Catch the full episode: https://www.wealthformula.com/podcast/269-is-the-irs-going-to-audit-you/
Buck: Welcome back to the show everybody. Today my guest on Wealth Formula Podcast is Steve Moskowitz. Now Steve is a tax attorney. He’s got 30 years of experience under his belt, extensive knowledge of tax law, a desire for swift and vigorous defense when necessary. He’s got decades of experience with tax authorities in the courts and he’s unusually perceptive in assessing the best way forward and the right resources to achieve resolutions. So today, together with a full team of tax attorneys and CPAs. Moskowitz LLP which he founded helps businesses and individual clients across the country and overseas to resolve a wide variety of tax matters. He also creates strategies to utilize the tax code and relevant treaties to clients benefits, provides an ongoing tax support and tax preparation. Steve welcome to Wealth Formula Podcast.
Steve: Thanks for inviting me.
Buck: Yeah so it was funny you know we talked a little bit offline here about this being a slightly different audience. I mean where we talk a lot about tax.
Steve: Who doesn’t want to talk about tax? I can think of no better subject
Buck: Well the question is you know when it comes to my audience, we have an inner group called Wealth Formula Network which is composed probably about 200 people online and we get these conversations and the depth of those conversations in terms of tax strategies and what we all know and bring to the table blows people’s minds sometimes and me too. But I’m always excited to learn more. So thanks for joining us. So why don’t we start out simply with this. Tell me a little bit, I know you were also professor before. What brought you to tax law and what do you find interesting about it?
Steve: I was also a CPA before I was a tax attorney and when I set foot into law school on day one I already had a bachelor’s and master’s in accounting. I was a CPA. The reason I went to law school was not to chase ambulances or do divorces. I realized as a tax attorney, I could do so much more for my clients than I could as a CPA. I want to be the guy to tell a client what you can do not the guy to tell him what you can’t do and also as an attorney I could defend everything that we do in the courts as opposed to saying well I can only go that far and that’s it. So that’s the reason why I became an attorney and I went into private practice because you know I have a very heavy background in tax and most guys that have a background like mine go to work for the big firms whose clients are the Fortune 500 and that’s what I did too and I worked real hard there and then I realized no matter what I did, I could be the best guy or the worst guy. I’m not going to affect the Fortune 500 but a small business or an individual make a huge difference. And I’ll never forget one of my very first cases. I was at council table with my client in court and about every five minutes my client was reminding me that if I lost his case he would lose everything that he’d worked for in a lifetime that would make most people nervous. For me it was exhilarating because I knew that I’m going to make all the difference in the world to this guy and I got him off and I was thrilled. I remember that client in that case to this day and I still get that same visceral thrill all these years later when I say to a client and that’s why you don’t have to pay the taxes just like look at the Fortune 500 that make billions and they don’t pay taxes. How do they do that? They have an army of people like me saying do this and this and this and this and I get a real thrill out of it. For example real estate that is such a tax advantaged area. To me the most beautiful words in the english language are positive cash flow or the tax loss is exactly what you can do with real estate and then you start combining all these different areas. For example, I’m sure your audience is familiar with cost segregation analysis or should I define it and explain it?
Buck: Oh no I don’t think you need to. But you know what, go ahead. Go ahead and do it. We do a lot of cost segregation and bonus depreciation in our private investment group but you know there’s people listening who are not part of that maybe and don’t understand the significance. So go why don’t you go ahead and talk about.
Steve: Basically what cost segregation analysis does is they do like the banks time value of money. If you have a choice between a benefit now or many years from now, it’s better to have it now. So suppose we have a property and we have this situation, the amount of money that we receive is greater than the amount of money we spend on it. So we have a cash profit, we have more in our bank account than we did before but then through the use of depreciation and here more depreciation because the cost seg we go ahead and we have a tax loss. We haven’t written a check to depreciation but we show that the result from that property is a loss. So for starters we say okay now we don’t pay any taxes even though we’ve made a cash profit. And when somebody gives you something nice what do you say?
Buck: Thank you.
Steve: Well that’s what most nice people say but the people I know say more. I want more. And I said well let’s give you more. Can you take that tax laws from the real estate and write it off against wages dividends interest profit from a business? The general answer under 469 internal revenue code is well no, that’s a passive loss and you can’t do it. However, there’s an exception. Real estate professional. And if you’re a real estate professional you can take that loss against that other income. So we have to be a real estate professional. So let’s assume we have this situation: we have a woman who’s a brain surgeon and she makes a profit of a million dollars from her practice. She’s married to a househusband. She also has investment in the property. We’re just talking about she says honey you’re going to manage the property. We now have hubby because what happens is essentially he becomes a real estate professional. There’s a bunch of rules but to simplify things, the major part here and what keeps most people out is that one of the spouses, only takes one, has to spend more than half their business time on the property. So here house husband is now managing the property then what they can do is say okay well I have that extra million dollar loss I want to go ahead and write it off against the profit from the practice. And here’s where you have people earning a profit from their business earning a profit from the property and legally not paying any taxes. That’s one of many many many things that you can do and if you would let me I could go on for hours.
Buck: Well I’ll tell you. Let me tell you this one Steve, and this might be the only podcast that you will hear someone say this but what you just told us is old news. We talk about real estate professional, cost segregation, bonus depreciation like all the time. So give me something special.
Steve: Okay what I would say is special
Buck: No what I’m saying is and I don’t mean it that way. I’m just saying is tell me something I don’t know right
Steve: And I don’t know what you know. But yeah what happens is basically what we do in the office when somebody comes in we basically ask them what’s your level of familiarity and then we may say hey you know all there is to know but we say well okay here’s what we can do is we can expand on that and make it work or maybe somebody knows about the concept but we set up the accounting records. So if the IRS says well okay you say you’re a real estate professional and you work all these hours well where’s your proof of that? Oh here’s my log, here’s this, here’s that. So basically that’s what we do is we go into what do you have and yes or anything we’ve approved. Now I’ll tell you with a lot of clients it’s been my experience that they do know the stuff but their record-keeping is horrendous sure and it’s a shame when somebody you know they qualify, the government says where’s the proof? Well you know I was really busy. Oh, you don’t have the records. And then we say okay well here’s the record you should keep and that’s why we want to go into tax court if we have a situation where we can say well wait a minute as we move up in the chain the initial auditor who said oh I demand these records and say all this allowed no benefit as you go up in the chain you can get it accepted by something called substitute evidence where we show other things that we show other things can be a letter or even this year where we’re keeping good records and it’s similar to the past year or testimony of people. A lot of ways to prove it and for example going way back remember the boxer, Joe Frazier? Joe had a tax loss on his mama’s farm in South Carolina they had no records. Joe and mom, not the greatest records. They had no records but the tax court judge found in favor of the Fraziers and you know what the tax court judge said? Why? He said I looked at Mrs. Frazier, I thought she was an honest woman and I believed her testimony. And that’s one of the things I want to say to your listeners that people forget about that the IRS agent says well you know what sure you know in planning have records for everything but this is real life. What happens if I’m representing clients? So we know what I’m Joe Frazier I don’t have the records. Your testimony counts if the judge believes you. You can go ahead and win that way. So the bottom line is just because some order says well you don’t have the records you can’t do it. You don’t just say oh that’s too bad and give up. There’s a lot of other ways to prove it. If you don’t have a birth certificate that doesn’t mean you were never born.
Buck: Let’s talk a little bit about you know when you hear about Fortune 500 companies that are making billions of dollars and they are not paying any taxes, how can an individual potentially do that? Now we’ve talked about our real estate professional designation and that’s a major one you know I happen to be a real estate professional so I understand that one. A number of people in our groups do. But is it necessarily the case that you always have your limitations right I mean you’re going to have and it’s my personal experience obviously you can only have so much depreciation and then if you live in the state of California for me even if you zero out your federal you still got a big California bump and on top of that because they don’t recognize some of these laws.
Steve: That’s why so many people are leaving California. Well yeah we all have California source income and one of my favorite areas to talk about Puerto Rico
Buck: Yeah well you want to talk about Puerto Rico if you want to or you know I mean because I know a lot about the Puerto Rican stuff but I don’t think probably a lot of people do so tell me what some of those options are the Puerto Rican options.
Steve: So basically a lot of people are leaving California especially for the tax-free states like Florida and the state of Washington and Texas but they’re still stuck with the federal tax. Now a few people like Tina Turner so you know don’t want to be an American citizen anymore. They have American citizenship but a lot of people say they’re happy to leave the state but they don’t want to give up American citizenship. If you move to Puerto Rico they have two acts down there that essentially you get down to the level of a very low level of tax like four percent where you live in Puerto Rico or at least half the year you live in there, and that’s one of the things you have to watch out for, you have to live there at least half the year. You get all kinds of exemptions from federal taxes. So that’s one of the solutions that a lot of people are looking at because you’re not giving up American citizenship but you’re giving up a lot in the way of taxes. So that’s one of the things that you take a look and now obviously another thing that we’ve done is in the international area. There’s all kinds of countries and this is the word tax haven is not a dirty word because if you look at various jurisdictions around the world there’s some jurisdictions that don’t tax. There’s some that don’t tax on certain transactions, some that don’t tax if you’re not their citizen, some if you are their citizen they don’t tax and then you make a decision. Some countries will give you a tax holiday for five or ten years they don’t tax you for a while. So you say well all right it’s a combination of factors. Physically, where do I want to live and then what’s the difference in options. You take a look at that and that’s where the citizenship comes up because as an American citizen unless we do Puerto Rico it doesn’t matter because we’re taxed on worldwide income. The states are a lot easier to get away from the state tax than the federal that’s why Puerto Rico has become so popular
Buck: Sure but if you are in now I ask you just personally you know obviously I live in Montecito. I actually moved here from Chicago
Steve: I moved to San Francisco from New York City.
Buck: There you go. So you you know you for New York City obviously and California are a little bit more similar in taxation. I took a little bit more of a hit here moving to California on the state tax side but is it possible for people to live where they want if they want to live in New York and live in California and still have other strategies? I mean listen moving to Puerto Rico is a big deal even if it’s for half the year and you know if you have kids in school and all of that you know you always hear about or I always hear about Fortune 500 companies utilizing a lot of international options you’ve talked a little bit about you know the quote-unquote tax havens can you give us an example a little bit how something like that…
Steve: Yeah so in the in the transfer pricing suppose you have this situation you have a company in California and you have a company in a tax advantage company so let’s assume that we have a profit of 100 here in California and we said well you know what I need to do a transaction and again it should be a bone flight transaction but I need some advisory services from my company in country X and I’ll pay them a fee of a hundred so we say well okay now I paid them a fee of 100. Now I wiped out my profit. So the fact that I live in California doesn’t matter because even in California or any place else. My profit is zero. My tax is zero. Now that hundred is in country X that either doesn’t tax at all has a very low tax rate so basically what I did was I moved the 100% that would have been taxed in California to a jurisdiction that’s either not going to tax it or low tax what you have to be careful about there is to show why it’s a bonafide transaction and just do it to save taxes that gets into the IRS transfer pricing rules.
Buck: Right. And is that something typically you know that only major Fortune 500 companies are going to be able to do just because of the cost elements or is that something do you think that even small businesses you know if they structure
Steve: Sure small businesses can do it and let me give you a personal example. Okay you know before the pandemic we had a big office in the financial district of San Francisco and we all worked there before the pandemic. I now have employees scattered all over the world. I am not a Fortune 500 company but I have employees living literally all over the world working for me. Now that being the case, if I said well I don’t want to employ you anymore but I would like to hire your company then I’ve achieved that.
Buck: Understood. Got it okay well great. Let’s talk a little bit about sort of you know individuals we’re talking about some of the stuff that you know I’m selfishly asking you about just in terms of California and all this kind of stuff but okay so you’re in let’s talk about the IRS audit which a number of us have been through and a lot of people are really scared of the idea of audits.
Steve: It’s nothing to be scared of.
Buck: Yeah tell me why.
Steve: Because the auditor has no power over you. The auditor might make suggestions to change your taxes but that’s all they are. They’re suggestions. Unless you sign on the dotted line, there’s nothing he or she can do to you. And here’s a way to take a look at an audit. If you drive a vehicle at some point a police officer may pull you over and want to see your driver’s license. Are you going to never drive a vehicle again because someday a cop might want to see your driver’s license? You show them the driver’s license and move on. Same with the auditor. Now first of all you don’t have to go to the audit yourself. Your representative goes. We never bring clients with us and if we can settle at the audit level that’s fine. The audit level though is the worst level to be. That’s where the auditor is going to be really picky, most demanding and in fairness to the auditor, they’re the most constrained. They don’t really have very much authority. They’re basically a light switch. On or off, yes or no, allow or disallow. So suppose we have a situation where the auditor doesn’t like what you’ve done. It could be for a variety of reasons for example looking at the case law. You see that the courts are all over can I deduct X. Some courts say yes some courts say no. So being more aggressive the person says well if there’s some cases that says I can do it, I’m going to deduct it where it says you can’t do that or the auditor doesn’t like your records well then what do you say okay Mr. Auditor I don’t agree with you issue your report so the order issue is your report a zillion dollars then you can file a tax court petition only cost you 60 bucks that’s the filing fee for the entire United States. For the Fortune 500, mom and pop inc and us as individual. There’s only 19 judges. Wait a minute 19 for what 19 for all 50 states you say wait a minute that doesn’t divide equally. You mean they they have to travel around like Abe Lincoln? Yes and the judges are judging themselves not by collection of revenue but closed cases. So you have a right to be in that judge’s courtroom but the judge really doesn’t want to hear from you. So what happens is there’s a very effective system of appeals. So what happens is if I’m representing you and the auditor doesn’t like what you’ve done, I file a tax court petition basically says my client doesn’t owe the money to the IRS, lawyer says yes he does, the judge never sees either one of those, the clerk of the tax court sends the case back to a settlement officer, the settlement officer’s full-time job is to keep people out of tax court. In fairness to everybody, the settlement officer has a lot more discretion than the auditor. Remember the auditor is a light switch yes or no it’s all they can do. So let’s assume we have this let’s go back to those cases where I said some cases say yes in some cases say no. the basic settlement to begin with is what’s called the hazards of litigation. Suppose there’s a hundred cases in one point and 70 of the cases say you can deduct it in 30 cases say you can’t the settlement officers say okay for settlement purposes I’ll offer you seventy percent you can have seventy percent of what you did and you can see thirty percent. If you’re going to take that I would sweeten it up by saying okay no penalties on the 30 if not then if we’re talking about something else. The settlement officer has a lot of discretion to use common sense for example if I’m running a trucking company and I don’t have one receipt for gasoline and I have gross revenue of a million bucks, I didn’t gross that million bucks without paying for a lot of gasoline so we will do a calculation. Say well our trucks get so many miles per gallon the average price that year was X, do the math and we have a receipt good for a certain amount of money. The settlement officer will accept that and then common sense they’re there to settle a case very different than another auditor is there to nail you and say you violated this you didn’t do that your P’s and Q’s are in order he assessed the tax that’s his or her job someone officer says this is the person who went for. Most people don’t go further most people with an audit say well they’re not going to jail it’s very unfair because they pay that monthly installments once you get to the level of a settlement officer that’s a person that wants to make a deal with you . They want to make a deal. So you have a much better chance there. And then what happens is when you get the final settlement from the settlement officer then you make a decision. Do I think I could do better or not and if the answer is you think you can you say to the settlement officer well okay you know look I know you tried your best but I want to try it. Then what happens is you say release the case for litigation. But now you have a second settlement attempt with the IRS attorney. Why would an IRS attorney have any reason at all to settle I mean he or she knows how to use the tax court they’re very skilled professionals why would they want to do that? They’re just like prosecutors they have too many cases and what happens is this if you go to tax court after the trial it’s not like on tv that just says you win and you lose. Both attorneys have to do what’s called post-trial briefs that’s where you pour over the transcripts and say well you know when Mr. Smith testified on page three there was an inconsistency on page 79 and therefore you make your point that takes a lot of time and a lot of effort. If you settle the case it’s quick for both attorneys to appear before the court and say we’ve settled. The judge says fine and moves on to the next case. So as a practical matter here’s an area just like criminal law most everybody wants to settle. Settlement usually means both sides give something up so the bottom line is we started that case where the order said no you can’t do that the settlement officer said well maybe you can maybe you can’t I’ll give you x percent to settle and if you choose not to do it then you go ahead and you say well all right let’s see what the IRS attorney will give me and then those few statistically few cases to go to trial. Then you begin from zero and you try to convince the judge why he should say you’re right and the IRS is wrong. And again, what I want everybody to remember is a judge will go ahead and accept things other than the standard receipts and don’t get me wrong from this point forward you should have a receipt for every penny you spend but I’m talking about real life and people who come in the office and they didn’t do what they were supposed to my little joke is if they did what they were supposed to do there would be no work for lawyers. And what happens here is you say well look let’s go back and think about Joe Frazier’s mother what he had the judge said he he looked at Mrs Frazier he saw an honest woman and he believed her the value of your testimony. Never forget that because the order isn’t one and done. You always say you don’t have a document you lose. The judges aren’t that way. So that’s the way the system works and knowing how the system works empowers you. This is a system that really can benefit you if you’re familiar with both the laws and the system and how system works.
Buck: So this is actually really fascinating for me and I’m going to ask you a few follow-up questions to this because I know people are thinking the same thing they’re like well okay well first of all you know I’ve got a great CPA already who says don’t worry about audits but the biggest reason he or she tells me that is hey it’s just a negotiation anyway. But you’re taking it a step forward saying yeah it’s a negotiation and you’ve actually got the advantage in this negotiation. So tell me this, the steps that you’re talking about, you mentioned the 60 bucks, I mean it seems to me like unless you could get anything you know pretty much everything that you wanted out of that initial audit why wouldn’t you go to that 60-second point is it just you know weighing your risk?
Steve: The difference between being represented by a CPA and being an attorney is you only have attorney-client privilege with an attorney. So for example when you’re talking about your case to your CPA if you have a weakness what the IRS has been doing is calling CPAs to testify against their clients and that’s bad for everybody right because they say okay Mr. CPA what’d your client tell you? Would you tell him hand us all your records? Whereas an attorney you could tell me that you axe murdered somebody while you were filing your tax return by law that’s a secret even if you decide not to hire me, the fact that you murdered your next-door neighbor they can never get that from me. And that goes back to old English law where the people making all the time said look you can’t have the attorney testify against me because then the person will be afraid. I tell my lawyer just tell the lawyer everything in here she’ll sort it out.
Buck: Okay so 60 bucks. Let’s also talk about the time frame there right because that’s also potentially on your side right like say if you have an audit you don’t like negotiation you go to that next step with the arbiter I don’t remember what you called that settlement officer and how long does that usually take?
Steve: To get to the settlement officer are we talking months years it depends on how busy the IRS. It was always slow after Covid. They got slower so basically if you have an audit and you go ahead and say I disagree with your report, what typically happens is the auditor has to close the case unagreed. He or she then sends the case back to the notice of deficiency unit. They have to send you a notice and usually that will take a few months. Then you get a notice of deficiency which gives you 90 days to file the tax court petition. Then remember you got 19 judges traveling around the country. So you’re talking about on average probably about a year and a halfm occasionally there’s an exception where something slips through real quick or takes forever but for the most part, most of the cases I see take about a year and a half. And then right before the case is going to go to trial that’s when you see the settlement officer. You talk with him or her and then you go through the process I just described. So you’re talking about it’s gonna let’s say on average maybe add two years.
Buck: Got it. Talk about the final step which is you know if you do end up in tax court, and again people listening to this thinking to themselves well geez well he said 60 bucks to get to that place but you know if I’m a small business and maybe I make a half million or a million bucks a year, what kind of costs are we talking about to get that far A and B to have you know somebody like Steve Moskowitz representing me? So tell me about the practical elements of all of that.
Steve: You know that’s one of the things that you look at because she said well who would not want to go to tax court and you weigh, if you said to me you know what I do not owe that four hundred dollars and for the principle of it I’m gonna go to tax court. I’d say you don’t go to court for the principal, you go to court for money. And that’s not worthwhile in a civil case. It’s only about the money so you take a look at what’s involved here. However sometimes you would want to go to tax court for a small amount because you want to set a precedent. You’re basically doing the same thing every year. So in my 400 example, if the government said well you can’t do that, then in the upcoming years you’re gonna have a lot more. It was a very slow year. That year in the future, you’re gonna have a lot of that. Those expenses that one you might not want to settle because you say well look I don’t want to set the precedent now I can’t deduct all of that. So the bottom line is you take a look at precedent. You also have to take a look at the states have an information sharing agreement with the IRS so if you live in a state that has a state income tax, and most states do, it’s not just what you pay the IRS, it’s what you pay the IRS in the state. Then we also talk about future audits. The way most people get audited is through a system called DIF discriminate income function and it gives 66 categories, a score, and one of the things you take a look at you if you’ve been audited in previous years and you had to pay. That’s something that weighs the scale more towards well this guy doesn’t do his taxes, audit him some more. So the bottom line is, there’s a whole reason that you might want to do this, but again like any business person you make a decision and every case is different but that’s that’s part of what you’re talking to a lawyer for. Is this worth going forward and then you make a decision and then you do the best thing.
Buck: So Steve, tell us, who are your clients who’s the right client for you guys what is your firm like what kinds of people do you represent currently?
Steve: We represent all kinds of people. The ones who are most likely to represent are business owners because business owners have a lot more tax challenges than employees. We certainly represent employed people too but the majority of our practice is business people simply because as an employee there’s not all that much you can do. You get a w-2 and that’s that. Maybe you have some deductions. However, as a business owner, there’s all kinds of things, and are you entitled to them. For example one of the things that we like to talk about as we do a tax return and one of the reasons I switch from being a CPA to a tax attorney, new client says well okay my tax return I said well yes but let’s talk about tax planning for example are you entitled to R&D research and development credit? Do you guys go ahead and do that in your practice? Shall I define what research and development credits are?
Buck: Yes please. Go ahead.
Steve: Okay so what happens is, the beauty here is unlike most other things is nothing’s in tax. Somebody say look if you spend X number of dollars, that’s a tax deduction. So you’ll save Y number of dollars of taxes. That’s nice but it requires cash. With research and development, the government will give you a credit, and a credit’s dollar for dollar, and I’m sure you’re familiar with that for new processes, innovative processes and doesn’t have to be new to the world, it’s new to you. And what happens is when we take a new case, we’re looking at the current year we can go back and amend three years. This is free money when we poke through somebody’s books. So you know what this money you spent here, here and here, that would qualify. You’re not spending any new money, you’re just taking advantage of one of these government programs. And a lot of people say well that sounds too good to be true. Why would you have something like this. And here’s what I remind people the tax system everybody knows there’s two purposes of the tax system. Everybody knows. One: extract money from us. But what’s the other? We still live in a democracy. Now the government says you know what it would be really good for the economy if you would buy a new factory. But the government can’t order you to buy a new factory. But they want you to buy the new factory. So how do they do it? They give you a tax incentive. Well if you buy the new factory that we’d like you to buy, you’ll pay less in taxes. That’s how companies legally avoid paying taxes. One of the examples I use mom and pop corner store pays more in taxes than Apple does. So we take a look at research and development credits. Another thing that’s around now is new is employee retention credit. So what we have here another government program. If you otherwise qualify the government will hand you 33 000 max per employee to cover 2020 and 2021. So if you’re a small business and you have 10 employees and you qualify for the max the government will hand you 330,000 so we have 20 employees 660 and so on. This is free money. It’s not a loan. It’s a grant. It’s a gift. You don’t pay it back. It’s not like PPP where you have to ask for forgiveness and you don’t have to spend it a certain way. It’s just free money but you have to know to ask for it and you say well you know what with this Covid I’ve had a terrible year, Can I even make a profit? How am I gonna get anything back? This is coming back from payroll taxes, not income taxes. So you can have a situation where we say you know I lost money. I said okay you lost money. We’ll do an NOL net operating loss. We’ll get you back money that you paid in the past five years. But here you don’t have to make a penny. If you have employees you’re paying payroll taxes. So what we do is we amend your payroll tax returns and we get back payroll taxes you’ve previously paid. You say that’s great and you know my feeling on when somebody gives you something nice so you say this is terrific I’m going to get taxes back and this goes all the way through the fourth quarter of 2021 So what happens is with your payroll taxes let’s assume we’re getting some money back from our previous year but now you’re getting ready to write a check to the IRS for your payroll taxes for this period. I say wait a minute hold on let’s assume that you were entitled to a credit of 100. Let’s further assume you’re getting ready to write a check to the IRS for 30%. I say well wait a minute don’t write the check for 30%. Don’t write a mini check. Let’s take 30% of our employee retention credit, we pay the IRS zero and now the IRS will write you a check for 70%. That’s one of the things we take a look at.
Buck: Can I back up on the credits because I can tell you that one of the you know with R&D credits and that sort of thing some of the pushback or I wouldn’t call it pushback but some of the reluctance that I’ve seen from CPAs on that is you know the the valuation of the R&D and you know and how much to really cost and getting you know third party involved and then all when you get all that stuff that they talk about at least the CPAs that I’ve talked about and the next thing you know you’re like well excuse my language but that would that would cost you know almost as much as the deduction. So why would I do that?
Steve: That is exactly why I stopped practicing as a CPA and became a tax attorney. Most CPAs don’t want to do anything like that. It’s oh it’s too much trouble, it’s too much you know I don’t have a receipt with a checkmark paid, it’s not finite. It’s been my experience with a lot of CPAs they don’t want to do something where you don’t have an actual check right now. I can deduct your rent because I see that check there for a thousand dollars to John Smith landlord and again everything in business is an economic decision and you say well okay how much do I stand and also when we walk into a client we’re talking about you know three years worth not just one year. So we’d say well all right how much potentially can we save and how much does it cost us and you just do a simple profit analysis. If I said to you look I can save you a hundred grand in taxes and we have to have an expert here and pay him 10,000, would you take that deal? Sure I take it all day long as a business person, but one of the and again I can speak because I have both licenses, CPAs are always doing that remember what I said I want to be the one when I went to law school as a student I want to be the guy to tell clients what they can do, not what they can’t do. That is what CPAs are doing all the time. Oh don’t do this don’t do this don’t do this. They’re so conservative and yes it’s conservative but the problem is what I say to those CPAs that are doing that you’re doing that with somebody else’s money, you say I can’t be booth you want to do with your own money you do whatever you want but you’re doing it with somebody else’s money. Well wait a minute let’s ask them. And not to mention the fact that if you’re entitled to these things we’re talking about three years for starters and then you make somebody aware of something say well look you know I do this process this is something that you know I can save money on taxes in the future. And also there’s additional benefits here. Suppose you say you know what that’s great you’re an established company you’ve done all this stuff and this guy’s talking about three years we just started out and you know what we lost money the first year we don’t even you know have any taxes to get back when your new company although your first place is income taxes the government will also give you money back again on payroll taxes. So this is very worthwhile. Another area that is tremendous is pensions. People are familiar with the simple pensions like you know IRA and 401k but the problem with those they’re so limited. So what happens is there’s over 20 different types of pensions and there’s three big reasons why you want to do a retirement account. One it’s a tax deduction and suppose one of your listeners is listening to that and says you know boy that’s great I wish I had a pension you know I’m going to have to pay so much on my 2020 taxes. I’m just working on it. I filed an extension and we know that almost everything you have to write the check by december 31st 20% deducted in 20% not with a pension there’s a lot of types of pensions where you get to have a deduction up to the time of filing the return plus extension. So suppose I met with one of your clients on extension right now. Suppose we set up a pension form right now today in 2021 and his tax return isn’t even due yet for almost half a year and he funds it the day before his return is due. Guess what he gets to deduct it from 2020? So there’s three big reasons for retirement cash. One, you get a big tax deduction and the typical client that we represent deducts hundreds of thousands of dollars. I was working with a client literally yesterday. You know what his pension deduction was for the year? 601 thousand dollars. Ask your business people would you like a legitimate six hundred and one thousand dollars? And to give you an idea in the past 30 years we’ve had 145 audits of pension that’s not much in 30 years and you know what we’ve had a 100% success rate in every case the IRS agreed. What we did was right and in these cases we didn’t have to go beyond the initial audit because this is statutory you’re entitled to it. So number one benefit big tax deduction. So you have to answer the tough question, would I prefer to a decrease my taxes and put my money in place where it’s totally safe or pay more taxes and not have my money in a safe place that’s why you want to do a retirement account. Second when the money is in the account it’s not being taxed so your investment grows a lot faster. And what a lot of people don’t know is that the pension itself is an exempt asset that means you know in your business people get sued all the time suppose the plaintiff gets a judgment against you in excess of your insurance you can take away everything that you have one lawsuit can take away a lifetime of earnings and savings. Not with a pension although I hate to mention his name let’s take a look at OJ Simpson. You were smiling you probably figured that out. OJhas a multi-million dollar judgment against him. He’s not lost a penny of his pension because of these protections. So pensions are fantastic. That’s why when we go in we talk to a client we take a look at them and say okay let’s see what we can do for you overall. There’s a lot of different things we can do when we do the tax planning.
Buck: We’ve talked a little bit on this show believe it or not of even foreign pension plans.
Steve: So that gets a lot also into the investments because there’s a lot of foreign investments you can make that pay way better than here. But we go back to our old risk-reward ratio and when you’re dealing with your retirement account, are you willing to take that risk for the reward? And when we do those, what we basically do is say look you can have multiple pensions just like making other investments. You want to incur some additional risk for some additional return. That’s fine. Let’s not put oil all our eggs in that one basket.
Buck: Right. Well good. Listen I could talk to you all day. In fact, I think there’s so many things here but I don’t want to take up too much of your time. There’s going to be a lot of interest Steve in what you have to say. How do we get a hold of you?
Steve: Call me at 888 tax deal that’s 888 t-a-x-d-e-a-l or moscowitzLLP.com
Buck: Got it Steve thanks so much for being on Wealth Formula Podcast and we’d love to have you again sometime in the future.
Steve: The pleasure is all mine thanks so much for inviting me.
Buck: We’ll be right back.