Ep. 55 | Overcoming the Fear Factor in Taxes
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Speaker 2:Welcome back to the podcast today on episode 55. We're gonna take a little time and talk about why taxes should not scare you as much as they may. So before we do that, jumping into today's show, let's take a quick moment and thank our sponsor.
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Speaker 3:You can look in our show notes or email us at hello@teachingtaxflow.com.
Speaker 2:Hey, everybody. Welcome back to the Teaching Tax Flow podcast. We know you missed us. It's been a whole week since you've heard us last time. And today, the day that this is being posted is Halloween.
Speaker 2:So we're gonna take the scariness out of taxes, but we're gonna get all that information from the smartest man in
Speaker 3:the room, Chris Pacquero. How are you doing? Well, John, great to
Speaker 4:be back. I don't know if I'm the smartest man in the room, but, you know, if you're not too shabby yourself, I appreciate the compliment. And we're gonna get spooky today.
Speaker 2:Oh, I like it. I like it. So Texas can be scary. Right? So I would say that probably the scariest thing for people let's start.
Speaker 2:I know we got a couple of them that we wanna go over, but probably the scariest thing about taxes in the IRS as a whole is that these people want your money. Right? So what's, Chris, in your in your response to that, you know, what's the best advice you can give to somebody just to keep the darn money in their pocket legally and ethically, of course, instead of giving it to the tax man?
Speaker 4:Well, we've been thinking about what are the three scariest things about taxes. We have you know, we get we've been very fortunate to have the opportunity to not only talk to taxpayers all over the country, but also tax professionals. And we did we speak at a lot of events, and we're just we attend events and educational opportunities and a lot of lot of cool stuff. One of the dirty secrets about being a speaker or presenter that, actually, that's not a secret if I'm just saying it on our podcast, is that as the speaker or presenter, you learn a lot more from the students than they learn from you. And most importantly, they learn it from each other.
Speaker 4:So that really spawned this this conversation. So the three things I think that people are most afraid of when it comes to taxes would be, one, the IRS. Okay? I mean, we're talking to talk on a federal tax perspective here. So the IRS is one.
Speaker 4:Number two, how much tax will they owe or not owe, in a given year? So that really comes down to coming up with the ability to project your taxes and then plan for your taxes. But if you don't have a projection, you can do a plan. If you don't do a plan, you can't implement a strategy. If you don't implement a strategy, the IRS is gonna pick your tax, not you.
Speaker 4:Then the third thing, we get a lot of questions about inheritance. What happens if I inherit money? Is that taxable to me? We could even sprinkle in a little gift issue. What happens if grandma gifts me $10,000?
Speaker 4:Do I have to pay tax on that? So, yeah. Those are the three main things that are a little scary about about taxes. There are a lot of things, I guess, that are scary about taxes, but those are the main things. We could well, we could should probably start by tackling the IRS first.
Speaker 4:Right? Because the scary thing is the a word. Audit.
Speaker 2:Oh, boy. Oh, there it is. Okay. I was thinking of something else. I gotta get my head out of the gutter or something, but okay.
Speaker 2:The audit. Nasty little audit.
Speaker 4:Word, John. So what happens if you get audit? Right? Well, the first thing is, that there's there's always a chance you can get audited. And what's important is to understand that if you do get audited or examined by the IRS, the first thing you have to understand is you're not alone.
Speaker 4:What does that mean? Luckily, there are several people that could help you out and represent you to get you the best result possible. There are there's a list of people that could represent a taxpayer in front of the IRS. I'd say 95% or more are made up of three categories. The first one is someone called an enrolled agent or EA.
Speaker 4:An EA is someone that's, that that's licensed to prepare tax returns, that has gone through a rigorous training program, testing, annual, education, you know, continuing education, and there are extremely or there's an extreme amount of talented enrolled agents out there that we work with all the time in the teaching tax flow community. The second are certified public accountants or CPAs. So, John, you always hear us say, yeas, CPAs on the show. Then the third would be an attorney. So those three those three categories of of professionals make up the vast majority of people that represent you.
Speaker 4:The first step, if you do get an audit by the IRS, would be to talk to your tax professional. Hopefully, your tax professional has one of those designations and, and then have that person file a power of attorney on your behalf and communicate directly with IRS. Now, most IRS audits or examinations, if we wanna be nice, are now correspondence. Meaning, the IRS sends you a letter, they're not interested in meeting in person, and a lot of times they're examining one specific part of your tax return. Could be donations.
Speaker 4:It could be auto automobile expense. Could be real estate professional status. So that, you know, the IRS doesn't want to comb through, in my opinion, all your paperwork. They're looking for certain things that might seem out of whack for your tax return, but that doesn't mean that they're not true. You You know, if you do your we try to prepare tax returns in our private CPA practice as if they're gonna get audited anyway.
Speaker 4:Now, that doesn't mean that we're not striving to get the get the best result possible legally and ethically. That that what that means is that we're gonna prepare the tax return to get the best result possible for our clients, and I think almost all tax professionals do this within the rules, yet still explaining to clients that there are some things that there are judgment calls and there's some things that sometimes, you know, could be deductible, could not be deductible, could be partially deductible, depending on their facts and circumstances. The IRS does not email you. They don't call you. They're typically not gonna just randomly show up at your door without a lot of notice.
Speaker 2:And They're not gonna text you a demand, most likely? Right.
Speaker 4:No. They will not. They will not do that. The best and I know we've had our friend who's an amazing enrolled agent, Andrew Pools, on couple times to talk about IRS representation. I would say the IRS's biggest ally is fear.
Speaker 4:So that fear that you're gonna get examined is their biggest ally. My personal opinion, and I've been very fortunate to, to teach for the National Association of Tax Professionals or the tax season updates this season, and we went through representation work and in my personal opinion and just talking to other practitioners is that the IRS is gonna focus their efforts on collecting penalties more than tax. So for instance, John, if you're if you own a business or a partnership and you didn't file you you filed your return late, let's say you're three months late and you have five partners in the partnership, That would be about a $3,000 late filing penalty. The IRS much easier for IRS just to try to collect that penalty because they have evidence that you didn't file. Hopefully, you're electronically filing.
Speaker 4:But let's say there's a reason you can't and you have to mail it in certified return receipt requested, instead of IRS bickering over business use percentage of your cell phone bill. You know, that that's just the that's just a lot of there's not enough the juices are worth the squeeze, in other words. There and you can tell by, you know, with with the kind of the two newer tax tax laws coming into play, the Secure two point o act and the Inflation Reduction Act, that their penalties are out there for not reporting cryptocurrency transaction, not reporting foreign, you know, foreign bank account and foreign assets. So those are the high high enforcement areas. It but understand if you're listening to this, because now it sounds like we're trying to scare you.
Speaker 4:Right? Hey. It's okay. We have clients we have clients that that live on the border of Canada. They like to gamble in Canada.
Speaker 4:They go into Canada. They actually won some money in Canada. They pay Canadian tax. Actually, sometimes they have a cottage in Canada, especially where you're from in the Detroit area. A lot of people bought cottages in Canada Many Years ago.
Speaker 4:Owning a cottage in Canada doesn't mean you have to pay tax like, file a Canadian tax return, but what happens when you sell that cottage? Yeah. There's some Canadian tax to pay. You'd still report that sale here in The US. You take a Canadian you take a tax credit for that on The US side.
Speaker 4:My point is, don't don't not do things because you're worried about the tax reporting. A a qualified tax professional can help you out with your foreign bank account reporting, foreign asset reporting. And, so don't don't don't be afraid. Don't be afraid of them. Be not afraid.
Speaker 4:And, you know, the so those that's where, so those enforcement areas and we talked about this, I think, in our midyear checkup about the IRS always issues their dirty dozen, as far as enforcement areas that, so that and what they're really looking for. Now, again, they're gonna be looking for, for things other than that. There's a chance that you could get examined just by chance, but, typically, it's gonna be something that is that is, a high enforcement area for that year. The average taxpayer, your audit risk is extremely low. He had It's not gonna happen.
Speaker 4:Pretty much not gonna happen. And one more thing to consider, you're not going to go from getting a getting what we call CP 2,000 notice, meaning the IRS has some on file that that you didn't you report could have been an innocent omission. We're gonna we're gonna talk about ten ninety nine k's and all those changes in a future podcast. I called it the the Taylor Swift law. Of Of course, you know, Swifties out there get get all excited about that.
Speaker 4:But my point is, John, I know you're a Swifty. Of course. Yeah. Of course. Yeah.
Speaker 4:So let's say you bought four Taylor Swift tickets when she came to Detroit, and you sold them to your friends, not maybe not even as a at a profit, but they then owed you the money. Well, if you got Venmoed more than a certain amount of money, $600, now you're getting a $10.99 for that. Well, you're not in the business of selling tickets. It was a personal transaction. The point is you might not report that on your tax returns because you didn't know that.
Speaker 4:Well, this year, you have to report it. Doesn't mean you're gonna pay tax on it. And a lot of times, most IRS communications, like I said like the CB 2,000 I just mentioned, could be resolved quickly without escalating through tax courts and, you know, you're not gonna go from getting an innocent IRS letter to someone seizing your home and and putting tax lien on it.
Speaker 2:Right. So Which is an excellent segue into people being afraid of how much
Speaker 3:they actually owe in taxes. You know?
Speaker 4:And there's been so many changes with the with the tax cuts and jobs act and then with people getting the advanced child tax credit a couple years ago during the pandemic. There's a lot of confusion on how to properly fill out a w four form, which is your tax withholding. If you're worried about how much you're gonna owe, you could probably take about one twentieth of that time and put the pieces together to have a tax projection done. We are at the October. My advice is if you're so concerned about this, which a lot of times you there's valid reasons to, Pretend October 31 was December 31.
Speaker 4:Pretend the year end ended right now. Figure out where you're at on your tax with your tax situation. You have two months, and you you know that we believe that your tax churn is a verb, not a noun. It's something you should be thinking about all year round, but you have two months to basically plan now for the rest of the year, and then some of the strategies can overlap into next year. Don't be afraid of it.
Speaker 4:Just figure it out, and there's no % tax. Yeah. I always crack up like, well, I got this bonus from work. 40% is going to taxes. Like, alright.
Speaker 4:Well, you tell you what. You give me you give it to me. I'll give 40% of taxes, and I'll keep the 60.
Speaker 2:Yeah. There you go. So really what really the the kind of closing note on that one specifically is that you do have control of the relationship. It just takes some effort.
Speaker 4:You control your tax if you want. If you don't want to, the IRS is gonna pick your tax. Awesome. That's up to you. And that's what I tell our private CPA firm clients.
Speaker 4:That's what we tell a lot of people that are just working with us on the tax planning piece or people in our defeating taxes private Facebook group. And then rolling
Speaker 2:into last but not least, inheritance. So I know this is one that people would almost die on a hill saying that they will have to pay a ton in taxes too. They are that strong and feeling that is the case. Now is that the case is the question. Right.
Speaker 4:Yeah. Right now under this under the tax cuts and jobs act, someone, someone could pass away with just a hair you're gonna throw a bald joke in against me. There it is. Million dollars of assets, and they're not being estate tax paid. So married couple, you're looking at almost $26,000,000 of assets could pass to beneficiaries with no estate tax being paid.
Speaker 4:That being said so it's very, very rare there's any any type of estate tax paid in this environment. There should be some proper planning, and we do have clients that are that are currently, moving assets out of their estate into their beneficiaries estate under these current rules. Because just understand without getting too technical and we're gonna do some additional podcasts on this, the state tax laws are very, very taxpayer friendly right now. Now if so just the fact that you inherit property typically doesn't trigger a tax for over 99% of inheritances. Where a tax might get paid would be as if you inherit an IRA or an annuity, and that annuity has money in there that's pretax or IRA that no one's ever paid tax on.
Speaker 4:So you're a beneficiary the beneficiary IRA. So what you need to be concerned about is when you take money out of a of an of an account that you inherited, that's where it could be taxable. It doesn't necessarily mean it is, but just simply getting those assets in your name is very, very rarely taxable. So rest easy on that. We, you know, we had our episode on revocable trust.
Speaker 4:We're gonna talk about gifting. There's a you know, as well in in in the future episodes, but but just know that, you know, there's an annual gift tax exclusion as well for 2023. That's $17,000 per person. So, again, gift tax and estate tax, very rarely paid in this environment. Doesn't mean you shouldn't be thinking about it.
Speaker 4:Be my one word of advice is this. If you did inherit assets, especially if it's real estate or stocks, bonds, talk to your tax professional about a concept of step up in basis. Meaning, if the if grandma bought a share of stock of Coca Cola for $5, and now it's worth a hundred dollars and you inherit it, and you go sell it for a hundred and $1, you're only paying tax on that $1. You get a step up to the fair market value in basis instead of where grandma sold it should be paying tax on $96. But, again, don't be fearful of inheriting assets.
Speaker 4:99% of the time, there's no tax on the fact that you inherited them. At times, there could be a tax on you taking the money out of the asset. Let's talk to your tax professional if you're and if you you need any help, jump into the defeating taxes private Facebook group, and we will make sure you are in the right direction. So, yeah, let's let's go out and trick or treat happily now, and let's let the kids have some fun. John, in two days, guess what's gonna happen?
Speaker 4:You're gonna be at the store. If it's you, it's Home Depot. And you know what's gonna be on? Holiday music.
Speaker 2:Oh, man. Don't don't remind me. That's what I'm afraid of. That this podcast has been things to be afraid of that's nontax related. But thanks, Chris, for running through those, man.
Speaker 2:Up I mean, those three we see all the time. Right? So people are afraid. Just kinda recap them just very briefly those three things. Everybody seems to be terrified of an audit or an examination.
Speaker 2:Don't be. As we mentioned, it's not that bad. It happens. Not saying that you're gonna go you're not gonna go to jail necessarily. They're not gonna go take your car.
Speaker 2:They're not gonna seize your bank accounts or levy your bank accounts. And then also just really, you do have control of the tax you pay, meaning you have control, believe it or not, of that relationship with the IRS by way of tax planning and strategy implementation. And, also, as far as for that inheritance go, hopefully, that time comes later in most cases unless you really want it to come earlier, then you got other problems, of of somebody you don't want around anymore, but you want the money. We're not here for that. We're not we're not a family law, family psychologists, whatever the best term is for that.
Speaker 2:So do not be afraid of being taxed to death, pun intended. That's my dad joke for Halloween. And, again, we will see everybody again, same place, same time, next week here on the Teaching Taxable podcast. Hey, everyone. Thanks for hanging out with us this week here on the Teaching Tax Flow podcast.
Speaker 2:Just wanted to say thank you to everybody as always for the feedback, the ideas, the content, etcetera. The list goes on and on and on. We absolutely love doing this podcast. As we always mention, we love hearing the success stories and just overall the confidence that we are helping to build within The US taxpayer base. So that being said, as you always hear from us, feel free to hop on that defeating taxes private Facebook group with any questions as well as feel free to email us at any time, hello@teachingtaxflow.com.
Speaker 2:And without further ado, happy Halloween. We'll see everybody next week here as always.
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