LET’S GET UP TO BUSINESS
Charlotte Erdmann 0f Orlando Tax Law
Charlotte Erdmann, Esq. LL. M. is a Tax Attorney with Orlando Tax Law who specializes in helping low to middle income families and small businesses prepare and deal with their annual tax returns. In this episode Jordan and Charlotte sit down and discuss how she became an attorney, why she chose Tax Law, and what to do if you make a mistake on your Federal Taxes.
Charlotte is active in the Florida Bar Tax Section and received a prestigious fellowship position for the Section for the 2017-2018 year. She further contributes to the Section by writing articles for other Tax Section members and presents legal education courses on federal tax controversy matters.
Charlotte Erdmann has been featured on Channel 9 news and is active in the Central Florida Association of Women Lawyers, the Orange County Bar Association, and the Florida Bar Tax Section. She is admitted to the Tax Court, Middle District of Florida Federal Court, and Florida State Courts.
Episode 2: Charlotte Erdmann of Orlando Tax Law – Full Transcript
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Hello, everybody. My name is Jordan Ostroff and joining me today is Charlotte Erdman. Charlotte, can you let everybody know a little about yourself? Um Yeah, I’m I’m a tax attorney, I run Orlando tax law in my overabundance of spare time. I’m also a mom to a rambunctious little girl who’s 13 months. And I also do a little bit of short track speedskating.
So what’s the difference between like a tax attorney and an accountant? Um, well, my particular area of tax law deals with tax law, controversy and litigation. So if someone has a dispute with the IRS or Florida Department of Revenue, or an audit or they’re coming after
a tax payer to love your lien, that’s when I can, can help and assist and accounting is usually more in a bookkeeping or tax preparation, type of a role.
So how did you get to where you are now? Well, depends on how far you want to take it back we can we can take it back all the way to law school I guess and why I went to law school. My background is actually in Philosophy and Religion let turn the arts that is a common one for people that don’t attacks I hear Not at all. So so my background is not accounting.
But after my undergraduate studies, I immigrated to the United States from Canada, did my own immigration paperwork, did a few other legal things on my own and thought, you know, I might as well do something while I’m doing nothing. And I think I’ll go to law school.
So like Elle Woods, I woke up one day and thought I think I’ll go to law school today. And at the time, it was a great time to go to law school because people were still graduating and entering the field with really good jobs. Once we got into law school, the housing market crashed everything around a crash. And when I graduated, it wasn’t a great time to be in the legal market.
While I was in law school, it took me a little while to figure out what I wanted to do. I think the first thing I had in my mind was criminal law, which is what you do now I can’t even ever imagine doing criminal law. I didn’t know that tax law was going to be the thing I did, but I thought if I was going to live in this country, I should know something about it.
And so I took a class did really well excelled, did a post-law degree, specializing in taxation and just kind of found my way. So if one of our listeners comes across something that they’ve got that issue, how can they get in contact with you? They can find us at Orlando tax law. com
or just by searching Orlando tax attorney and we’re usually come up on the first page of Google, give us a call or shoot us an email.
We’re easy to find. What’s the phone number? The phone number is 407-347-4701. And we also have 1-833-3TAX-LAW. The vanity number. So obviously you’re called Orlando tax law. I know that you can help people outside of Orlando just in the state of Florida across the entire country. How does that work?
Um, we can help people across the country and we have many clients not only in Florida, but outside of Florida too. We also represent a lot of attorneys. I have an attorney in Iowa right now that I’m helping an attorney in New York. So wherever you’re located, we can do most everything we need to on an online basis.
And so most of our listeners, they’re going to be, you know, solo entrepreneurs or small business owners. What information do you always wish that you can give to that group of people before ideally before they need your services? The first thing is I would recommend it, you know, if you’re our business owner, meet with a business attorney first, not necessarily a tax attorney, but a business attorney and make sure that you’re setting up an entity and help me with an attorney that will help select what is the right entity for you.
There’s a lot of things that go into entity selection. But protecting yourself and your interest is really important and part of entity selection is also figuring out what type of tax structure that entity is going to be. So right from the get-go. Seek out professionals seek out a good business attorney and an accountant who can help get you set up right from the get-go assist you with payroll needs, you know, that kind of thing. So that would be the first thing I would recommend.
So you mentioned sitting down with a business attorney. And obviously, that’s a lot of what we do. But from the tax perspective, you know, from you seeing it already go sideways, what different entities would you prefer to see? Or in what circumstances do you see where that might have helped somebody.
Um, sometimes you can set up an entity in such a way that can have a tax structure that will be more tax effective for the owner.
You know, some people might run their business as Bob’s computer service and just be Bob and not have an entity set up. Everything that Bob then earns is going to be subject to not an only income tax, but the Social Security and Medicare tax as well, which is the FICA taxes. So on top of your income tax is going to add 15.3% to the entirety of the income.
When you set a business up, say, as an LLC, you can pay yourself a salary, and then also take a distribution on top of that, and the distribution part isn’t subject to that FICA, which can lead to some tax savings. So there there are some of those beneficial structures that that can can help a person from a tax savings perspective.
So from the standpoint of I mean, you mentioned LLC, but obviously, you’ve got PA, you’ve got a number of other situations. Are there certain entities of those styles that you seem to prefer to come across when it comes to your work or is it different on the situation? I think it’s different in the situation. I mean, you can make almost anything an escort for tax purposes.
An entity is set up according to state law and a tax classification is set up based on federal law. Some things happen because, for example, banks have to be C-Corp. I think insurance companies have to be C corpse. If you have a foreign member want different classes of stock, you have to be a C Corp or maybe a partnership. You can’t be an S Corp.
So there are limitations but an LLC, a PA, p LLC, a limited partnership, you know, different types of structures can be different types of tax classifications. So you kind of choose an entity, not only based on what tax classification it can be but also what your goals are, how much administration, you know, do you want to have to upkeep the entity?
What are your liability risks, not only your outside risks, your internal risks, how many members and shareholders are there involved in this entity? All of those things that you know play when you’re choosing an entity, you know, with your legal counsel. So in addition to the entity part, you talked about an S corp and a C Corp The difference being obviously an escort with the pastor taxation, C Corp being the entity itself is its own taxable entity and in theory, you can get double tax, but that can open you up for certain benefits elsewhere, right?
Sometimes, yes, I mean, with the change in the new tax law in 2017, they lowered the corporate tax rate to about 21%. Well, when they did that, they also changed all the past through structures with this other provision, and they did so in order to try and create some parity between the pass-through structures and the corporate tax rate.
So, you know, I see a lot of people concerned about the lower corporate rate and wanting to jump to a C Corp. And because of the the inherent nature of the double taxation of a C Corp, meaning you’re going to pay 21% at the entity level and then whatever gets distributed to the shareholders also going to be taxed at your individual tax rate. It’s not usually the most effective tax structure and I still usually caution strongly against it. But there could be circumstances where it would be beneficial.
So other than for those specific agencies that are going to require a C Corp, are there any other just, you know, quick off the top of your head situations where a C Corp might be the issue because obviously with us, most of our clients were talking to them about an S Corp. If a bunch of shareholders if there’s more than one shareholder if you’re trying to take a business public if you are concerned about investment structures, venture capital, things like that.
It might be more beneficial to set up a C Corp because you can have different classes of stock in a C Corp and where you cannot in an S Corp. So you can have, you know, different levels of preferred stock and a C Corp. Also with a corporation. There are some nifty things that you can do for tax-free reorganizations and some other things. You know, like that, but usually, C-Corp involve a lot of money. Understandable, it’s oftentimes that’s all it’s about, it’s about money.
And obviously, the government always wants their share and when they want their share and they can’t pay it. That’s when you come to me. So you talked about you know, I’m a brand new small business owner, you know, I need to sit down with a business attorney first and account what is the first step when somebody should look into potentially sitting down with you for a consultation.
I would say right at the get-go I mean in terms of you as a business attorney, or in terms of me as you as a tax attorney, so you talked about, you know, those brand new business owners should be sitting down first with a business attorney and an accountant to make sure everything’s set up correctly. But at what point could they potentially need a tax attorney like yourself, you might want to get a tax attorney involved during the business setup phase.
Especially if your business attorney doesn’t know the differences between the entity structures and maybe they want to co counsel or bring someone in to, you know, discuss those issues.
Also, anytime you’re dealing with an international person or international entity, the tax consequences are going to be much more complex. You’ll probably want to sit down with a separate tax attorney who does the planning and business side of things in terms of when someone wants to sit down with me?
Someone would usually want to sit down with me when they get audited when they’re in collections, you know, that kind of thing. I’m more of the fixer attorney, tax attorney, not the planner, tax attorney.
There’s there are all kinds like the fixer, not the planner.
What’s interesting, so, you know, you’re talking about coming in, kind of after the problem has already blown up, I guess. Yeah. So you’re, you’re able to kind of sit back and see where this person either went wrong or at least what they could have done differently. Is that fair to say?
Yeah, absolutely. Um, you know, a planner attorney kind of things prospectively and a fixer attorney kind of has to look both ways. You know what was the thing that went wrong? How could it have been different? You know, what type of advice can we do moving forward? And how can we get this individual or this business into a better spot.
So not only do we, you know, fix the audit issue or fix the collection issue, but there might be times when we’re looking at a structure when we’re working with an accountant and we’re like, there’s a better way to do this moving forward. Let’s move from you know, this type of entity structure to another type of entity structure and sometimes those recommendations we will make.
Switching tax classifications is not an easy thing to do depending on what you’re trying to do with it. Sometimes it’s even easier to dissolve an entity and start up a new one. So you know, depending on what kind of mass taxpayers whether their business or individual what they find themselves in
You know, really depends on what we’re able to advise on an ongoing basis. When you say switching, taxable? Sorry, I should have written down the exact phrasing that you used. We said it’s easier to dissolve instead of switching tax classification.
Right. When you say that, are you talking about S corp, C Corp, you talking about LLC versus Limited Partnership, you’re talking about either one of those? Yeah, I’m talking about all of those types of things. If you’re a disregarded entity, basically yours as a sole business that’s just offering as yourself and everything falls onto your individual tax return.
We basically call that a disregarded entity or a sole proprietorship. It’s very easy to go from that to an S Corp. Going from a C Corp to an S corp can’t necessarily really be done going from a partnership to an escort but we might be able to do that. It depends,
So, so you know, that’s when you’re going to want to bring in a planning tax attorney at the recommendation of your other counsel, you know, to see if it makes sense to kind of make those types of moves are interesting. You mentioned, sometimes it’s easier just to kind of tear everything down, close it and start back fresh.
Absolutely. So I’m assuming you have some clients that just genuinely end up needing your services through some sort of misfortune. That’s not really in their control. Is that fair to say? Definitely. I mean, you know, sometimes, taxpayers just get scared of the IRS. It totally falls on them.
They really mess things up, haven’t filed for many years ignored. stacks of IRS mail. Sometimes the IRS gets it horribly, horribly wrong. With the government can make mistakes the government can actually make mistakes pretty, pretty fantastically, too.
And sometimes it’s a little bit from column A and a little bit from column B. So, in those circumstances, I mean, look, I think somebody who hasn’t filed tax returns in the last five years knows what their mistake is that they didn’t file tax returns in the last five years. But I’m sure you get a nother portion of your clients that like genuinely don’t know that they made a mistake that they did something wrong that they put themselves in this position.
Correct. Is that going to be is that most of your clients? I would say that’s probably about half of them. Maybe, maybe slightly less. Um, you know, sometimes what happens? Let’s, let me give an example. If someone files a return, they think they have all of their documentation that was sent by all the third parties, all their employers, the banks and everything.
They gathered it up. They had their tax return, prepare, prepare their return, they filed they think they’re all good. And then lo and behold, nine months 10 months down the road, they get a letter from the IRS saying you didn’t file and include this document, we’re going to assess you this additional amount.
And so, you know, under those types of circumstances, the taxpayer did everything right, they might have moved, they might not have gotten a document. And then we can kind of fix their issue from there. So it can happen like that where there are the best intentions and then the taxpayer does everything right.
In that situation you talked about though, I mean, that doesn’t sound like that’s going to be too big of a mistake. Um, it can be, you know, if someone’s sold, you know, a ton of stock and then didn’t get a form from their brokerage. You know, the impact can be, you know, quite a lot.
The IRS is going to make an assumption that they sold that stock that they bought the stock sorry for zero dollars and that they sold it for what they sold it for, as opposed to you know, actually buying it
What they bought it for, which is going to, you know, greatly reduced the amount of gain and us the tax that they pay. So, you know,
those mistakes can be a few hundred bucks to thousands and thousands and 10s of thousands of dollars.
So, you know, I think I have one, one client that’s coming in that, that we’re looking at, you know, potentially an impact of millions based on that kind of issue. Alright, so we’ve got the group of people who just, for whatever reason, have not filed at all. We’ve got a group of people who have tried to do everything but missed the form or didn’t get a document from somebody else.
What are some of the other common mistakes that you see are common groups of people that are going to need your services so that hopefully, our listeners can kind of avoid needing a tax attorney, most people I would say most of the clients that come in and some of them are businesses, and some of them are business owners, so they have both business and personal issues.
But most of them are just so terrified of the IRS to the point of not being able to move forward. And so they might still file their returns, but they have a ton of accrued liability tax liability. Some are terrified, they’re going to have, you know, their house foreclosed on their banks levied, but they just don’t know how to move forward. And finally, something might happen either in their personal life or by action from the IRS that that sparks movement where they feel the need to pick up the phone and call us and they get over whatever that initial fear was because it got so bad that they call us and they say I need help, I need to fix it.
By that time, they’re so already neck deep in it, that it’s still totally fixable is just becomes much more painful to do so, but we can still get through it. And what I tell my clients is that, you know, it’s not easy to pick up the phone for that first call and to give us a call, you know, we acknowledge that and say, and tell the clients
This is fixable we can get there, it’s probably going to take about a year. But if you stick with us, we can get you to the other side. And I want clients to imagine what life is going to be like on the other side where they do not have that tax issue. And something that makes us different than resolution companies is we don’t prepare returns in house. We work with accountants in the area because we want the client to be established with an ongoing professional so that that professional can help them into the future to take them into the future after we have finished cleaning up the mess will still be around if needed.
Because some sometimes clients or repeat clients, but we want that client to ultimately get past this thing and move forward and move forward with the professionals they need to help get them there.
So, I think we’re going to circle back to the difference between you and resolution company quite a bit because I think that’s important for a lot of our listeners to listen to. But I want to stick on this to make sure that we kind of cover everything. So are there any other major groups or major or, or common situations that you see that can be easily avoided or mostly avoided if our listeners, you know, no, no, some key fact or know something else before getting into this problem?
Yeah, I see a lot of businesses get into trouble with payroll tax issues. And it’s almost always it always is actually more expensive to fix on the back end than to just get it set up right on the front end. Which means you know, either have an accountant or an online company, something like gusto.com. They’re a great company. I use them for my own payroll, I recommend them to other attorneys, my clients, basically everyone, you know, something like 50 bucks a month, they can do all of your payroll.
Now, what does a payroll company do? Because when I was setting up my own firm, I was a tax attorney. I had all this education, I had no idea how to do payroll, they didn’t teach me that in school, so I had to figure it out myself. So you know, the someone who’s a new business owner trying to figure out payroll, I can only imagine the fear and anxiety and trepidation that that can cause for someone so so what a payroll company does is they basically disperse money into your employees bank accounts or you can write them a check.
They also take money from your account and make deposits on your behalf to the federal and state governments for for taxes. In the state of Florida, we don’t have a state income tax, but we do have what’s called reemployment tax. So there are state tax filings that employers need to file and the payroll company files, new hire reports, they, they file
all the tax forms with all the different agencies, they file the year and reports.
So it’s really worth the money and the effort setting it up right up front instead of trying to fix it later. So so my big recommendation would be to get a payroll company. Yeah, that’s one of the things that I keep circling back to is I wish it was just an amount of tax that I had to pay that covered everything instead of having it but obviously, you’ve got federal tax here. You’ve got state tax there. You’ve got this. You’ve got that.
So that can be very difficult. That’s why one of the things we’re doing is we’re trying to put together a calendar for our business owners that will go through a lot of those deadlines which they repeat over the course of the year. And obviously payroll will be a little bit different because it depends upon when you’re on payroll versus how much you make, but I can be a very difficult minefield.
Alright, so before we go into the resolution companies and more detail any other large group of potential clients or issues that our listeners should be aware of, or look out for?
Not that I can think of, I mean, you know, we really represent individuals and, and individuals and businesses that are involved in business. You know, I see a lot of clients who are small businesses, just that they didn’t have the support up front, from accounting or legal services to help set up their business right from the get go. You know, that’s really who.
Well, our client is really anyone that has a tax issue. But we see a lot of those groups of individuals. So your advice is, you know, suck it up and put the money in towards a good payroll company, a good business attorney a bit a good accountant so that they don’t need you as their tax attorney. Right. I mean, a small business in America is pretty amazing because you know, anyone can bootstrap a company.
I mean, when I started my firm, I started it with two clients and 800 bucks. And that was almost five years ago, and now we’re at between 140 and 150 clients. I’m still not making anything but we’re changing that. You know, right now we’re doing a great job growing and providing great service to the community.
But my advice is definitely if you’re going to start something up, try to set aside a couple thousand dollars to get the right paperwork in place and get the right accountant bookkeeper in place because it is going to save you time.
And save you money down the road. And I know for us a lot of a lot of what we’ll do with those new business owners is we’ll try and work with them on the incorporation in the first step as little as possible. And then obviously, as they continue to grow and need more services, you know, we’re still there to help with those things. So it’s, it can be a long road, but I think it’s a lot easier to have that peace of mind and have all those things lined up in advance.
Absolutely. So let’s talk about resolution companies and then and then we’ll go from there. You mentioned that and so obviously, a resolution company is going to be usually a non-lawyer or always a non-lawyer. They’re usually a non-lawyer. Resolution companies are kind of the businesses you might hear on the radio or the TV that they can fix your tax and IRS issue and save you pennies on the dollar and, and call us we can help you.
The issue with them is that most of them are not run by attorneys. If they are run by attorneys, the attorneys are likely skirting advertising rules that are associated with their attorney bar organization in the state attorneys have very strict solicitation rules. We can’t just call up new clients send letters to new clients, we can send letters to new clients, but they have to be pre-approved by the bar.
I don’t personally send them out that resolution companies will do anything to get in touch with a new client, including scare tactics, and either scare tactics or promising everything in the world in order to get a sign up and what happens typically and there are some good resolution companies but there are a lot of not good resolution companies and a resolution company will.
Oftentimes take your money and then not do the work. And every time you call back, they’ll either want more money and what recourse Do you as an individual or business owner have against them? You can’t really call the IRS and complain about them, the IRS isn’t going to care. When you hire an attorney, a tax attorney who specializes in resolution and controversy and an IRS issues and litigation, you always have recourse, you know, attorneys have recourse or orgs clients of attorneys have recourse and can always contact and file a complaint against the Florida Bar.
So there’s an extra level of care. I think that that goes into that level of representation. You know, we actually have an attorney in town who just kind of disappeared and so it was interesting to see how other attorneys, you know, stepped up and tried to take over some of the
And handle those as well as the bar, stepping into potentially refund some people some money, I’m assuming in a reference resolution company if they go bankrupt or disappear overnight, there’s not going to be any sort of similar protection.
Correct there. There isn’t. So you know, there. And a lot of these, you know, they might be certified by the Better Business Bureau or whatnot. You also don’t really know what their caseload sizes, you know, or what’s really going on behind the scenes. And, you know, you don’t have to be an attorney to do the work that I do. You can talk to an accountant, you can talk to a former IRS individual. The IRS also has a special certification called an enrolled agent. And they’re also licensed to practice before the IRS in resolution matters.
You know, the other thing about hiring an attorney as opposed to a resolution specialist is that you know, attorneys usually going to think about what our litigation options, you know, relating to your case. I’m not scared to file a tax court petition. I’m not scared to take an issue to District Court. If that is what the case requires. So, you know,
sometimes when we’re working in case we’re trying to also protect the issues and develop the issues in the event that the case has to be disputed, you know, in Tax Court or a district court or other type of venue. So having that insight is also pretty invaluable.
So every time we talked about this, I always kind of try to compare it to something that most people are going to go through. So when it comes to like buying a house, you know, it sounds like your realtor is more like your resolution company. They can help you through the process as long as the process runs normally, but they’re not going to have the ability to file you know, a lawsuit that there isn’t something that was properly disclosed.
Or do the title work themselves? I mean, that’s something that’s going to require usually an attorney. That’s a pretty fair analogy, I’d say. So are there circumstances where you would recommend somebody go with the resolution company? Or is it always going to be better to go to an attorney?
There are circumstances that I would recommend either self-help.
remedies. So, you know, one thing that sets me apart, I’m not just here to take client money. If I think isn’t it if I think an issue is relatively simple, and I can help direct that potential client, I might say, hey, potential client, you can resolve this issue by doing x, y, z. If you do not feel like doing it or it’s too time-consuming, feel free to call us back but that way they can save, you know, a little bit of money on that and or I might say, Hey, you know, this is something we can fix.
However, you can also have your account file an amendment or do this other action. There aren’t really situations where I would recommend a resolution company over an attorney. But there are situations where I would recommend maybe alternative solutions. Understandable. So,
Alright, so let’s go to the next step. So let’s say, you know, I’m a business owner, I’ve gotten my information from the IRS. I’ve got some sort of issue. I know I’m in over my head, I’m going to go sit down with an attorney. What questions should I be asking in that meeting to make sure that I’m finding the right tax attorney for me?
That’s a good question. You know, the first thing that the attorney you know should do is basically ask about, you know, what is the story what, why are you contacting us? You know, it might be that you got a form if you got a form or notice from the IRS.
What notice did you get? Chances are if you say, okay, Attorney I got, you know, form x, the attorney is going to be able to know exactly what the issue is and potentially how to resolve it before you even say another word.
But context also matters. The IRS isn’t just a numbers game, you know, we don’t just play settlement and numbers and resolution, how much is owed and let’s settle for this or your monthly payment amount is that it also depends on you know, the non monetary considerations, what hardships Have you are the business faced all those other kinds of things.
If I was an individual seeking the advice of an attorney, I would ask them, How long have they been doing this? Do they do other types of law? Have they had a similar case? Like there’s, you know, how much does it cost?
You know, if there are, if we can’t give an exact cost of it’s going to cost a flat fee of x, we might be able to say hey, and similar cases like yours that cost between this range and that range. A good attorney is going, to be honest with you, and also not scare you either. I had one client that just came in, who called another attorney before calling me and the attorney scared or so bad because he said that she was potentially liable for or that or that there was criminal exposure that she had potential criminal liability and criminal exposure. And she called me and I said that’s, that’s ridiculous. And she ultimately drove from the coast to retain me and we’re and we’re, you know, actively working her case.
So, you know, be aware of pressure tactics, be aware of fear tactics. You know, try to work with someone that you’re comfortable with because
this type of work isn’t something that you can just give to somebody. You can’t just give this to a tax attorney and say here, this is your problem. Now it becomes a relationship that the attorney and the client work together to resolve the issue. Because I can’t work any of these cases without information that’s provided by a client, you know, and a story that’s provided by a client and documents that’s provided by a client.
So we need to be able to work together in order to fix the issue. So you need to be comfortable with that. I know also you have an LLM and tax I do. So is that something that a person should only go to somebody who’s an LLM in tax or something that should definitely weigh heavily in the favor of the attorneys who do have it? Is there something that’s a good question um, so an LLM is is a law master’s degree and you can get a law master’s degree and in a few different specialties, but one of the specialties you can get a Masters in is for tax law.
And basically, it’s a one-year post juris doctorate program that specializes only in that area of law. So for an entire year, I was at the University of Florida only doing tax law. So in that regard, it sets me apart from someone who might have had one basic income tax class in their JD program. You know, it sets me apart from someone who does mostly bankruptcy or mostly some other area of law.
But that is not to say that I would only exclusively seek after an LLM tax attorney some of the best tax attorneys I know I’m Florida only have their Jade ease but they have an accounting background. Some of the best attorneys I know that do what I do. They’re in the midst of getting their LLM program. But they decided to practice a few years and figure out what they want to do. And they fell into tax law and love it. So, you know, again, I think it’s it’s how much of your practice is dedicated to this particular area of law, that’s a more important factor than whether someone has an LLM or not.
So I know we talked about the LLM or tax background, what sort of experience they have. And this obviously, what sort of caseload they’re going to hold. I mean, is it an attorney who’s going to have 20 cases anytime or 100 or 200? Any other facts like that any other big issues that they should be looking for to make the right decision on an attorney for them? Um, I would look at you know, what is the majority of their practice again, you know, dedicated to and do you have a
good connection, a good working relationship with that attorney.
I think those two factors, you know, are probably the most important. Okay, so now let’s look at the other side of this. I put myself in a bad spot. I’ve gotten the letters I’ve I’ve not done anything with them. I didn’t talk to the resolution companies. I didn’t talk to the attorney. What sort of potential punishments Am I looking at?
It depends on what stage you’re you’re at and how many letters you’ve ignored. The IRS can’t just file a lien on your house without sending you notices. They can’t just love your bank account or your wages without sending notices. So it kind of really depends on where in the process of the notices Are you in.
Sometimes we’re able to before one of those types of collection actions hit were able to file for a hearing request with the IRS level of appeals, in order and to put the file on hold, basically, in order to seek for resolution action. Let’s say that someone is past the point of that notice period and let’s say that your bank account is levied. If someone’s bank account is levied, they call me I can usually get it released in 123 days, when you say Levy, what does that mean?
That means like, taken so whatever is in your bank account on an on a given day, they will, the bank will say you have zero balance that the IRS has taken it. Basically, it’s a freeze only as the day of that Levy, there’s kind of some more intricacies to it, you know, there’s like a 21-day holding period by which we can have them release it before the bank actually sends it to the IRS.
But usually, they get noticed the day from the bank, they’ll go to make a purchase. And they say, like, Can I make a purchase? There’s no money, insufficient funds, they’ll call their bank and they’ll say, Oh my gosh, I have a levy. They’ll call us up. And so the difference between a levy and a lien being they’re not taking your house, they’re just going to put a lien on it so that if you sell the house, they’re going to get money from the proceeds of the sale. Right? So a lien is basically a document that the IRS has an interest in the property as a creditor.
And it’s, it’s not unlike other types of liens against properties. There are priority issues and other issues involved, but basically, it’s the IRS securing their interest in your real estate, and other property. So, you know, you wouldn’t be able to sell that property unless that lien was addressed. With a love that’s like taking of property and it could be actual, like physical inventory if you’re a business but usually it isn’t usually it’s a bank account.
It’s usually wage garnishments type of a levy. They can also levy retirement accounts in some cases, although that’s more aware, I’ve seen it. What about this homestead matter? I mean, if it’s something where you’ve got rental properties or Airbnb is, is that something that they can levy or still use? Or in? Or is it mostly going to be a lien still, for real estate? It’s going to be a lane. Um, but if there if it’s a non-personal residence, property, investment property, Airbnb, the likelihood of a potential foreclosure that goes up.
And so I know about a week ago or so you and I were joking about there was a cartoon going on online with a guy doing Turbo Tax and then asked him you know, how much time in prison is he willing to spend when he finishes filling out his taxes? Where’s that stuff coming in? Because I know that that’s my biggest fear is one day I’m going to go to federal prison because of some IRS issue that could have been avoided here.
Um, so criminal stuff with the IRS is relatively rare. Um, I have clients that over a million dollars and give zero cares about it. When they probably should. Are those people who are purposely evading the payment of tax and not trying to work it out with an IRS revenue officer, are those people potentially at risk for criminal liability?
Yes. Someone who owes you know even $800,000 is probably not. It ultimately depends on what are the underlying facts of the situation.
And there are a couple of different ways that those criminal issues come into play. Either a taxpayers action is so agreed that the Criminal Investigation Unit, the special agents get a referral from a revenue officer who’s working the civil side, or if someone is famous.
And this is what happened with I think Wesley Snipes, for instances, you know, he’s basically publicly blowing all this money on luxury goods while not filing his taxes. In those instances, the IRS will typically go after someone the IRS can, or I should say the criminal unit criminal investigation unit, which is a department of DOJ they can really go after business owners as well.
Again, it really depends on the situation. I have had some clients who have had businesses where they have closed down a business, open a new business, closed down in business, open a new business and didn’t pay tax throughout the whole thing. But they didn’t do it for tax evasion reasons. They did it for separate reasons.
Those clients were potentially at risk for what’s called a criminal referral. But we were able to avoid that we were able to show that there was no intention there. It is relatively rare. The cases that criminal investigation tends to go after or cases involving other criminal activities, money laundering, drugs, you know, tax return and refund schemes, you know, things of that nature because there are only so many funds to go around in that unit.
So they tend to go after the really, really big cases. So so going to jail for missing your estimated taxes is not going to happen. Okay, so step one, don’t create a fraudulent company. Don’t knowingly break the law with your company, don’t money laundering step to fill your taxes. Step three actually respond to the letters from the IRS when you get them?
I mean, really, that those seem to prevent most of these situations? Yeah, absolutely. I mean, there are technically criminal statutes on the books for failure to pay and failure to file. But I’ve got clients that haven’t filed for 1520 years and they’re not at risk for that type of criminal liability. I always go back to 1955. The IRS did everybody’s taxes and I just can’t imagine, you know, it wasn’t that long ago. I just can’t imagine how different it would be if the IRS still actually did everybody’s taxes?
You know, it’s an interesting point. And I mean, I just pulled a return from, I think it was the 30s or something one of the first returns and it looked like it was a self filed return. So, you know, in terms of the history of this cell filed returns stuff, I don’t know a lot about it, and I’d have to look into it. With all that being said, let’s say there is a client or there is a taxpayer who hasn’t filed in 10 years.
And basically, when an employer or some other third party that has been sending 1090, nines or w twos to a tax pair, they also are required to send that to the IRS. The IRS will file what’s called a substitute for return on behalf of a tax pair. If the taxpayer doesn’t file their own returns, usually at some point and that doesn’t happen for everybody.
Buddy, but if there’s like a huge 1099 and there was no tax withheld, the IRS is going to, to file a return and assess the tax and start going after and collecting against the individual.
And I’ve got several clients in that situation. The thing was a substitute for returns, and we call them SF ours for short, is that they’re almost always higher than what the actual tax liability is or shouldn’t be, because they don’t include any of the applicable deductions or credits or other things that the taxpayer might be entitled to. So when we have one of those cases, we usually take a good look at it and decide whether it’s going to be worth going back and filing original returns to replace those assets. Or whether it’s it’s better to just let them be and settle the case. Regardless of them.
So, in theory, so I guess so how do people actually avoid not paying taxes or not having a tax return for so long? There are all these checks and balances. I mean, does it have to be someone who’s self-employed and they’re not sending it from either side? They have to keep a low enough profile. I mean, it just seems like it’s so hard for people to get in this situation. But obviously, we hear that people are always in it.
That’s a good question.
Um, you know, I’m trying to think about how to how to answer the question. Hey, can you invest questions or the unanswerable right, can you rephrase the question? Maybe? I just, I mean, I guess it’s we’re looking at this podcast from the standpoint of being a solo entrepreneur or a small business owner or something along those lines.
What sort of situation Do I have to put myself in to really get stuck in that worst-case scenario where nothing’s getting filed? They’re coming after me. There’s potential criminal liability mean? Like, what’s the, what’s the simplest way for me to accidentally fall into that position? I think it’s hard to accidentally fall into that position.
I mean, you know, inaction is still action at some level. And, and so, so not filing and not paying is the easiest way to get into a mess. And whether that’s your individual tax returns or your business tax returns, or whatnot. And some people, you know, especially when the economy was crashing, they really did the best they can and they still filed their returns all the time the business returns, but they just didn’t pay the tax.
And that’s another way to kind of get in a sticky situation. But that situation is a lot easier to resolve. Then a situation where there are no returns because now you have to go back and file all those returns. If you already filed the returns, there’s going to be no failure to file a penalty. At least there might be a failure to pay a penalty of some other issues.
But the mess becomes a lot more easily fixable. When all the returns are filed, it’s still not unsolvable in the returns aren’t filed is just adds another level to the case. So the easiest way to get into trouble with the IRS is not filing and not paying.
So what percentage do you think that our listeners should be putting away or at least assuming is going to go to taxes? I mean, what’s the average amount that’s going to come from a normal S corp? Something along those lines?
Yeah, that’s a tough question. Because ultimately, you know, our income tax structure is based on a graduated rate system. So if you’re only making $30,000 a year or whatever, you know, part of that isn’t going to be taxable. Another part might be taxed at a 10% rate. Well, if that income is, it is based on self-employment income, then automatically you’re already looking at, you know, essentially 25% that should be set aside for taxes. And sometimes, you know, those are the cases that are most heartbreaking because when you’re making that kind of money, it’s really hard to set aside 25% when you’re, you know, still trying to pay your mortgage and feed your kids kind of thing.
It also really depends on how your business is structured. I would say as a fair estimate for most people, making under $150,000 would say try to put aside 20%. And again, that’s a really rough estimate. And that’s another reason you’re going to want to seek an accountant and seek that kind of help.
Our tax system is a pay as you go system. So even though our 2019 tax returns aren’t going to be due till 2020, we have to estimate what our tax is going to be based on however we’re doing this year and file estimated taxes on a quarterly basis or pay and deposit estimated taxes on a quarterly basis.
And the IRS, of course, has rules on that. So for 2019 estimated taxes, you can look at your 2018 return and pay 100% of your 2018 return or pay 80% of what your estimated tax liability is going to be for 2019. And of course, none of us have magic, you know, a magic eight ball or a crystal ball. So that kind of becomes hard to hard to do. But if you base it on your prior year, it’s usually a pretty safe bet.
The 80% of projected or the hundred percent of last year is that a whichever one’s higher is that you’re free to pick which one is that it’s whatever one is lower. But again, how do you know? How do you know if you don’t know what your 2019 is? So so you know, and that’s what we call a safe harbor provision. So when I’m working in case I usually base it on the prior year and just do that, you know, do the best we can with it when I’m advising a client.
It’s also a lot easier to pay your estimated taxes on a monthly basis than it is on a quarterly basis. So for self-employed people, I usually recommend one of two things. Either pay if you know your estimated tax liability based on your prior year is going to be like 1500 dollars a quarter.
Pay $500 a month because paying $500 a month is a lot easier than coming up with 1500 bucks. The other thing is, if you are going to take a distribution from your company over and above what you’re paying yourself for payroll, as soon as you take that distribution, you take that 20% aside and you pay it to the IRS because that can get you know, in a pretty good position.
What often happens with people is they think their year is going to go better than it actually does. And then they owe a bunch of taxes and can’t pay it and they’re already in the new year. And so they kind of scramble, they don’t know whether to get caught up with the old year or to start new with the new year. In that type of circumstance. I usually recommend clients start with the New Year be current for the new year because if your current for the new year, we can fix the old year
So when in doubt, so uh, that would be last in first out. I mean, the last bill in the first one paid out as opposed to the prior one. I mean, basically, before the IRS is going to cut a deal with you or give you an installment agreement, you have to show them that you’re in compliance with your current obligations. And basically, that means you got to file on time and pay on time.
So if you only have so much money that you can either pay 2018 taxes or pay your estimated taxes for 2019 you might be depending on the situation and a better situation to pay your 2019 estimated taxes, file your 2018 return and then got get on an installment agreement for the past liability.
Alright, so we have covered a lot here. I think. I mean, I think there’s a lot of very helpful information that we’ve come across from your brand new business owner or even you know, in the process who are caught up or not caught up in taxes or knows what to do now to catch up more? Is there anything else just kind of brief topics or issues that you want us to make sure that we explained for the listeners?
Yeah, I mean, if the majority of the listeners are business owners and business focused, you know, really think about is this what you want to be doing, you know, think about the why of what you’re doing. Because it’s important to have the vision and the plan for your business and know what you want to do with it.
And it’s very important to be intentional, you know, with it, I mean, that’s kind of high-level stuff, but, you know, we’re usually doing these things for a reason, you know, hopefully, we like what we’re doing. Hopefully, we have a vision for where we want to go with what we’re doing.
Regardless of the type of business, we’re in and, and you know,
even before you step foot an attorney’s office or an accountants office, you know, think to yourself, what do you envision for your future with this business? You know, why are you doing this business? Do you like it? Think about those big, those big-picture ideas?
So Charlotte Erdmann, Orlando tax law, if anybody needs you the name that truly sums up what you do. We’re in Orlando and we do tax law.
Is there I guess let’s do this. We’re going to end every I think every one of these podcasts the same way so what is the piece of advice that you wish you could give your younger self?
And don’t worry, we can edit out the dead time. It’s okay. There’s lots of dead time. Um, I would tell myself to better use my dead time I guess. Okay. To better use my dead time for processes and procedures for planning.
For a goal making for vision building, when I started the firm, I had a lot of spare time on my hands. And I don’t think that I, I used it to the best of my ability. So, you know, there’s a lot that can be done in terms of planning process and procedures, goal mapping, even marketing plans, that kind of thing that that you can do.
So even if you’re not answering the phone, helping a client, doing the things that are actively engaged and running a business and collecting money in your business, there are still things that can be done for your business development and to not neglect those in the earlier stages. So the old work on your business, not in your business at least as much as possible. Yes. All right. Thank you so much for joining us. Thank you for having me.
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