Episode 10: IRS’s Dirty Dozen

Steven Jarvis:     Well, hello, everyone. And welcome back to The Retirement Tax Podcast. I am your host, Steven Jarvis, CPA. And as always, I have here with me Benjamin Brandt, who has so many great qualities, I don’t even know how to begin listing to them. So, Benjamin, welcome.

Benjamin Brandt:         I’m so happy to be back recording with you, Steven. I can’t believe it’s already February.

Steven Jarvis:     Yeah. So this is getting released in February, but this is the first time we’ve talked in the new year. So I feel like I still need to say, Happy New Year to you.

Benjamin Brandt:         Happy New Year to you as well, Steven. We had quite the 2021 together.

Steven Jarvis:     Yeah. Yeah. We had a lot of fun. There was some good adventures in there. A lot of great conversation around taxes and retirement and some of our favorite topics.

Benjamin Brandt:         Exactly. That’s exactly right.

Steven Jarvis:     Yeah. Well, so for today’s episode, I brought this one up because it’s something I always like to take a lookout for on the IRS’s website. And I know there’s not much fun that comes along with the IRS, but it all always makes me smile that the IRS puts out something called the Dirty Dozen. And they usually update this a couple of times a year, you can find it at the IRS’s website.

                           But they take time to put together some of the most common frauds and scams that go on that taxpayers can fall victim to, as just a reminder of things to be on the lookout for. So we wanted to talk today about some things to keep in mind and be on the lookout for.

Benjamin Brandt:         Dirty Dozen, that’s a really creative title. It really invokes like a Dirty Harry image of like, you’re going to try to scam taxpayers, do you feel lucky punk? That’s what I think of when I see a Dirty Dozen.

Steven Jarvis:     Well, and this is the CPA and me coming out, it is just a little bit disappointing to me that when I click on the link, there aren’t actually 12 bullet points. Maybe they get to a dozen throughout the year, but being the numbers guy, I want to be able to click on it and say, oh one through 12.

Benjamin Brandt:         Well, the tips … marginal tips are a dozen. Effective, it’s only six.

Steven Jarvis:     Exactly. That’s tax humor at its best. So, Ben, I know you had a direct experience with a client that had an unfortunate experience with the IRS. And so I want you to share your experience first, and then we’ll put some context to how this could really happen to anyone.

Benjamin Brandt:         Yeah. So I had a client several years ago, and I tell this story all the time … with her permission, of course. I’m not going to use her name or anything like that. But the reason I share this story is because when I tell the story, it sounds so ridiculous. You’re going to hear this story and you’re going to think, who would really fall for that? I’m smarter than that. And I share this story because it’s ridiculous, but these scammers that are going to call you on the phone, or you’re going to click on something on your computer and they’re going to somehow be in your computer … You’re only going to get scammed once in your lifetime, or once every few years. They’re doing this all day long.

                           So they know exactly what buttons to push. They’ve got a script that they’re reading off of. They do this all day. So they’re going to know what buttons to push, they’re going to know how to get you worked up. The more excited they get you, the worse decisions you’re going to make. You’re going to make bad decisions under pressure. And they know how to turn the pressure. This is what they do all day long.

                           So my client got a call and they said, this is the local Sheriff’s Department. And we are on our way to your house, unless you can come up with $2,100, or whatever the amount is, immediately. And the only way that we’re able to … we can’t take a credit card over the phone. We can’t take a digital check. We need you to go down to the grocery store and buy iTunes gift cards. And we need you to read the code off of the thing. And there’s literally a sheriff headed to your house right now, he’ll be there in 15 minutes. So you’ve got to move quickly. Which, again, sounds totally ridiculous, but put yourself in her situation. There’s a person on the phone that says you’re about to go to jail unless you do this thing.

                           So luckily, it was only a couple thousand dollars, and this wasn’t financially detrimental to her. But she went and got the iTunes gift cards, read the number over the phone, and then her money was gone. The reason it’s iTunes gift cards, I’m assuming is because it’s an untraceable amount of money. That now this person has money that they can go buy the new, I don’t know, Fergie album or whatever you do with that money.

Steven Jarvis:     For $2,100.

Benjamin Brandt:         But anyway, so that … right. So that’s my most recent client getting scammed by an IRS scammer.

Steven Jarvis:     Yeah. And this is one of the areas included … not that specific story. But this is one of the areas included in the IRS’s dirty Dozen. And frequently, it is, but it’s definitely on the 2021 list. And one of the reasons this gets highlighted is because if you’re armed with the right information, this is one that you can definitely avoid if you know what to look for. And really, the biggest thing to remember here is the IRS never starts with phone calls, and the IRS does not collect money over the phone. The IRS always starts with letters.

                           If the IRS does have an issue with something you’ve done … which happens. I actually had a recent experience with a client who, a year, maybe even a year and a half after the fact, got a letter about tax return they’d filed and all these penalties and interest they owed. That they, honestly at first, they thought that this can’t possibly be real. How is the IRS coming after me for this? Because it was thousands of dollars. But it’s always going to start in the mail. That letter’s going to include a phone number you can call, so that if you ever were to get a phone call, and you think, oh, this sounds really legitimate, this much must really be the IRS. I mean, you graciously hang up the phone and go back to that letter and call the number on the letter. There are steps that you can take to make sure that you aren’t just ignoring the IRS, because they will keep accruing more interest on you.

Benjamin Brandt:         Yeah, don’t do that.

Steven Jarvis:     Yeah. Don’t just ignore the IRS. They might be backlogged, but they are relentless.

Benjamin Brandt:         That has to have come up in a trial at some point, where, why did you ignore us? Oh, I thought you were a scammer. I was just being responsible.

Steven Jarvis:     How can you charge penalties that are that large? Yeah. Some of the penalties for not filing or not reporting income, they do become significant.

Benjamin Brandt:         Absolutely. Absolutely. Okay. So phone number on my caller ID, I don’t recognize it. I make the mistake of answering it. It’s an IRS agent and they’re trying to scare me. That’s almost certainly a scam. They’re going to start with a letter. It’s going to be official. There’s going to be some kind of a case number or something on it. There’s going to be a one 800 number on there that I could call or we could continue corresponding by snail mail.

Steven Jarvis:     Yep.

Benjamin Brandt:         And so this is going to be a physical letter. They’re not going to email me either.

Steven Jarvis:     Nope. It’s going to be a physical letter that comes to you.

Benjamin Brandt:         Excellent.

Steven Jarvis:     Yeah. Yeah. So that was one of the areas that got highlighted in the Dirty Dozen. Another one I wanted to bring up was, unfortunately, fake charities. And this one … this is airing in February. So we’ve gotten past the holiday time of year, which is definitely a big time for that. But anytime natural disasters happen or pandemics, things where people are feeling charitably-minded, scammers are going to take advantage of that. And they’re going to call you, they’re going to pull on your heartstrings. They’re probably not going to use the scare tactics, but they’re going to try to get you to take action right then and there. It’s still playing on your emotions of, here’s these terrible things that have gone on. And you’ve seen them in the news, you know they’re real things.

                           And it’s millions of dollars that get lost to this stuff every year. And so, of course, then what comes along with that is, okay, how do we make sure we’re avoiding that? And there’s a couple of really good … tips to remember. And then some resources. One of the first things is, whenever possible, stick to charities you know. The main point in giving, of course … even if there are tax efficient ways to do it. The main point in giving is to support causes you care about. So sticking to reputable organizations you know is a great starting point.

                           The IRS actually has a good tool for looking up whether an organization actually is tax exempt so that you don’t have to worry about people calling you with charity names that sounds similar to ones you’re familiar with. You can always go and look them up. Sometimes you can identify red flags, especially over the phone. If people are pressuring you to donate right now, or that it has to be in iTunes gift cards, if it sounds like they’re really trying to force the issue, maybe take a step back and say, okay. What’s really going on here, and is this really something I want to be going down the road of?

Benjamin Brandt:         Absolutely. Yeah. If someone is soliciting you, I think that that is a different kind of a red flag than if you’re seeking someone out. If you’re seeking out a charity to help with hurricane relief or something, if you’re taking that initiative, I think you’re less likely to be scammed than if someone just contacts you via email or random phone call. You’ve got to take better steps to protect yourself if they’re reaching out to you first, I think.

Steven Jarvis:     Yeah. So that was another one that the IRS unfortunately sees a lot of. And then the last one I wanted to highlight from the IRS’s Dirty Dozen is what they label as unscrupulous tax return preparers. And especially being a tax preparer myself, this is one that definitely rubs me the wrong way that this happens so often, but unfortunately, it does. Because the sad part is, is there’s actually a very, very low bar for who can prepare tax returns. But at a minimum, if someone is being paid to prepare tax returns, they have to register with the IRS and get what’s called a P-10, which is a number that says that they’ve been registered with the IRS. And so you can look that up on the IRS’s website. If someone’s reaching out to you for tax preparation services, this is an area where maybe the cheapest option isn’t automatically what we should pick. I’m all for a deal, but let’s make sure we’re taking the time to verify that who we’re working with is really going to get the job done for us.

                           Other things to look out for, tax preparers who require cash payments only, or they require everything up front or don’t want to provide receipts. And really the other piece that comes along with this is if you’re working with a tax preparer who is coming to you and pushing you towards things that don’t quite sound like they should be in a tax return. Whether that’s reclassifying what income should be … or what income should be called without any reason for it or making up deductions. You want to make sure that this is a situation feel comfortable with. And, like I said, you vetted that who you’re working with is registered with the IRS, and is going to do the job you need them to do.

Benjamin Brandt:         Okay. So if I want to hire Steven Jarvis as my tax preparer, I can specifically search your name on the IRS website to make sure that your credentials are who you say that they are?

Steven Jarvis:     Yeah. So you can look to see that I’m registered with the IRS. For tax preparers who do have other licenses, like I’m a CPA or there’s enrolled agents who, that’s not a requirement, to get registered with the IRS, but you can also look up those credentials. I’m licensed as a CPA in the state of Washington, so you can look me up on the Washington Board of Accountancy’s website and see that my license is valid, that it hasn’t been revoked, anything like that.

Benjamin Brandt:         Okay. So I’m a certified financial planner. If you go to cfp.org, I think it is, and you search Benjamin Brandt, you’ll find my name. Now, I’ve taken some steps to … I’m not accepting new clients. So my name’s not on the advertisement side, but you can still check that I’m … So there’s a version of that for CPAs. Is that a national body? That sounds like it’s by state?

Steven Jarvis:     Yeah. So CPA credential is a little bit unique in that way that you are registered by state, but unlike an attorney, the license is good nationwide. I can do CPA work nationwide. There are some states that require a couple extra hoops to jump through. But in general, my designation is valid nationwide, but you would have to go to the state’s website to look that up.

                           And so if you’re going to work with a CPA, for example, certainly a question you should ask of, okay, could you let me know what state you’re licensed in? And yeah, go check. Make sure they’re … they do have the credential that they say they do.

Benjamin Brandt:         And how about for an enrolled agent? Is that where you said to go to the IRS website and look for the name?

Steven Jarvis:     Yeah. So that’s a designation through the IRS.

Benjamin Brandt:         Okay, excellent. What are some of the other areas that we could look for for unscrupulous tax preparer? I see on our list, direct refunds into their bank account, not the taxpayer account. Is that something that happens?

Steven Jarvis:     Yeah. So unfortunately, people get a little too clever out there with how some of these things work. And there’s a lot of legal or valid programs that get you your refund in ways other than the IRS that you to check. I mean, you go to any of the major, especially like DIY-type tax prep softwares online, and they’re going to just bombard you with advertisements of, hey, we can advance you your refund or all these different ways to get them. Or I think one year, or maybe it’s still the case, there were websites that they would give you … there would basically be an incentive if you took some of your refund as a gift card instead of cash.

                           So there’s all these things out there that are valid, I don’t know that I would particularly encourage them. But it sets this context for, oh, there’s lots of different ways to do this. So then the unscrupulous tax preparers will take that a step further and leverage that idea to, unfortunately, take advantage of people. And yeah, things like the refund going directly to the tax preparers bank account. As a tax preparer myself, I never want to touch your refund … I never want to be in possession of your money. Just, I don’t. And so that is definitely a huge red flag.

Benjamin Brandt:         Yeah. Same thing as a financial planner. If I’m in possession of your money, that means I have custody of your assets. Which, if I’m not specifically set up to have that happen as a planner, that triggers all kinds of potentially audits and things like that I’m just not set up for. So yeah, you should want a planner or a CPA that doesn’t actually want to have custody of your assets. That’s a giant red flag.

Steven Jarvis:     Yeah. The other thing the IRS calls out, and I mentioned it a little bit, but tax preparers who want you to claim fake deduction so they can boost the size of your refund. I think we’ve mentioned on the show before, but the size of your refund isn’t how you should be measuring the success of your return anyways. That’s just a timing issue of, did you pay the IRS too much? And so if your tax preparer’s only focus is getting you the biggest refund, they might be a completely valid tax preparer, but they definitely don’t have a long term or planning focus, that’s a certain sign of that.

                           But that also brings up some interesting questions of, okay, well, what are valid deductions? And for me, it brings up the question of, well, what have people tried to get away with that would make that list of fake deductions? And there was an interesting article recently, actually in Kiplinger, that listed a bunch of tax deductions that people actually used. And then the IRS came back and said, no, no, no. That’s not how that works. My favorite one being a taxpayer who was selling plasma. Which, I remember being a poor college student and looking for ways to certain money.

Benjamin Brandt:         I’ve still got the scars to prove it.

Steven Jarvis:     Yep. Me too. I’ve switched to just whole blood donations. I’m all for helping people, but I don’t do the plasma one anymore. But so this taxpayer, they didn’t want to pay taxes on the income they are getting from selling plasma, so they reported amortization of their body as an expense. So the idea of amortization is that we can spread expense over a really long time, but they said, you know what? That plasma is coming out of me, so I’m depleting my body. And so I should get a tax deduction for that. And I thought, you know what? Points for creativity, but I agree with the IRS on this one of, no, that’s not a tax deduction.

Benjamin Brandt:         That’s incredibly clever. Yeah.

Steven Jarvis:     Yeah. Which the other thing that illustrates is that just because you put it into a tax software and it goes to the IRS and they don’t immediately reject it, that doesn’t mean it was okay. Because the IRS can come back later and evaluate these things. And so it’s not just, hey, what can we come up with to put in the box? There needs to be a justification behind it.

Benjamin Brandt:         Yeah. Someone is going to check these things at some point. How long can the IRS reach back and tell us we made a mistake and we owe some money?

Steven Jarvis:     It really depends on the situation, but it’s years, not months. So depending on whether it’s, you filed but reported incorrectly, or you didn’t file at all, or there was criminal activity involved, there’s some different windows of time. But it’s definitely years, not months, in all cases.

Benjamin Brandt:         Excellent. Well, should we move on to our listener question, Steven?

Steven Jarvis:     Yes, let’s do it.

Benjamin Brandt:         A listener question wrote in … question. “Am I okay using my HSA to pay my old employer for my retiree health benefits? I’m not paying any insured directly and I’m just continuing the benefits I had while employed. I just have to write a check rather than having a pre-tax payroll deduction.” So I think the listener’s asking, am I doing some something wrong? Is this above board? What say you, Steven?

Steven Jarvis:     Yeah. So this is a great question, because so often when financial professionals, tax preparers, CFPs talk about HSAs or health savings accounts, it’s on the front end of, hey, get lots of money in there. It’s a great way to save and a tax-advantaged vehicle. Which is true, I’m a huge fan of them. But not as often do we talk about, okay, what about when we take that money back out? And so that is the limiting factor on an HSA, is that it’s very specific as to what we can use the funds for. And typically, especially during your working years, it has to be medical related expenses that are not your premiums. That’s a pretty specific criteria.

                           There’s a couple of exceptions, if you’re on unemployment or if it’s for COBRA coverage. But typically, if you’re under the age of 65 … because that’s the magic age they picked for this particular rule. We have to use it on expenses other than premiums. When you’re over the age of 65, that changes. And we have a lot more flexibility in how we use this, including for covering premiums.

Benjamin Brandt:         Yeah. I’d have to say I’m a little bit guilty in only understanding one side of the HSA question. How much can I put in my HSA? Where is the deductible, how is it deductible? How does this benefit my retirement? I’ve got a lot less knowledge on, we’ve had the money in there for years, now what can we spend it on? It feels like most of my clients are on one extreme or the other. I put money in my HSA and then immediately, I’m taking it out for expenditures. Or I’m putting money into my HSA and I’m going to probably leave it there forever. There’s no RMDs on an HSA, so I’m just never going to take it out.

                           So I actually went and did some Googling online. And I was surprised, there’s quite a few areas that you can spend the money on. So we’ll include this in the show notes. It’s an article from Investopedia, Some Things You Might Not Have Considered Where You Can Use Your HSA Dollars. And so dental and vision, I guess that makes sense. Prescription drugs and insulin. Your Medicare premiums. I think Steven said after 65, that changes what we can spend our HSA dollars on. Hearing aids, x-rays, wheelchairs and walkers. And if you read through the article, it even talks about a portion of those premiums for a longterm care insurance policy, potentially even for some senior living care, things like that.

                           So like anything else with retirement planning, if we put money away and leave it there for a really long time, there’s some really neat things that can come out that. So check out that article and get a refresher on what you’re actually saving towards, and hopefully you’ll get maximum utility from your HSA dollars.

Steven Jarvis:     The other thing I would recommend is that when in doubt, ask your HSA provider. They have a huge incentive for you to use these dollars correctly, because it really affects your customer experience. And so most HSA providers or administrators have good resources available for you as far as what these dollars can get spent on it. And a lot of times, they’ll even have a place that you can submit specific questions to say, hey, is this something I can spend this on, before you’ve actually spent it.

Benjamin Brandt:         Excellent.

Steven Jarvis:     Yep. Well, Ben, this has been a lot of fun. And as always, just love being able to take the time to share these experiences and how people can be proactive on these areas.

Benjamin Brandt:         I love it.

Steven Jarvis:     Well, Ben, until next time, and for all of our listeners, be sure and remember to not let the tax man hit you where the good Lord split you.