Steve gets a letter from the IRS
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.
Enunciate.
Tyler: There you go.
Ma ma ma ma ma ma.
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