Episode 38: Eliminate Your Fear Of The IRS


Dealing with the IRS oftentimes is stressful and frustrating. In this episode discover how to efficiently and successfully navigate your way through IRS notices and audits.


01:49 – What’s The Difference Between A Brown Envelope & A White Envelope?

02:42 – What Is The IRS Tax Hotline?

04:17 – What Is The Job Of The IRS?

05:04 – How Many People Should Review Your Return?

07:50 – How To Protect Your Return Against Filing Dates.

09:57 – When Should You Refuse To Talk To The IRS?

10:38 – How Do You Protect Against IRS Scams?

14:44 – What Are The Strategies You Can Use If You Can’t Pay Taxes?

20:20 – What’s The Best Way To Deal With IRS Auditors?

Announcer: This is The WealthAbility® Show with Tom Wheelwright. Way more money, way less taxes. Tom Wheelwright: Welcome to The WealthAbility® Show where we're always learning how to make way more money and pay way less taxes. Hi, this is Tom Wheelwright your host, founder and CEO of WealthAbility®. So, what if you never ever had to fear the IRS? Not those notices, not an audit, nothing? Today we're going to walk through how to deal with the IRS when you have to deal with them. Now of course, the goal is not to have to deal with them, and we'll talk about that too because there are ways you can actually make sure you have to deal with them less. It's like getting pulled over by a police officer. Nobody wants to get pulled over by the police officer because it creates stress. It creates anxiety. Tom Wheelwright: I remember a number of years ago when I lived in Maryland and the Maryland police force came with his great idea, “Let's stop motorists and thank them for obeying the law or congratulate them on wearing a seatbelt.” Well, people hated it because it just created stress and anxiety. Plus they didn't want to get stopped. They wanted to keep going. So that lasted like a month and they had to discontinue it. Well, the same is true with the IRS. Nobody really wants to hear from the IRS. Now, there's one exception to that. If you get an envelope from the government and it's brown, not white, brown, that's a check. You want to open that, deposit it right away. That's the good news. The good news is that brown envelope with the check. Anytime you get a white envelope from the IRS, it means the IRS wants some information from you or is saying that you owe some money. It's never really a good thing. So how do you deal with that? Tom Wheelwright: I have this philosophy. My philosophy is, do what you're really good at and that you enjoy doing. I don't know very many people that enjoy talking to the IRS. Now, I don't mind it at all. In fact, one of the advantages that tax professionals have is that we actually have a hotline. It's actually called the tax practitioners hotline where we can call the IRS and we don't wait in line forever and ever. I mean, sometimes it takes some time. It can take up to an hour. But remember, when you call the IRS, the general number, they may not answer the phone at all. They don't answer 100% of the calls. They don't have the people to do that. So when I call the IRS, I always get an answer and it's not somebody getting paid 10 bucks an hour. I'm talking to another tax professional who has some authority to make some decisions. So typically, when you get an IRS notice, it's one of a couple of things. Tom Wheelwright: First, it could just be that something you put down on your return is different than the information the IRS received. Let's say for example, that you put down what your wages are. This would be simple. You put down your wages and the amount you put down, let's say that you transposed a number or somehow you made a mistake and the IRS says no, according to our records, the number is not X, it's Y. Now, the very first thing you do in that case is you look to see if they're right and if they're right, you just pay. That's really the simple thing to do. Don't worry about it, don't stress out about it, just take a matter of fact. Remember the IRS has a very difficult job and their number one job is to administer the law. And they're actually the best at it in the world. Tom Wheelwright: The US Tax Compliance is higher than any other country on earth by a long ways. And the reason for that is because we've got good laws and we've got actually a fairly decent system. The IRS computers, there's a lot of work to be done to get them more up to date. They want to do more matching. That's what we call matching. So they've matched what you put down in your tax return with the W2 they received from your employer. That's a matching program. One of the things you can do to avoid that notice, of course, is to be accurate in your tax return. That's why, for example, when we prepare tax returns for our clients, we don't have a single person preparing. We have a person prepare. Then we have a person do what we call a detail review, which is to make sure it's accurate to the best of their ability. So they're matching the numbers against all the documents so we don't get notices. Tom Wheelwright: Then there's a second review that is looking at it from a big picture. That's typically where I come in and I'm looking at it, is there something we can do to either avoid IRS scrutiny frankly, or is there something that we can do to actually lower taxes or do we just need to make it look better on the return? That's part of avoiding an IRS scrutiny, is making it look better, making it look more appropriate to what it really is. And understanding that the IRS, there are certain terms the IRS doesn't like. For example, seminars. If you have a seminar expense, they may challenge that. Whereas if you had a continuing education expense, they may not challenge that. So there's just little tricks that you learn over the years. I've been doing this for 35 years, so there's little tricks we learn over the years and little things, they're just little things. Tom Wheelwright: We're not trying to obfuscate, we're not trying to hide anything from the IRS. We're just trying to present it in the best light possible. That's really what we're doing. In the most appropriate way and in the way that reduces taxes the most. So think about that. We have three people involved in the tax return process. If you're preparing your own tax return, you probably have one. Tom Wheelwright: So I would suggest if you do decide, let's say you just got a really simple tax return, even if you decide you're going to prepare it yourself, you're going to use some online program, I would suggest you have somebody, say your spouse, somebody else take a look at it and do a double check for you, audit it. That will avoid, I mean, if you really want to avoid the notice, that's the way to do it. Now, you may not care. If you do care, that's the way to avoid that notice, is to make sure your tax return matches all of the documents that the IRS may have received, 1,099, 1,098 which is your mortgage interest deduction, your W2, all of those things really do need to match up. And if they don't, then the IRS might send you a notice. Tom Wheelwright: Now, another time the IRS might send you a notice to say they just want some more information. Or they might say, well you filed late. And they'll say you filed late even though you may have filed on time. So this is a funky one. Let's say that you filed your return on April 15th and the IRS says you didn't file it until April 17th so you have a penalty. Because they charge penalties by the month, by the way. They don't charge penalties by the day. They charge penalties by the month. So if you're one day late, you have a month's worth of penalties. Tom Wheelwright: What you want to do in that case, when you file your tax return or make an estimated payment, if you're not doing it online, if you file something by paper, you want to make sure that you have some documentation that shows the proofs that you mailed it that day. So you want to send a certified mail return receipt, certified mail return receipt. If you're sending something by mail to the IRS, always send a certified mail return receipt to prove that you sent it on that day because the post office is going to stamp it. And then the return receipt is to prove that the IRS actually got it because they have to sign for it and send that receipt back to you. Those are two things. We always, we send everything out from our office, certified mail return receipt. That's just a little trick to do to avoid. Tom Wheelwright: If they do assess a penalty, then all you do is you just send them a copy of that and say, look, I filed on time. Here's the certified mail stamp. Here's your acknowledgement that you got it a few days later and here's where it is. Or they might say, well, we didn't get it at all. Well, now you've got the return receipt saying they did get it. So it's very important that if you're doing something by mail that you do it that way. If you're doing that electronically e-file, then you want to make sure that you've got the confirmation. The e-file confirmation that show that you did file it on time. So there's that. Those are those notices. Tom Wheelwright: Now another notice that you might get of course, is an audit. Now an audit, it's very simple. How to not be stressed out over an audit. All I have to do is write down these words, I will never speak to the IRS. I will never speak to the IRS. That is not your job. That's when you have to involve a CPA. Now, if you get a notice and you can tell that it's just a math error or something that you did or it's really easy to correct, let's say that they need a copy of your W2 or something, you may not need to involve your CPA. Tom Wheelwright: Now, I would always ask your CPA. And the reason is, is because one thing you want to make sure is that this is legitimate request from the IRS. there are a lot of scams out there, a lot of scams. By the way, the IRS will never ever send you an email, ever. They will never send you an email. So if you get anything that says it's from the IRS in an email, it's not from the IRS. They will never call you. They will always send you a letter. So if you get a call or you get an email, ignore it. Wait for the letter. Now, do not ignore the letters. I can't tell you how many times I've seen people ignore letters from the IRS and they pile up. What happens is there's actually a series of notices. Tom Wheelwright: The very first notice is just an advice of, okay, here's what we found. The second notice is you haven't responded or you're still late. The third notice, like the fourth notice, you could have a lien on your property. Now, the IRS made a mistake many, many years ago. They made a mistake with respect to my company's payroll taxes. They put a lien, we never even saw the notice. They just put the lien on our account. We didn't have any money in the account, but we had a lien that showed up as an IRS lien. Took me years to get that off, years to get off an IRS lien. So you do not want a lien put on anything. Please, whatever you do, don't let it go so far as to have them put a lien. It's really hard to get the lien off. Tom Wheelwright: Don't be afraid involving your CPA. The cost of talking to a CPA is minuscule in comparison to the time, anxiety and cost of dealing with the IRS yourself because we have ways to deal with it. Like I said, tax practitioner's hotline is the first place I go. I actually don't even like sending letters back to the IRS. We do once in a while, like let's say that it's a penalty for filling late and we didn't really file late or let's say that we got a penalty and we have a really good reason. Okay, sometimes we're going to write a letter, but frankly we're professionals at writing those letters. So I would suggest you not write those letters. The only time that I would think that you would ever want to deal with the IRS is if it's just a matter of it's a little mistake. Tom Wheelwright: Now, one of the questions is, what if they send you a bill you don't think it's right and it's for like 50 bucks? You don't think it's right. The question is, is it worth your time to dispute it? Because that will take you hours. Now, if you hired a CPA, the CPA is going to charge you more than that $50. So there's a lot of, a lot of people get, oh, the IRS made them stay and they screwed me out of $50. My advice, get over it. Just pay the 50 bucks. Seriously, it's not worth it. You're fighting machine and it's a very complex machine. If you ever saw that movie Hitchhiker's Guide to the Galaxy and the Bureaucrats, that's what that machine's like. It's tough to get through and you need to find somebody who can get through and that's why you hire a professional, like a CPA, to get through it. Tom Wheelwright: Now, sometimes you get to the point where you go, let's say you had a big, big income, but you made a mistake. You spent the money, you invested at something else, something happened. You had big medical bills, whatever, and you can't pay the tax. So let me explain a little bit about how that works. First of all, you still want to file your returns because the penalty for not filing a return is 5% of the unpaid tax per month. That's a boatload. If you owe $10,000, 5%, that's $500 a month penalty up to 25%, up to $2,500. The penalty for not paying is only one half percent per month, so it's 10% of that. So instead of $500 a month, it's $50 a month. Tom Wheelwright: What you do is you file the return even if you can't pay the money. Now, I would wait to file the return until latest. I'd file an extension, file return October 15th. Gives you some time, maybe you can get the money together. You're still going to have a penalty for those six months between April 15th and October 15, but only half percent a month, which by the way, it's like 6% of your interest. It wasn't that long ago when home mortgage, you paid more than the 6%. so it's not a huge penalty. If you actually file the extension and then when it comes time in October, you file the return on time. Now, once you do that, you're not going to do anything. You're going to let the IRS send you a notice that you owe money. Then at that point, you're going to get your CPA involved. But that could be, you might file in October, you might not get noticed until February. So by that time, again, you may have the money together. Tom Wheelwright: Now, let's say you can't get all the money together by the time you absolutely have to pay it. Then what you do is, the easiest thing to do is called an installment agreement. Installment agreement basically is an agreement over a period of years, usually up to five years, where you pay it back over and so on. Now, by the way, penalties continue to run and so does interest. You pay interest and penalties of that half percent a month while it's sitting out there. So don't ignore it. You've got to make that payment. And another requirement of an installment agreement is that you have to keep your taxes current for the coming years. Let's say for 2018, you couldn't pay and so you have an installment agreement for the 2018 tax year. But for 2019 tax year, you need to make sure you're paid in. So don't get behind on subsequent years. Even if you have a problem one year, make sure that your next year that you're all paid in, you take care of it. Tom Wheelwright: Don't let it go more than one year. That installment agreement, the IRS will pretty much give anybody an installment agreement. They really will. Now, sometimes you hear there's a lot of television ads called, they say, “If you owe more than $10,000, call us, we can get you out of it.” Well, 99% of the time, that's baloney. They can't get you out of it. Because if you have the ability to pay it, you're required to pay it and the IRS isn't going to let you off. Now, if you don't have the ability to pay it, let's say you had this huge income one year, it's all gone for whatever reason, maybe a divorce, maybe medical, whatever, and you literally cannot pay it back and still live, then what you do is you get what's called an offer in compromise. Tom Wheelwright: All of those ads, if you pay 10,000 dollars or more, call, taxes are us or whatever. Then that's where you either call them, better yet call your CPA and and say, look, I need an offer in compromise. Now, these people who are on the TV, they are specialists in offers in compromise, and you do need a specialist. So you just need to look at how much do they charge versus how much does somebody else charge and can they really do it? What's their experience level? Just like any other buddy you would hire. You need to make sure that they're experienced, they've got good reviews, that they know what they're doing and that their price isn't exorbitant. That's an offer in compromise. Tom Wheelwright: That is a legitimate option. It can take years to get through. Just understand, this isn't something you do and tomorrow you owe, instead of owing $20,000, you owe $2,000. It doesn't work that way. It takes a lot of time and you really do have to prove it. So don't take it lightly. Don't take taxes lightly. Taxes are our obligation. I'm not necessarily opposed to the idea of the income tax. I like roads. I like services. I like government services to a large extent. Now, I like to minimize taxes. Always want to do it legally. Always want to do it in a way that the government has said, this is the way to minimize your taxes, which is an incentive. Tom Wheelwright: Remember, all taxes, all tax provisions are some type of an incentive. They're either an incentive or a penalty, which is another incentive. So they're either a positive incentive or a negative incentive. But all things that increase or decrease taxes are incentives to do what the government wants you to do. So remember that if you're reducing your tax and you're doing it illegally, this is something, it's legal because the government wants you to do it. You're not evading taxes. Most of the times you're not looking for loopholes. You're looking for true ways to reduce your taxes. Now, let's say that you do end up in an IRS audit. Tom Wheelwright: Let's talk about IRS auditors just for a second. Now, we're going to do a show with an IRS auditor because I do want to do one just on IRS audits. Remember that for the most part, these are people that are doing a very difficult job. They know nobody likes them. I mean, can you imagine a worst job where every day you go to work and your best customers don't want to hear from you? They hate you, they don't want to see you, they don't want to hear from you. They actually detest the ground you walk on. Can you imagine a worse job than that? Seriously, some of you heard me say before, I would much rather a proctologist than I would an IRS auditor. I just think it's a really tough job. Tom Wheelwright: When we work with IRS auditors, we treat them very well. Now, that doesn't mean we give them stuff. They're not allowed to take anything, but we do make sure that when they come, they're going to come to our office, not your office. We do not want them in your office. Remember, you will never speak to the IRS. We want them in our office. We'll talk to them, we'll work with them. Our job is to make their job easier. That's our job. So when it comes to dealing with the IRS, just remember these are people doing a very tough job. For the most part, they're not bad people. Now, there are some bad apples, just like there are in every business or every organization. For the most part though, they are really just trying to do the job the best they can. So don't be mad at them. This is another reason, by the way, that you want a professional handling it is because a professional can have professional detachment because it's not our money. Tom Wheelwright: It's more matter of fact for us than it would be for you. It is emotional. Money is always emotional when it's your money. Then there's always this, well, they're doubting me. They're questioning me. That's their job. Their job is to question you. All they're trying to do is verify. They're not out to collect every last nickel. For the most part, they're not. They are trying to administer the law the best they know how and what they think the law allows for. Now, I frequently disagree with the IRS. What I will do in that case is I will work with them and I will help them understand and persuade them that my position is correct. Tom Wheelwright: Most of the times, I'm going to win because I have a lot more experience than IRS auditors, much more experience and much more education, much more background. I've dealt with this a lot longer and with a lot more clients. So I'm going to have an advantage over an IRS auditor and we have a lot of new IRS auditors because we lost a lot of the old experienced auditors. They're trying to hire new ones. They're trying to train them. I'm not trying to apologize for the IRS. What I want you to understand is that, be respectful, is what I'm suggesting. You will get more if you're respectful. If you get mad at them, you're not going to make it better. Tom Wheelwright: So let's recap. If you get a brown envelope, celebrate, it's a check, just deposit it. You might want to make sure it's right, but you're probably okay depositing it. If it's a white envelope, then there's a question. It's either an audit, there's a mistake or they think there's a mistake or there's a penalty. That's what the white envelope is. If it's a really simple mistake and you agree that it's a mistake, just pay it. Send them the money. Don't even think twice about it. You don't need to call your CPA, send the notice to the CPA, let them know because they're going to need it for your tax return next year. Because it has an impact. You do need to let your CPA know that you've got a notice. Tom Wheelwright: But if you prepared your tax return and it's a very simple thing and just a mistake, just pay it. If it's a big thing or if you want to dispute it, my recommendation is, don't talk to the IRS. Let your CPA, let a professional do that for you. Especially if you get an audit. And if you do, if you do these things, see, here's why we have professional tax return preparation. Unless you have a super simple return, like all you've got is W2 and maybe some interest income and a mortgage. If that's all you got, you're probably fine doing your own tax return. Tom Wheelwright: If you have a business, if you own real estate, if you have any kind of complicated transaction, I strongly recommend you hire a tax professional. And if it's a business, a CPA to prepare your tax return. Make sure that that tax return is reviewed. Make sure that your tax advisor understands the law. I would suggest you have them read Tax-Free Wealth and make sure they've read it before they prepare your tax return. Because you want them to make sure they understand, here are ways to reduce your taxes as they're preparing the tax return. So when we do all this, when we handle the IRS properly, when we take care, first of all, we never have to worry about the IRS, but what really happens is we're always going to make way more money and pay way less taxes. See you next time. Announcer: You've been listening to The WealthAbility® Show with Tom Wheelwright. Way more money, way less taxes. To learn more, go to wealthability.com.