¶ Literal guinea pigs
So, Steve, I heard you had some guests recently at your house.
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.
Oh, class pets.
class pets. Yeah, exactly.
forgot about
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.
ha, ha
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.
Okay, that sounds kinda fun. Uh, how long did you have them?
Uh, just over the weekend. Sent them
Okay, and they survived, I
they survived, yes. Warm, alive.
That's cool. I once had a pet chinchilla. That's as close as I've come to having a guinea pig.
What is a chinchilla?
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.
Lucky for us, the dog was not interested in eating these guinea pigs, so that was, that was not a problem.
that is lucky. That could have been
I was a little concerned about that.
Yeah. Did the dog even react? Did they notice? Did, like, what
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.
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.
Yep. Hello there, dear listener. I am Steve.
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,
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.
¶ Steve gets some ominous mail
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.
Hold on. So they were telling you, you owed a bunch of taxes.
yeah.
Okay.
That's, that's the right, right at the very top of the letter. They just cut right, right to the chase.
No small talk, no pleasantries.
You owe us a bunch of money. And then they spend another, nine pages, eight pages explaining how they arrived at this conclusion,
Whoa.
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
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.
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.
Okay. But you still have to deal with this somehow, I assume, right?
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.
¶ What went wrong?
So it was related to investments.
Okay.
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.
So it was a reporting issue from the brokerage, it sounds like? Did I get that right?
Uh, yes, but, um,
Or just a mismatch between what they reported and what your employer reported or something?
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,
Okay. So this applies to anybody who gets RSUs as part of their compensation at their job. be on the lookout for this, potentially.
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
Okay. So the
that will be the end of it.
they didn't really make a mistake based on the information that they had. They're just missing some information, it sounds like.
That's right. Yep.
¶ What if Steve didn't have his documentation?
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?
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.
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.
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
Yeah. Yeah.
way of compensating tech employees, especially. So,
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,
yeah, we'll see if this convinces them. But I think I have a very strong case, so I'm not worried about it.
¶ Open your IRS correspondence!
So what are some lessons that you learned from this?
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
Yeah.
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?
¶ Should you hire a tax pro to do this?
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.
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
Yeah, right.
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
uh, theoretically it could be, but, uh, usually it's, it's not.
Yeah.
¶ Taking the deductions you're entitled to, as long as you can back it up
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.
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?
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.
Right. Okay. That makes sense.
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.
¶ Who's liable for your taxes?
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?
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.
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?
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
Yeah, that makes sense.
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
Yeah. I mean, you're trusting them, right. To do a good job. So
Yeah,
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,
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,
So now, you can speak from personal experience. Yes. You can empathize. That's awesome. All right.
okay.
that sounds like a good place to call it.
Sounds good. We'll see you again on another episode of It's Not About The Money. Enunciate.
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