Wealthy & Wise: Are You Overpaying Your Taxes?

About the Video: Wealthy & Wise: Are You Overpaying Your Taxes?

Working with a business tax professional is of paramount importance for any organization. Tax laws and regulations are complex and ever-changing, requiring expert knowledge to navigate effectively. A business tax professional possesses the necessary expertise and experience to ensure compliance with tax laws while maximizing tax benefits and minimizing liabilities. Their in-depth understanding of deductions, credits, and incentives can lead to significant cost savings for businesses. Moreover, a tax professional can provide valuable advice and strategic planning to optimize financial decisions and minimize tax risks. By collaborating with a business tax professional, organizations can focus on their core operations with the assurance that their tax matters are handled efficiently and accurately, ultimately contributing to long-term financial stability and growth.

Prefer to read? A full transcript is provided below.

Adam:

So, welcome to another edition of Wealthy and Wise. I’m your host, Adam Kintigh. And today I brought in the best CPA I know to give us really some great advice and tips as business owners and investors in how to make sure that, A, you are working with the right CPA and B, that you’re actually working with a CPA. So, we have with us Jack Cohen. I’ve known Jack for, I think 15 years now.

Jack:

Probably, at least that I would say.

Adam:

And Jack, your background, give us just a quick background of who you are and why you’re here.

Jack:

Sure. Well, first of all, thank you for having me, I appreciate it. And it has been a good 15 years. No pressure telling everybody I’m the best CPA, by the way. Technically, I can’t say that, but… My background is basically I started out working for the Internal Revenue Service. I was there for 33 years. I ended up in large corporate audit. I was the number one employee in the nation in large corporate audit one year, and then in public accounting about like 15 years or so. Not only am I a CPA in several states, but I’m also a licensed real estate broker in two states. So, I know a lot about taxes, I know a lot about real estate, which is a great combination for people. So…

Adam:

That’s awesome. Well, thanks for taking time out of your day here. So, the first thing that people always look at is do I need a CPA and isn’t TurboTax, they make it so easy to do your own taxes. What do you think about using TurboTax?

Jack:

Well, again, I’m a little biased. I think there’s a lot of value in having a CPA, because the truth is, I’ve probably forgotten more tax than most people will ever know. If you have a simple return and you just have W-2s, there’s nothing wrong with TurboTax. But if you have a business, if you have rental property or investments, if you have a good CPA, I’m a firm believer that what we deliver will more than pay for our services. How’s that? I don’t know how many phone calls I get from clients, you know, wanting to get information. I’ve gotten client calls from clients from car dealerships at 9:00 at night, should I buy or lease. And so, my theory is, is that any transaction that you have that involves a lot of money probably should bring your CPA in on it. CPAs are in fact, if you research it, they’re the most trusted advisor of all. We are, we have no skin in the game at all. So, our advice, our advice to people tends to be good advice because we don’t have anything to gain or lose by our advice. I mean, so…

Adam:

I always tell people you’re a CPA is worth their weight in gold because they can either make or break you with a lot of things that happen, especially from a tax planning standpoint. So, using TurboTax, for example, you all the time are doing reviews on people that have done their own taxes.

Jack:

Oh sure.

Adam:

Had a couple of rentals. They use TurboTax, did it for a couple of years, and now they got their third or fourth rental and are thinking, well, maybe I should hire a CPA. So, you go back and do a review. And what are the, what’s the number one mistake you see people make?

Jack:

Well, first off, let’s start out by saying there’s nothing wrong with the TurboTax program. But like any other software, it’s garbage in, garbage out. And we do get to review a lot of tax returns that are done by others, even other CPAs and other tax returns that are done by people themselves on TurboTax. And quite frankly, I find a lot of mistakes. I would say the biggest mistake I see for people who do the wrong return on TurboTax that have rental property, and I’ve seen a lot of it this past year, is they don’t claim depreciation on the property. I can’t believe it. One of the, one of the huge advantages of having real estate is you get to depreciate the property. Basically, you’re writing off the cost of the property. And I don’t know how many schedule E’s I’ve seen. Nothing. Zero, nada.

Adam:

Wow. Now, the other thing I was looking at, I was reading it, like from a tax foundation. And they talked about the combinations. When you’re calculating the qualified business income, we get that special 20% reduction.

Jack:

Yeah.

Adam:

But to calculate that, there’s 12 fields that each have four options with a total of 12,400 combinations. Easy to screw it up.

Jack:

Listen, if this was easy, I wouldn’t have a job, okay? But you’re right, even rental property qualifies for the QBI deduction. However, it is software, and if you don’t check off the right box, ya don’t get it. That’s all I can tell you. It’s as simple as that. Where I do this every day and I’m trained to look at tax returns and I, as I said a few minutes ago, I mean, I’m always looking at tax returns that are prepared by other people. I know exactly what to look for. I know the common areas where people make mistakes. And it’s easy for me, of course, it’s not easy for other people, but I do it all the time. So, it’s easy for me to point out these errors. And that’s what we do.

Adam:

And that’s where I always remind people. You think that working with a professional is expensive. Try hiring an amateur. So, in your profession, in your career, we’ve got the investor side of things with a schedule E, where we’re writing off our rental income and expenses.

Jack:

Sure.

Adam:

And I think that people oftentimes don’t do a very good job with recordkeeping and that turns into a big problem later on.

Jack:

That’s a great point. When people ask me, even like, as far as like what they could do for planning, one of the things I always tell them is you got to do a better job maintaining your records. I mean, I have trouble telling you what I had for lunch yesterday. If people don’t keep good records when they go to do their tax return at the end of the year, it’s quite possible they’ll leave stuff off because they won’t remember. How can you possibly remember everything you’ve done in the last year? And I’ll tell people, recordkeeping could be as simple as either working through one checkbook maybe, that handles all your rental income and expense. Or, having a manila folder where you put all your receipts. But the truth is, the better job people do during the year maintaining your records, it’s much easier to do the tax return and it comes out with a better result. Because you’re not leaving anything off the table. So…

Adam:

Good. Now the rental is one side of it. But as a business owner, we see all the time people form their own LLC, they get their EIN number, they run things.

Jack:

And then they screw it up.

Adam:

And they screw it up. So, what are your biggest mistakes you see with people that are doing their own business taxes?

Jack:

They don’t understand, you know, when you have an LLC for tax purposes, the IRS says you can treat this anyway you want. And one of the ways you can treat it as a single member LLC, which means basically you put that business on your personal return as a Schedule C, and everybody thinks the IRS is doing you a favor by allowing you to do that. But they are not. The truth is, in that situation you would not maybe, you would absolutely pay more tax than you would if you took that LLC and you filed it as a Subchapter S corporation. I see Schedule C’s all the time where people form their own LLC. They don’t know anything about a Subchapter S corporation. They put it on their personal return. They show, you know, 50, $60,000 in income. They end up having to pay Social Security tax on 50 or $60,000. I mean, I just looked at one the other day. I mean, for one year, I’m pretty sure I’ll get these people back easy, ten grand because they paid ten grand. They had no idea that they could have treated the LLC differently. Happens all the time.

Adam:

Now, the Social Security, Medicare is one part of it, but the other part of it, I know you were telling me that the audit risk for the filing types, you said the U.S. inspector general does a report card every year of what those audit risks are. And can you share with our audience what that is?

Jack:

Sure. The Treasury inspector does a report card on IRS every year and basically it details who they audited by category and every year you can go back years and see what the results are. But for the most part, it’s remained fairly consistent. Subchapter S Corporations, the last time I looked, the audit selection rate was one quarter of 1%. So, think about it. That’s practically nothing. And again, there’s various reasons for that. And one of which, of course, is they don’t have any employees to audit. But the partnership Sub S’s, the audit selection rate is very, very low. In fact, if you have a schedule C, statistically you’re probably much more likely to get audited than you would if you filed that as a corporate return. And every year the Treasury and the Treasury inspector publishes those results and it’s available to the public. And that’s just a fact.

Adam:

And I heard it was, I read an article today that said you are 900% more likely to be audited operating with a schedule C versus S Corp reporting.

Jack:

I didn’t see the article, but I believe it. And again, you know, when we do tax returns too, listen, we always want to do a tax return that’s to the benefit of the client. We want to come out with the least tax possible. But I also have an obligation to tell clients sometimes if they’re doing things that look shaky. I didn’t say, are shaky, but look shaky because appearance means something. That’s, I mean, that’s how returns get picked for audit. I mean, if you have a schedule C with no income and $200,000 in expenses, I’d pretty much count on getting audited.

Adam:

Well, and you had mentioned that kind of the guarantee for these audit rates are that if you get a W-9 or if you’re doing and you don’t claim it, if you don’t get your, I’m sorry, the 1099, you don’t claim it.

Jack:

Oh yeah, that’s easy.

Adam:

Or, if you do business with someone that doesn’t do theirs, they get audited. You’re getting audited.

Jack:

Right. So, the IRS for years has had a matching program and the easiest way to get audited I know is people issue you 1099s, the IRS gets a copy, they match the 1099 they get against your tax return. If it ain’t on your return, I don’t think you’re getting a letter, I know you’re getting a letter. And a lot of those are handled as correspondence audits. But again, even when that happens and you have a Sub S, there’s a way around that as well. I mean, but you still have to account for it on your return. I mean, that’s it.

Adam:

And even when you get those letters in the mail, first thing I always tell people, call your CPA, call Jack. Don’t call the IRS on your own.

Jack:

Oh, yeah.

Adam:

Work with a professional.

Jack:

Never try, every, I’ve seen this before where people think, well, I didn’t do anything wrong at all. I’ll try and handle this myself. It doesn’t, it always turns out bad. Let’s put it like this. It never has a good ending. It really doesn’t. Because again, the IRS employees represent the IRS. They’re not going to, they’re not going to help you. I mean, they’re going to interpret anything that they can to benefit the IRS. And the truth is, you really need someone to represent you. And quite frankly, I’ll be honest with you, a lot of CPAs don’t even want to represent people. They’re not good at this. Do you know who they call? Me, OK?  And I don’t want to say I’m pretty good at this, but I’m actually really good at this.

Adam:

Well, and that’s that type of experience. A guy like you working with the IRS day in and day out.

Jack:

You know what happens? We represent, I represent a lot of people that are currently under audit. And you know what happens? Now remember years ago when I started with the IRS, there was no Internet. But you know what the agents do when they get a new case assigned to them? They Google the CPA. And when they Google me, they already know ahead of time, they’re in for a battle.

Adam:

That’s awesome.

Jack:

It’s not, it’s not even fair.

Adam:

Well, and one of the things I thought was really interesting. I was reading an article that said that the IRS is less likely to target higher income individuals that will fight, versus lower income individuals have a higher audit risk.

Jack:

That could be I mean, I know, I know even when I worked there, I mean, there are some returns that are really, really, really complicated, probably over the head of a lot of the agents. And so, you know, there could be a reason that they just don’t want to do those audits because they just realize they’re going to be overmatched. But, I mean, listen, no different than other businesses in some cases, I mean, the IRS sometimes wants to go after the low hanging fruit, if that makes any sense. And that’s why, like we were talking about the 1099s and them doing the match against your return. It’s not, you know, in some ways I don’t think it’s a great way to do business, but that’s what they do. You know, I know when I was in large corporate audit, I could get more tax on a Fortune 500 company than 10,000 agents, okay? But the IRS doesn’t operate like a business. And so, Congress kind of mandates that when they audit, they audit a little bit of every category, if that makes any sense. But from a business standpoint, it don’t make any sense. But they wanted people to know they’re there, and sometimes to audit tax returns that have low audit potential. I mean, and so, but again, to go back to your original point, my opinion and your opinion, you really should never represent yourself. It’s really, really, really, really foolish. I’m so much better at this than most people will ever be in their entire lives. And so, I think I’m worth it. How is that?

Adam:

But if you’re one of those unfortunate people where you just happen to get audited, you did everything right, you still get audited. Thank goodness we have guys like you to make sure that you have our back and making sure that those…

Jack:

You know, I don’t know if I ever told you the story, but back here in Las Vegas, what happens is, is when you have an audit and there’s no agreement, you can go to appeals or you can go to tax court. So, turns out this is, when I used to go to tax court all the time. And I used to know all the attorneys who were here in Vegas, because whenever you go to tax court, you can designate where you want to go to court. So, no matter where you lived, I put down I want to go to Vegas. And so, I got to know a lot of the attorneys here, What they taught me was amazing. I couldn’t believe this. I was the only CPA, the only one that they ever met with and never dealt with. That means that everybody else either defaulted the case, or they hired a tax attorney and paid like humongous dollars. I was the only CPA that they ever met with. That’s crazy. And we petition tax court all the time.

Adam:

Good. So, I want to thank you for taking time out of your day to be here and for everyone listening tonight, if again you have a business, you have investment properties, hire a CPA, contact NCH. We have a great team of professionals. Jack is part of our team. He has an amazing team of CPAs that can support you, make sure you’re doing things right and start your tax planning now. Don’t wait until April or March rolls around before you start worrying about these things. Start doing your tax planning now. Meet with your CPA, talk to your CPA about major purchases or investments you’re making, so you can do it correctly and get the best tax benefit. I think it was Judge Learned Hand said, it is not illegal to arrange your affairs in such a way as to pay the least amount in tax as possible, and there is no patriotic duty to pay taxes. So, with that being said, Jack, thank you so much for being here.

Jack:

You’re very welcome.

Adam:

And have a great rest of your day.

Jack:

Thanks, Adam!

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.