RSUs as part of their

compensation at their job.

be on the lookout for

this, potentially.

Steve: be on the lookout
for this, exactly.

Yeah.

So, because, uh, because I know all
of that, and because I still have the

1099, I have the paystubs, I have the
W 2, all of that, I can assemble all

those documents and write it up in a
way that will hopefully be convincing

Tyler: Okay.

So the

Steve: that will be the end of it.

Tyler: they didn't really make a mistake
based on the information that they had.

They're just missing some
information, it sounds like.

Steve: That's right.

Yep.

Tyler: So what would happen if you
didn't have that documentation saved?

Would you still have any chance at,
like, making a case or going back to

your employer and digging up stuff?

Or what, yeah, I don't know.

What would you recommend?

Like, if you, if, if a client came to you
in this situation, what would the, how

would you think through that with them?

Steve: Uh, well, the brokerage
statements, uh, I was able to go pull

those again, just to make sure that
they matched the copies I had saved.

And they did.

So if you didn't, if you hadn't
saved those, you could go pull

them again from the brokerage.

And the W2, I still had on file
and it would be part of your Tax

return documents probably as well

from previous years.

Yeah, exactly.

Uh, the, the pay stubs though, is
the one that I'm really glad that

I kept because that's going to make
it real easy to show what happened.

And if you didn't have those and
you had left the employer, like

I did, um, I'm not entirely sure.

I imagine you can still go
back and ask for them if it's

not too far after the fact.

Tyler: Yeah.

Or just tell the IRS, pretty
please, this is what happened.

Here's my story and I'm sticking to it.

don't know.

That's interesting.

Steve: I, uh, but even just with the.

Without the pay stubs, I could probably
make a good argument for explaining

what it is that's going on here,
because RSUs are a pretty common

Tyler: Yeah.

Yeah.

Steve: way of compensating
tech employees, especially.

So,

Tyler: Okay.

So that's a, that's kind of
a scary experience, I guess.

Uh, but you survived, it sounds
like, or in the process of surviving.

What,

Steve: yeah, we'll see
if this convinces them.

But I think I have a very strong
case, so I'm not worried about it.

Tyler: So what are some lessons
that you learned from this?

Steve: Well, the first one is, if
you get a letter like this, don't

Don't, uh, stick it in a drawer and
sit on it for six months, like open

it immediately and see, because
like the bad news is not going away,

whether you pretend it's there or not.

So just open it and see what it says.

Uh, and maybe it's not a big deal or
maybe it's a really big deal, but either

way you should know what it is so you
can take action as soon as possible.

Uh, and then the, the second thing that
occurred to me is I'm really glad I

kept all these records and I have them.

Um, so at least like.

The last three years, because that's
the window that the IRS can audit your

returns three years after you file it.

If you haven't filed a return from
three years ago and then you file it

today, the statute of limitations is
three years from now when you file it.

So there's, there's a little tidbit
there, but like, so keep them

for at least that three years.

Um, like you don't need to throw
them away if, especially if

they're digital, like just keep

Tyler: Yeah.

Steve: because it may come in handy for
something like this or just for, you know,

some gee whiz, like 20 years down the road
to be like, how much did I make in 2003?

Then beyond that, I would say if If you
don't feel comfortable doing this kind

of analysis and writing the letter to
the IRS yourself, which you can totally

do, you don't need to hire a tax pro for
this, but if you don't feel comfortable

doing it yourself, or you don't know what
they're going to expect or how to write

it, all that kind of thing, uh, find a
tax pro who specializes in representation,

or at the very least, um, a tax pro
who can represent you, such as an

Enrolled Agent like I am, or a Certified
Public Accountant, or a tax attorney.

All three of those designations have
unlimited practice rights before the IRS.

They can represent anybody.

There are other tax professionals
that may or may not have a license

and they can represent you under some
circumstances, but not everything, and

especially not a situation like this
where you're getting correspondence later.

So if you don't already have somebody
like that in your corner, uh, it

might be good to at least ask around
so you know somebody that you could

call if something like this happened.

Ideally, you'll have a tax pro that
you're working with all during the

year and you can just email it to
them and say, Hey, I got this letter.

What should we do?

And they'll know exactly
what to do with it.

Tyler: That makes sense.

I'm trying to think if I've ever had
anything remotely close to this happen

to me, and the answer is no, but I did,
I did get a IRS one time many years ago.

I think it was actually the year.

The first year I started using a tax
pro instead of just doing it myself

through one of the online tools.

And it had something to do with
the interaction between state tax

and federal tax and like I had tried
to deduct maybe state tax from Afu.

I, I don't remember, but I got
a letter and every guy was like,

oh, it was only for a few hundred
bucks, but still I was like.

I don't like the feeling of the
IRS looking at me like this.

It's kind of scary because I had no

Steve: Yeah, right.

Tyler: Um, and I think that's actually
what, uh, got me to go to tax pro

the first time, actually, if I, if I
recall correctly, and they sorted it

out for me real quick and it was great.

Again, not, not nearly as
big of a deal as what you've.

Are going through right now, but still
kind of enough to, you know, like I

said, any, any letter from the IRS
I presume is not necess, is not . I

don't know, is it ever good news?

I, I don't know of a
situation where it would be

Steve: uh, theoretically it could
be, but, uh, usually it's, it's not.

Tyler: Yeah.

Steve: I will say though, uh, my
philosophy generally with my clients

is that it's okay to take aggressive
tax positions that you are entitled

to, as long as you can back it up
if IRS comes knocking like this.

So if you've got documentation for
it, you can make a good case for it.

Uh, you feel comfortable taking
a deduction, a position, whatever

it might be, go ahead and do that.

And that's how I like
to run with my clients.

So what you get out of that is that
you're getting the best tax treatment

that you can for your situation
now, but I'm not putting you in a

bad spot if you ever get audited.

Like, you'll still be able to back it up.

We have all the documentation.

We can prove to the IRS
that we had a good case.

Tyler: So tell me more about
aggressive tax positions.

I'm not familiar with that term.

Is that, like you mentioned one example
of like claiming a big deduction or a

deduction that maybe may not be like
what, uh, immediately obvious or.

Yeah.

What are some other options for
justifiable positions like that?

Steve: Yeah.

One is, business use
of a personal vehicle.

The IRS looks at that one rather closely
from what I hear, uh, is, well, let's see.

What is that?

Basically, uh, you have
a personal vehicle.

You sometimes drive it for work
to visit clients or to make

deliveries or whatever it might be.

Uh, you can deduct those miles
at a certain rate that goes

up for inflation every year.

Uh, it's currently around 60 cents a mile.

And, uh, you can take that as a
business deduction, but you have to

have really good records that were
made contemporaneously at the time

that you took the trips and you need
to know, like, what was the mileage at

the beginning and the end of the year.

Um, you have to answer a bunch of
questions about the vehicle and what

other vehicles are available for use
in the, you know, there's, there's

a bunch of like caveats around it.

But if you have all those records and
you did actually drive the vehicle for

business use, let's take the deduction,
you've got everything you need to

back it up if the IRS questions it.

Tyler: Right.

Okay.

That makes sense.

Steve: However, if you're missing some
of those and then you get audited, then

you're kind of in a bad spot where if you
can't prove it, the IRS might say, well,

you're not entitled to this deduction.

And so we're going to claw that back.

Tyler: Okay.

So one of the things I like about working
with my tax pro is that the end, once

my return has been filed, he always
gives me this beautiful little packet,

my tax return, and nice little booklet.

And I keep them, I've kept all of them
even like probably longer than I need

to, cause I just like having them.

Um, I don't know what's, what,
so that's my side of things.

What about your side of things?

Like as a tax pro, how long are you
obligated to keep records of the work that

you've done for your clients, if at all?

And like, could I rely on my tax pro if
I needed past stuff or is it all on me?

Steve: uh, it will depend on the tax pro.

I think in my engagement letters,
I say something like I'll, I'll

keep them for some number of years.

Uh, that's bigger than three.

I would have to check, uh,
exactly what I say in there, but.

So, I will probably have them, but I'm not
ultimately the one liable for your taxes.

So, you should also keep
a copy of the records.

Tyler: Can we talk more about the,
the difference in liability, I

guess, between the individual or
the business and the tax preparer?

Because that's something
I hadn't thought about.

I kind of thought when you hired a
tax pro, like maybe they took on, like

they're, they're authorizing this is
accurate as far as I know, like, you

know, but, but if the IRS comes knocking,
do they come to you or your client and

what is your role in that situation?

Steve: Okay.

Yeah, that's a great question.

The liability for your taxes falls to you,
you're the one that has to pay them, and

ultimately you're the one that, uh, has
signed your name on the return saying,

this is, this is how much I think I owe.

However, uh, they do, the IRS will
sometimes come after preparers,

especially if they notice a pattern
of like, this preparer, uh, is doing

the same thing on a bunch of returns,
and it's all, fraudulent or erroneous.

Uh, they can come after the, the return
preparer and say, um, you're, you're not,

um, holding up your end of the deal here.

Kind of, you're not doing your due
diligence or whatever it might be.

Uh, and there are penalties that can
hit a tax return preparer for that.

So my responsibility as the tax pro
is, I am not in charge of auditing you

when you come to me with your records,
but I have to do enough due diligence

that I feel comfortable with what
you're wanting to do on the tax return.

Um, or another way of saying it is,
I'm not in charge of enforcing the

law, but I Uh, I am obligated to let
you know what the law is, uh, and if

I don't feel comfortable with what
you're doing, I won't, I won't prepare

your return kind of thing, just

Tyler: Yeah, that makes sense.

Steve: I don't want to, I don't
want to lose my license either.

So it, it kind of goes both ways.

If you hire a return preparer, they're
not taking on all of the liability and the

risk for it, but there is a degree of it.

That you are, yeah, there's a bit
of a degree of assurance there

Tyler: Yeah.

I mean, you're trusting them, right.

To do a good job.

So

Steve: Yeah,

Tyler: that makes sense.

And they're trusting you to be
forthcoming about your situation

and not be dodgy and hide stuff.

So cool.

Oh, that helps.

Thanks.

Well, uh, I'm hoping for a.

Happy and quick resolution
for you in this matter.

I'm sure it was quite a shocker.

I'm sure it'll turn out fine.

Yeah,

Steve: Yeah, I think, I think it will.

It this, if nothing else, this
experience gave me much more empathy

for taxpayers when they do get
these letters, uh, because, uh,

when I see them, it's usually like.

A little bit after the shock has worn off
and they're like, yes, I have a letter

from the IRS and here's what it says.

And it's a little more matter of fact,
but being on the front end of that now,

Tyler: So now, you can speak
from personal experience.

Yes.

You can empathize.

That's awesome.

All right.

Steve: okay.

Tyler: that sounds like
a good place to call it.

Steve: Sounds good.

We'll see you again on another
episode of It's Not About The Money.

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Tyler: There you go.

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