My CPA has no idea…what do I do next?

Read The Transcript Below:

Ben (00:08):

Welcome back to the Least Boring Tax Podcast, AKA, the Retirement Tax Podcast. I’m your humble co-host, as always, Benjamin Brandt. And joining me is International man of mystery, Steven Jarvis. How are you doing today, Steven?

Steven (00:21):

Ben, I’m doing really good. I have a quick tax sort of anecdote to share, it was my wife’s birthday. Yesterday we were out looking for waterfalls and we come across, we’re in a national park and there’s this hole in the ground outhouse in the middle of nowhere that probably costs the federal government millions of dollars to put in. But I just, anytime I’m out seeing these kinds of things, I always like to tell myself that my tax dollars go towards that instead of going towards things like interest on the national debt. And then, because I’m a numbers nerd, I did the math really quickly on how much interest is accumulated every second on the national debt, about $20,000 a second. So my tax contribution to the country is gobbled up in seconds. Definitely less than a minute of just interest. So on that fun note, let’s talk about tax planning.

Ben (01:11):

Oh yeah, I pay a good amount of taxes, but I think I’m well under a minute. I want to meet somebody that’s over a minute.

Steven (01:16):

Most of us are under a minute. To get over a minute, you have to have paid over a million dollars in taxes. So aspirational goals, but we’re going to keep helping people not get to that minute mark.

Ben (01:28):

I would aspire to someday pay a million in taxes. I couldn’t hardly wrap my mind around that, but that means like we tell clients you get to pay taxes, that means somewhere we made money. I was answering a question on an online forum the other day from someone that wrote in and they had read that there’s no income state income taxes in Florida, and they’re wondering why people don’t move to Florida just to do Roth conversions because it’s free conversions. And my response was, well, usually your state taxes are an afterthought after you choke down your federal income tax bill. It’s sort of like the tip at the end of the meal is the state taxes, the bill is the federal income taxes, and that’s why, because the interest is 20,000 a second.

Steven (02:06):

Yeah, Ben, it sounds like you take the same approach. Usually when I’m talking about states and Roth conversions, we’re talking to clients who are already thinking about moving and then figuring out if it makes sense to do it before or after the move. I can honestly say I’ve never worked with a client who has moved for the exclusive reason of doing Roth conversions. Because even if you’re in California paying 13.3% income tax and you want to move to Nevada or Texas or somewhere close that doesn’t have income tax, you’ve probably got a lot of other things you’re considering aside from just, Hey, how much am I going to convert to Roth?

Ben (02:37):

Yeah, I think this person that wrote the question was thinking that there was no taxes whatsoever because they lived in Florida. Another kind of interesting lesson is they posted a screenshot of their question. They asked Google and Google will now preempt their search results with AI generated results. And it said as of February, 2024, there’s no income tax in Florida state income tax. And my interpretation of what they misinterpreted is AI doesn’t have up to the moment training data because this training data has beginning and an ending. So the as of February, 2024 was probably the AI telling you that that was the end of its training data. So it doesn’t have any more current information. Not that this law changed in February of 2024, which as a person that plays with AI a bunch, I recognized what I thought that was, but your average person Googling it probably doesn’t. They think, oh, something just recently changed. Maybe I can move to Ford and get free Roth conversions.

Steven (03:29):

Yeah, Ben, we could go down a whole rabbit hole on ai. Lots of people do. I like confirming things grew through Google. It’s a pretty powerful search engine. And notice the same thing that it gave me an AI generated result, and the AI generated result contradicted itself within the first two paragraphs because it was laying out the thresholds for single, the thresholds for married filing jointly. But it applied the principle in opposite directions based on the filing statuses, which it should have been different numbers but the same direction. And it was a small thing. Most savvy people would’ve noticed it. But no matter where we’re getting our information from a couple of guys on a podcast, from AI from Google, we always want to make sure we’re applying these things to our own situation and making sure we understand what we need to do for ourselves.

Ben (04:10):

Understanding what we need to do for ourselves, and then also understanding where, and I think I could bring this all together here when we have a question that we don’t have the answer to, where do we go next? So we can Google things, we can go to chat gpt, I can text Steven, Steven can text his team. Steven can call the IRS or inform with them. He’s got all kinds of funny of fun software to use. So the question of today is where do I go when there’s a question that I don’t have the answer to? And actually you and I, Steven have a joint client. We’ll call them Jim and Pam just because everybody watches the office and knows who Jim and Pam is. But Jim emailed us earlier this week with a question. Do you have the question in front of you? I could pull it up if we don’t.

Steven (04:51):

I don’t have it in front of me, Ben, but I remember what it is because these ones stand out to me. So Jim basically writes in and says: Hey, got my refund, but it was a hundred dollars more than what you put on my tax return. I can’t figure out why, any idea why, even though it was only a hundred dollars compared to a several thousand dollars refund. I really appreciate that Jim’s paying attention that he’s asking the question because we really should be paying attention when we’re doing these things.

Ben (05:19):

And I think I do know the reason why Jim got more than he asked, and I think we’ll break some news on the podcast here. You and I always talk about the IRS is to use your money for a whole year and they don’t pay you interest. We can break this news in the podcast now, I think the IRS has finally started to pay interest. When they owe you money, they owe you 1500 bucks, they’re going to pay you back 2,500 because they used your money for a whole year. Can we break that news on the show?

Steven (05:41):

I think that’s the kind of stuff that gets people saying fake news all the time. So that’s true. Let’s not wander into the fake news territory. There are very limited specific situations where the IRS will in fact pay you interest, but it is very specific and it doesn’t apply to most of us, and it certainly is not the case when they just happen to give you a refund. But yeah, this one was interesting, Ben, because we’ve had a couple of situations this year. We’re going to leave Jim and Pam aside for a second because it doesn’t apply to them. But we’ve had some other clients who have reached out to us and said: Hey, I got a refund amount that was different than what was on my tax return. Any idea why? And the first thing we have to respond and tell these clients is: Hey, we actually we’re really familiar with the IRS’s process on this, and for whatever reason, the IRS will send money and then separately in a different envelope with a different stamp maybe just to prop up the postal service. Usually a few weeks later they’ll send you an explanation as to why. Now I’m not aware of any situations where they won’t send that explanation. So if you’ve had one, please let me know. It’s just there’s a time lag. And so we have this whole group of clients that basically what it came down to is the IRS calculated their underpayment penalty for not having made payments throughout the year differently than the tax prep software that we use. And so now I’ve got a question out to my tax prep software. I’ve got a couple of questions out to ’em of one, how did this happen? Thankfully, it was small dollar amounts and it was in the client’s favor. My bigger question is: Hey, it worked out nicely that it was in the taxpayer’s favor. This is going to look really bad for me if it would’ve gone the other way. And there’s this math, and you and I were talking about this before we started. I look at the return close enough to know that it was in the right ballpark that it looked about. None of them were hugely off, but I don’t redo the math on every single calculation. That’s what the software is for.

Ben (07:26):

Right? And so the lesson to take away from this I think is, and we’ll talk about what the lesson is, but if a client has a question, the client calls me. If I have a question, I call you and you can call and you deal with the IRS on a daily basis. So you know where to get the answer from. But I think what the listeners should take away is if you have a question, where is a good place to look? Now we can Google things and you’ll most of the time get the right answer. You can ask AI or chat GP, and then my expectation of working with another professional, and Ben, IT, and as long as you know how to use it and give your query correctly, most of the time get the right answer. But ultimately having someone in your back pocket where I don’t need to have the CPA or the CFP manual memorized, but I can go to someone that will be able to find it, and they don’t have the manual memorized either, but they know the order of operations or how to get to the flagpole to run the question up the flag.

Steven (08:19):

If we go back to Jim and Pam for a second, they sent the question in. I immediately pulled back up their tax return to see if anything stood out. And Ben, at the end of the day, I have no idea why it’s a hundred dollars different. And I let the client know that I always err on the side of transparency. And so I wrote back and said, Hey, Jim and Pam, really appreciate you reaching out with this question. Here’s what I do know about how the IRS works. And honestly, in your situation, not sure what that a hundred bucks is, but within the next couple of weeks, you’re going to get a letter from the IRS explaining what it is, and you just go ahead and forward that on to me and we’ll take care of it together. So we’ll have to follow up in a couple of episodes once that email or that letter’s come in from the IRS so we can figure out exactly what happened to Jim and Pam and why they got an extra a hundred bucks, it makes me think of the old Monopoly card. That’s bank error in your favor.

Ben (09:03):

Bank error in your favor. Yeah. So that’s a great, I don’t know if we ever do teasers on this show, but that’s a great teaser to tune in a few weeks to see if, because we’ll learn together what Jim, why Jim and Pam got an extra a hundred bucks and they can go have dinner on the IRS. Like you say, bank error in your favor collect a hundred dollars.

Steven (09:20):

Well, if you’re a DIYer, it is helpful to understand that the IRS has this process so that I wouldn’t immediately start trying to get on the phone with them. That’s a nightmare. I wouldn’t worry that something’s gone cataclysmically wrong. You’ve got to wait that extra couple weeks to see if that letter comes. You can also go to irs.gov and if you don’t have an IRS account set up, it’s good to set one up. There’s not a ton of information there, but sometimes they’ll at least be a transaction history to see what the IRS is doing on your account. So that’s a good step to take. But if you work with a tax professional, absolutely ask him the question and then my expectation of working with another professional, and Ben, love your input as well. I don’t expect them to have all the answers as long as they’re transparent with me when they don’t and they have a plan for what we’re going to do if they don’t have the answer immediately.

Ben (10:04):

Extremely important. I know we have advisors that listen to the show as well. I don’t think a client is ever going to be upset when you say, I don’t know the answer, but I know where to find it and I’ll get back to you. I think where we would get in trouble as advisors, as professionals is if we think our value is having the manual memorized and we give kind of an off the cuff answer that may or may not be correct, I think that’s where you may be getting more trouble. So clients really, they want an answer. They don’t need you to have it memorized. They just need go find the answer, bring it to me. You mentioned claiming your IRS username and password claiming your account. The IRS definitely agree with that. Same thing with the social security website. There are some identity theft things that we can get out in front of or be made aware of if we own both of those accounts. So have your IRS account and your social security account. I check in sometimes I’ll forget with quarterlies, did I pay X dollars or XY dollars last quarter? I can log in and everything’s what was paid, what year it was applied to. Sometimes, you have to pay money in March for the pr,evious year, and it’s got all that itemized. So that’s a great thing to do. If you don’t have that, it’s fairly easy to set up. I would recommend everybody go look into that.

Steven (11:09):

Yeah, Ben, as we were talking through this stared client, one of the other things that came to mind for me is again, and this was a hundred dollars and the client was great about it. They clearly weren’t upset or ready to burn anything down, but they were curious as they should have been. But it got me thinking that especially as we transition from our working years to our retirement years and some of those gap years in between, taxes start getting a lot more complicated. Taxes change quite a bit as we get into retirement. And Ben, I thought you put this really well that your returns, you might have years where your returns still feels relatively simple, but especially when we get into retirement, our options suddenly become endless because we went from working a lot of our career as a W2 employee where someone’s withholding our taxes where we have a set salary, we can decide to put money into a 401k, but we’re typically not taking money back out. We’re not trying to make a plan for the timing of those distributions. And so we get into retirement, suddenly we have this huge list of choices and choices that we can make and then have to adjust and then have to remake and have to revisit quite often. And so there are a lot of things that individually might feel simple or easy or insignificant on their own, but we start adding these together and it can be really helpful to have somebody helping you look out for all these things.

Ben (12:22):

Yeah, yeah. Even straightforward returns can feel complex because there are an unlimited number of things that we could do. Clients have questions like, I got X amount of dollars from social security, but the number that flows through to my tax return is different. Or for clients, different states might tax social security and pensions differently than they might tax capital gains. So while it’s simple and straightforward, it’s not K ones and it’s not all this other kind of panamanian shell corporations or whatever that would be. There are unlimited options. So it is if your taxes were very straightforward during your career when you’re a W2 employee, I think it does make sense to listen to podcasts like this and just start to understand a little bit of the nuance of even though my return is still straightforward, there’s a lot more moving parts in retirement to think about.

Steven (13:09):

Absolutely. Ben, as you’re describing that, it just triggered a memory for me as we’re recording this. We just coming off the 4th of July holiday, so thank you everyone for your patriotism through your tax payments. But anytime there’s holidays, there’s lots of time with friends and family, and it just seems to concentrate the number of times I hear things that start with, well, my friend said, or my uncle told me, and then follows with some nonsense about taxes. And one of the themes I heard through this last set of holidays was people not filing tax returns. And there are situations, and there are some people who get into retirement, typically only if you have very, very little income in retirement, you have social security, and that’s about it. There are situations where you might get to a point where you no longer are required to file a tax return, but especially for the people who listen to a podcast like this who have a level of income and savings and retirement accounts where they need to be strategically planning the chances of you getting to a point where you’re not required to file a tax return, let’s just go ahead and assume for safety’s sake that it’s little to none and that if that ever happens, it’s a bonus, but most people are going to be required to file tax returns. I had three or four different situations as described to me, and in every situation, from what I was being told, it really sounded like, well, I haven’t gotten caught yet, so may as well keep trying.

Ben (14:27):

Well, there’s a lesson there too. Yeah, you could hear from someone, I’ve been doing this for the last several years and it’s never come up. That doesn’t mean it’s a valid strategy that just means they haven’t caught you yet and maybe they never will. But honestly, for the money, especially if we’re talking a lower income person that maybe they’re on the threshold of maybe they should or shouldn’t file, I don’t think it’s worth it. I think pay your taxes, I think you’d rather owe money to the mob than the IRS. So when in doubt file the return. I wonder if this has come up more recently because the standard deduction has doubled and our social security checks certainly haven’t doubled, saying there’s more people kind of in that zone where their standard deduction is going to be more than their income and they don’t have any other income sources other than social security, which may not even be fully taxable at that income level. So I get where that’s coming from, but I think it’s a measure twice, cut one situation for me.

Steven (15:16):

Yeah, absolutely. And Ben, you referenced the standard deduction. That is a good rule of thumb to keep in mind that if you had income, it gets a little more complicated with social securities involved, but if your income is higher than the standard deduction, which for 2024 for married filing jointly, that’s just under 30,000 for single. It’s just under 15,000 if your income’s over that just plan on filing a tax return. It is interesting. It might be a combination of the standard deduction going up. I’m a bit cynical, so I think it’s also just the proliferation of the internet and people being able to say whatever they want, which I’m a huge fan of free speech, man. I wish people would stop talking about taxes, so not a change I’m going to vote for, but there is some serious nonsense out there.

Ben (15:57):

But Steven, the guy that said it was standing in front of a private jet on one video, and then he was sitting in his Ferrari on the next video and he said, only suckers pay income taxes, and I don’t want to be a sucker.

Steven (16:08):

Yeah, don’t be a sucker, Ben.

Ben (16:09):

Yeah, yeah. Most of those guys are on the buy, borrow, die plan, which is not appropriate for hardly anybody, but some of these guys can pull it off if they got a lot of company stock and things like that, but not recommended for your average Joe.

Steven (16:21):

Yeah, and the even worst part about this is not only you probably likely should have been filing taxes, and it’s possible that the IRS will notice because the IRS is still getting copies of your 10 90 nines and your W twos, they’re still being told you’re owing income. They just haven’t gotten around to the enforcement. But if you don’t file a tax return, the statute of limitations does not start counting. So while typically the IRS might have three to seven years, depending on the situation to go back and look at your tax return, if you haven’t filed taxes, they can go back as far as they want and they’re going to charge you taxes and they’re going to charge you penalties, they’re going to charge you interest and it’s going to be a nightmare.

Ben (16:58):

What happens if I pass away before they find me? Are any of my spouse or family members be responsible? Do you think maybe this is the end game for people that I’m putting on the spot?

Steven (17:09):

That is a great time to be hiring an attorney? I think so. I thankfully have not dealt with that personally, but tax debts are pretty high on the list of ones that are really tough to get rid of. So not going to try to speak off the cuff on that one because I don’t thankfully deal with it firsthand. If that happens to me, if I have a relative passed away with a huge tax debt and me named in anything, I’m definitely calling an attorney.

Ben (17:32):

I like that. Yeah. If any of our clients are in that situation where they might be on the hook for someone else’s unpaid tax bill, let us know and we’ll research that. I’m curious. Excellent. Any parting thoughts for us today? Steven?

Steven (17:44):

Ben, as always loved the conversation. Really appreciate being able to share these stories and hopefully other people avoid some of the same pitfalls and feel a little bit more confident about the tax plan they’re doing.

Ben (17:53):

Can I tease next week’s episode?

Steven (17:55):

Oh, please tease next week’s episode.

Ben (17:56):

 So we mentioned the billionaire in front of the private jet and sitting in the Ferrari. Oftentimes they’re selling a course or a membership where they’re going to tell you to buy real estate because you never pay taxes. So next week we’re going to be talking about a situation where I bought real estate and I didn’t make money, and I think I’m going to have to pay taxes. So Steven’s going to walk me through that and you guys can hear about it on next week’s episode.

Steven (18:19):

Wow, Ben, that’s two teases in the same episode. What are we doing here? This is exciting stuff. Be sure and tune in next time and tell next time, don’t let the tax man hit you where the good Lord split you.

Steven (18:29):

Hi everyone. Quick reminder before you go. While Ben and I feel very strongly about the information we’re sharing on this podcast, it is for educational purposes only and should not be taken as specific tax, investment or legal advice. You need to make sure that you are working with a professional to evaluate how these concepts apply to your specific situation before you take action.