Settle Your IRS Debt for Pennies on the Dollar

I dedicate this blog to the memory of my dead hamster Lulu.  Her full name was Honolulu Maui.  She was my Hawaiian fuzzy friend.  From the moment she friended me on Facebook, we felt an instant connection.  Although I never caressed her furry body in my palms, she was my soul mate.  I longed to see her nibble on a carrot.

For a few moments, like when she asked for my bank account information, I thought that maybe she didn't really exist.  When she explained how her Skype account had been cut off, I used my Paypal account to send her the necessary $10K to get it turned back on.  Her Skype never did work due to a vicious German Shepherd, who bit through the cable to her camera.

Lulu died in a tragic car accident in September.  Her Volkswagen Beetle was crushed underneath an eighteen wheeler carrying dog poop.  Even though alcohol was found in her system, I do not believe her driving was impaired.  So long and farewell Lulu.  I am sending your estate $20K for the funeral.  I won't be attending her funeral because of tax season, but she knows I'll be there in spirit.

Speaking of imaginary friends, this time of year the tax resolution firms bombard us with advertisements for  new IRS programs that offer to settle your IRS debts for pennies on the dollar.  Former TV "star", Alan Thicke, stars in one ad running now on the radio.  He tells us that a brand new IRS program now gives you the chance to eliminate up to ninety percent of old tax liabilities.  What great news!

Maybe not.  First of all, there are some relatively new IRS programs, such as the Fresh Start program, but these programs won't relieve you of taxes you legitimately owe.  How can the tax resolution firms make these outlandish claims of tax freedom?

They lie - or at least they only tell a small portion of the truth.  To find out if you "qualify" for these wonderful new programs, you'll pay a $2,500 to $5,000 retainer.  Then they'll listen to your story and explain to you that you don't really qualify for the ninety percent reduction programs. But, they can negotiate an installment agreement with the IRS so that you can pay your taxes, including interest and penalties, over time.  How can they get away with doing business this way?  For the most part they don't.  These firms are always in trouble with state authorities.  Some of the owners are doing jail time now.

The other way they claim big tax liability reductions is to cite instances where a taxpayer really didn't owe the taxes in the first place.  For example, maybe you forgot to record stock sales from your brokerage statement.  The IRS computer sees this and sends you a big tax bill.  They assume you paid nothing for these stocks.  All you have to do is amend your return for both the sales proceeds and the cost of your stock purchases, and you may owe little or nothing.  Maybe you even get a refund.  I handle these situations fifty times a year.  But, I don't claim I got rid of ninety percent of your tax liability.  I know you didn't owe the taxes in the first place.

What's the real story about settling tax debts with the IRS?  First, let's look at the regulations that govern when the IRS can accept an agreement to pay back taxes for less than the full amount.  There are three reasons the IRS can accept for paying less than your full tax liability.

First,  the IRS will settle for less than your full tax liability if there is doubt as to whether you actually owe the money.  This happens when you have been audited by the IRS, and they assess additional taxes on you based a gray area of the law.  Rather than face you in tax court and potentially lose a case that could set a precedent, they'll negotiate with you.

Second, the IRS will settle for less than your full tax liability if your tax debt is not fully collectible.  Before you break out the champagne, there is a catch.  You don't get a break because you are having a rough time financially.  Not fully collectible has a very specific definition.  It means that your income and assets, after allowed living expenses, cannot pay the debt in full within ten years.  Any amount not collectible in ten years will be written off.

"Allowed living expenses" has a very specific definition as well.  You will be given an allowance for housing, vehicle expenses, food, clothing, and some other necessary items.  The allowance for housing does not include an amount sufficient to make payments on your million dollar mortgage or the payments on your Mercedes.  You get regionally adjusted amounts from a table.  The IRS doesn't really care if you have to stiff your other creditors and file for bankruptcy to live within their allowance.

The third reason the IRS will compromise your tax liability is for efficient tax administration.  Not even the IRS knows what that means, nor do I.  I have never seen this provision used.  I suspect the IRS fears a congressional backlash if they ever use this provision.

What about this thing the tax resolution firms refer to as an offer in compromise (O.I.C.)?  Keep in mind all three rules above apply to O.I.C.'s.  So don't expect to walk away from your tax bill.  The O.I.C. form walks you through the calculation for rule two above.

Here's a sobering statistic about O.I.C.'s.  The IRS accepts less than twenty percent of O.I.C.'s.  Even that is a vast overstatement.  The overwhelming majority of people, who start the O.I.C., process, never complete the process.  I have started the process for a number of clients, but I have never submitted a completed offer.  In most cases, we come to an agreement with the IRS through other programs.  However, in some instances, our client simply stopped the process when they realized that the O.I.C. process gives the IRS complete knowledge about their income and assets.  if the IRS turned down the offer, they would have all of the client's bank account information.  The IRS would be in position to immediately seize all of my client's money.  So your odds successfully submitting an O.I.C. are slim and none.
The IRS will work with you to settle your tax liability.  In my next post, I will discuss the mechanics of reaching a real world agreement with the IRS.  Expect pain.  The basic IRS collection principle is that someone, who pays his taxes late, cannot be placed in a better position than a taxpayer, who complied with his payment obligations on a timely basis.  That is just basic fairness to all of us, who meet our obligations.  Yes, you can settle your IRS debt for pennies on the dollar - 115 pennies to the dollar just like everyone else.

Next week's Superbowl has been renamed the Psychopath Bowl.  It features the Forty-niners coach, who has turned the post game handshake into a potential UFC fighting match.  He doesn't play well in the sand box with the other NFL coach children.  The Ravens feature Ray Lewis, the would be serial killer, whose limo was found with blood stains from a murder victim prior to a Superbowl a few years back.  I have no idea who to root for.

Thanks for reading.  For real tax and accounting advice, please like the "Stitely & Karstetter" Facebook page as well as the "How To Screw Up Your Small Business" Facebook page, where I post daily business tips.  Until next time, let's do it to them before they do it to us.

Three Ways to Screw Up a Business Purchase

Hundreds of thousands have asked me to weigh on the gun debate.  So here it is.  I understand the paranoia of gun owners when it comes to gun control legislation.  There is an idiot mayor in NYC, who is trying to ban 32 ounce soft drinks.  I have no doubt that he would ban hunting rifles, pea shooters, and metal cutlery.  Politicians never voluntarily restrict their own power.

On the other hand, most of the people, who want to own assault rifles, are precisely the type of people, who should be banned from having them.  Thirty years ago, many of these people were against stores opening on Sundays.  So just how much about freedom is this?  It's really about guaranteeing the right for everyone to think just like they do.

Here is my conclusion.  Assault rifles should be legal, but you should only be allowed to shoot politicians with them.  This would be handled the way deer season in Pennsylvania is handled.  Every registered voter gets a tag.  When you shoot a politician, you tag him, and then you are done for the year.  You only get one.  So choose well.

Here are three ways to screw up a business purchase.

First, buy the corporate stock of the seller.  When you do that you not only get the assets you want, such as customers, equipment, favorable lease, but you also get all of the liabilities, both known and unknown.  Two years from now when you find out the old owner didn't pay payroll taxes for a year, guess who gets to pay.  Sure, the purchase agreement states that he will pay any old liabilities that show up.  Try to find him after three years.  And if you do find him, what are the odds he has any money left.  Yes, you'll win in court, but you'll spend $50K in legal fees to collect nothing from him.

Second, let the seller continue to run the business.  Yes, you need a transition after the purchase to make certain the customers successfully transfer to you.  However, that is all you should need from the old owner after closing on the purchase.  If you need training in operations, get that before you close.  Once you own the business, own it for real.  There is little worse than a business with two conflicting owners.  Put in the agreement that the seller has no operational authority after the sale.

Recently, I saw a medical practice sale that went wrong when the new owner's decisions were overridden by the former owner.  The practice was the seller's baby for thirty years, and he just couldn't let go.  He let patients and staff alike know he didn't agree with any of the new owner's policies.

The old owner was to receive a monthly consulting payment from the buyer.  After two months of conflict the buyer quit paying to get the old owner to leave.  Four years of litigation follies ensued.

Finally, make the purchase formula as complex as possible.  Make certain a doctorate in mathematics is necessary to determine the price.  Here is a good example.  The purchase price shall be 50% of the lesser of the greater or the lesser of gross profit as derived under the assumption in subchapter A of part IV except when the moon is in the seventh house and Jupiter aligns with Mars.

Any formula based on profitability will cause litigation.  Yes, in theory profitability is a great measure, but profitability can be manipulated easily by massaging expenses.  For instance the buyer might decide his girlfriend's rent is a business expense.

Here's an example of a simple pricing formula that is in reality quite complex.  The buyer will pay the seller 20% of sales for five years.  This is how CPA's firms are commonly sold.  It is called an earn out.  Earn outs are great in theory, but complex in practice.

The problem is defining sales.  Are we talking about sales from customers of the business on the purchase date, or are we talking about sales from all customers before and after the purchase date?  You had better define that in the agreement.  The purchaser's lawyer will argue that only customers at the purchase date count.  The seller's lawyer will argue that all customers count.  Both will be billing at $400 per hour.  Budget $50K in round numbers to sort this one out, unless you go to court.  Then allow $100K.

There are a lot of other ways to screw up a business purchase, but these are three common ones.  I'm always amazed when I see a buyer rely on the seller's attorney to draft an agreement with no advice from his own attorney.  I am even more amazed when a buyer agrees to use the standard agreement from a business broker.  Many of these are fill in the blank agreements used for everything from gas stations to medical practices.  By fill in the blanks, I mean the blanks are filled in by hand.

When you buy a business, you need your own lawyer and CPA, both of whom should be experienced in business purchases.  Pay a few grand up front to avoid $100K later, not to mention a failed business.

As I write this, I'm watching the Baltimore versus New England playoff game.  I have tried rooting for the Patriots, but rooting for Bill Belichick is like rooting for Darth Vader.  I'd love to root for the Ravens, but they are stolen property - from Cleveland.  I grew up as a Baltimore Colts fan.  Then they packed up and moved to Indianapolis in the middle of the night.  So I'm sensitive to douche bag owners who move teams.  Also, I'm not that wild about middle linebackers who have been involved in murders.  I guess I'll just have a beer and wait for RGIII to come back next year.

As always, for real tax and accounting advice, visit www.skcpas.com or like the Stitely & Karstetter page on Facebook.  Connect with me on the How to Screw up Your Small Business Facebook page for daily advice on messing up your business.

Drugs for the Medical Needs

Drugs have two sides of edges, good side and bad side. With those sides, then you can get benefit from it, yet you can also fall deeply because of it too. The good side of drugs is that it can give you medical help by getting Medical Marijuana Canada so that you can have it for your medical purpose easily. Yet, when you get drugs in the wrong dosage then you will just fall into a drug abuse conduct. It’s not only you that might get into this situation, yet the people close to you also have the same risk to be plunged into this misery.

To have friends or relatives that have gotten addicted to drugs might be a miserable thing to experience since seeing then to suffer after the effect of drugs will make you feel so sad too. People who have become addicted to drugs won’t be able to control anything that they do when they are under the effect of the drugs. Yet, when they have become sober then they will need drugs soon after since their body has a big need to drugs when they have gotten the feeling once. This will be a bad effect when you have no control of your own body and mind anymore so that you will need to cure your addiction by going to a rehabilitation center. This is a medication place that will help you to get over your addiction to drugs so that you will be able to live normally without any dependency to drugs.

That is the bad side of drugs which we cannot object or doubt about it. Yet, there are still the good sides of it that you can use for the medical purpose too. You can take a peek on Vancouver medical dispensary to know what advantages that you can have from this substance. You should be clear about this case and not only see it from one point since it will be troublesome and unfortunate if you cannot observe this case from many sides. When you have a need to use drugs for your medical purpose then you won’t feel hesitate anymore since you have become so sure that there are several of them ready to be used to keep you in steady condition gradually.

This is why you should just go to that site and learn some information about this thing thoroughly. By going there then you can have some information about this topic and you won’t just get trapped to this point of view anymore. That site will give you some insights related to this topic and you won’t just have one-sided information to be used as the source of information. That’s why you should Visit Site now and get abundance information right away. By getting there then you can possibly get updated to the news related to the usage of drugs in the medical ways. After you have learnt some information from this site then you will be able to add your knowledge related to drugs well enough so that you won’t just have one-sided information about it.

Help Your Employees Steal

Some of you were upset with the sundress story from my last post.  As my business partner, Paul, has often said.  My greatest strength is that I tell it like it is.  He also said it's my greatest weakness.  I agree.  In my defense, if I prevented just one person from wearing a sundress to work, I have served humanity well.

Here's a quick test to see if you should be a business owner.  What was your first thought after reading the sundress story?  Was it, "How dare he tell a story about an employee"? Or was your reaction, "His clients had to see her dressed like that"?  If your reaction was the first one, don't mortgage your house, empty your 401(k), and start a business.  You will be making an expensive mistake.

Here is a key point business owners understand.  Businesses exist to make money.  While I can't say the sundress cost me money, I can absolutely state the sundress's purpose was not to make money.  At least I hope to God it wasn't.

I gave a talk to a chamber of commerce group about the dangers of employee theft about ten years ago.  I talked about preventing it with segregation of duties and some other absolutely brilliant insights.  Afterwards, a man came up to me and said he didn't have the time to take any of the actions I suggested.  He was a busy guy.  He trusted his bookkeeper implicitly.  That is when I learned the meaning of implicit.  It means stupid.

A few years ago, the bookkeeper for a client scheduled a meeting with me.  She came in and told me that the company owed a substantial amount in unpaid payroll taxes - about $500K.  That shocked me as their bookkeeping records showed nothing of the sort.  Then she told me that instead of paying the IRS, she was taking the money personally.  How did she do that?  She was a signer on the company bank accounts and just transferred $700K or so to her personal bank account, recording the payments as if she were paying the IRS.  The owner trusted her implicitly.

Employee theft happens to almost every business.  Don't be embarrassed about it.  Prevent it from recurring with three simple steps.

First identify your company's vulnerable property.  If you have valuable inventory that is easy to steal, start your list there.  Your bank account always makes the list.  To misquote Billy the Kid, people steal money because that's where the money is.  Your credit card machine could be another opportunity for a thief.

A few years ago, I got a call from a panicked client.  He had gotten a call from his credit card processing company.  They told him that his account had processed an unusual amount of credits in the past week - all to one account.  His bookkeeper had been processing credits against her personal credit balances using the company credit card machine, to the tune of about $40K.  In effect, she transferred, via credit card chargebacks, $40K from the company bank account to pay off her credit cards.

Second, determine who has access to the valuable property on your list.  Your internal bookkeeping staff should always be on the list.  Your warehouse or purchasing manager  should also make the list.

Before we started the CPA firm, I worked as controller for a company that installed telephone systems.  We had a purchasing manager, who was in charge of the warehouse as well as purchasing.  We caught him accepting kickbacks from a company that sold lightbulbs.  He had purchased hundreds of useless lightbulbs and hid them under a compartment in the warehouse ceiling.  He got caught, because the company was broke and I was paying attention to every invoice we got.  We got suspicious at the number of invoices we were getting from the office supply store selling the lightbulbs.  I didn't write that thieves are particularly bright.

Third, enforce segregation of duties.  The person depositing your customer checks should not be the same one applying the payments in your accounting system and making collection calls.  She can steal customer payments and hide the theft, because she has complete and exclusive access to the entire accounts receivable processing cycle.

If you have valuable inventory, mandate a system where inventory is signed out by technicians.  The inventory should be stored in a locked area with no technician access.  A manager should be in charge of issuing the inventory from the controlled access area.

The person printing your checks should not be a signer on your account.  This seems pretty obvious, but I see this all the time.  Also, bank statements should come to you unopened.  Scan the statements for unusual transfers and large checks.

Segregation of duties makes employees collude to steal.  While this doesn't absolutely prevent theft, segregation makes theft exponentially more difficult.  Fortunately, thieves tend not to trust each other, and justifiably so.

Finally, only the people you trust can steal from you, because you don't give people you mistrust the opportunity.  Trust no one implicitly, even your spouse, if he or she works in your business.  A few years back, as the result of a divorce, a client discovered that his bookkeeper wife had put her parents on the company payroll with salaries over $100K annually.  Talk about miserable in-laws?!?  Thanksgiving must have been wonderful in that house.

This week we mourn the injury of RGIII.  I was never able to get insurance on him.  You might remember a post from the beginning of the season where I predicted he would get killed behind the Redskins offensive line.  Their pass protection this year was truly offensive.

I'm not one of those second guessing Mike Shanahan for playing him in the playoff game against the Seahawks.  RGIII's superhuman feats during the season seduced his coach into making a bad decision.  As I told everyone during the season, enjoy every game you get to watch RGIII.  With a running quarterback, any game could be his last.  Get well soon!!  Until then, thank Mike Shanahan for being stubborn enough to draft a second franchise quarterback, Kirk Cousins, despite other pressing needs.

As always, thanks for reading, and don't take me so damn seriously.  For real tax and accounting advice, visit our S&K web site at www.skcpas.com.  Also, like the "How to Screw Up Your Small Business" Facebook page.  I post mercifully short tips there every day.  Until next time, let's do it to them before they do it to us.

How to Screw Up Your Divorce

This evening on the way home from work I remembered a funny story about an employee, who worked for us ten years ago.  She refused to sign a receipt stating that we had provided her with a copy of our company manual.  She was upset, because the manual banned sun dresses.  Of course, Paul and I had no idea exactly what a sun dress was.  So we made an exception for her.

Then she wore one to the office, and we understood why the author of the employee manual we purchased banned them.  She looked like an elephant dancing in a circus parade.  It wasn't a sun dress.  It was a total solar eclipse dress.  No, I am not an attractive guy, but I know my fashion limits.

Step one for business owners going through a divorce is get an attorney.  No, you should not share one with your soon to be ex to save on attorney's fees.  An attorney is only allowed to represent one of you.  If she represents your ex, she isn't representing you, and your interests will suffer.

Step two - find someone in whom you can confide your feelings.  This should not be your CPA or attorney.  You don't want your professionals making decisions based on your emotions.  You want sound business judgment from them.  When I'm meeting with a business owner going through a divorce, I don't even hear, "The bitch sucks" comments.  I'm focusing on the tax and business issues.  Consider therapy if you don't have a close friend with no connections to your ex.  Or call Dr. Phil.

Step three - get busy with life and your business.  During my divorce, I almost went to therapy.  Then I got busy and started dating.  Dating reminds you that you are worthwhile as a person, or at least that most people are a lot more screwed up than you are.

On one date, a woman told me, and five thousand of our closest friends at a minor league baseball game, that her ex-husband was a drug using wife beater.  That was scintillating first date conversation.  A couple innings into the game, a toddler ran up behind me and gave me a big hug.  He was telling me, "I'm with you brother."  After a few dates like this, I really needed the therapy.

Get busy with your business.  Your personal life is undergoing major changes.  This is a good time to take a close look at your business with fresh eyes. The more time you spend on productive activities, the less time you'll spend hating that spiteful, alcoholic, drug using, child molesting, lavish spending ex.  Did I miss any adjectives?

Finally, understand that you win in a divorce if you end up with a healthy business and a healthy mind.

Let's put the Redskins season to rest with two observations.  First, the offensive line can't protect RGIII in the pocket.  He runs for his life every time he drops back to pass.  That is why they run naked bootleg and short drops from the pistol formation.  The line just isn't good enough.  They have one legitimate NFL starter, Trent Williams.

They can't really run block either, but they don't have to with stretch plays.  Either RGIII or Alfred Morris looks for lanes vacated by defensive lineman on the move.  Then they cut back against the grain.  Next year, watch how many times the offensive linemen are standing at the end of a running play.  That isn't blocking.  It's spectating.  You should have to buy a ticket to do that.

Second, the defense just doesn't work.  Yes, I know they had some injuries.  Yes, I know their points per game looked good the last few games of the year.  But consider this, if you lose a game three to nothing, because your opponent had the ball the entire game, how good was the defense really?  The job of the defense is to get the ball back for the offense, and not inside their own ten yard line.  If RGIII is on the bench or starts deep in Redskins territory, the offense can't score.  Points against is an overrated statistic applied to defenses.  Last year the Patriots made the Super Bowl with a horrible points against defense.  But their yards against was better than the Redskins and a lot of other teams.

Thanks for reading.  Check out the "How to Screw Up Your Small Business" Facebook page.  I post business tips and what not to do daily.  Also, check out our main S&K web site at www.skcpas.com.  Until next time, let's do it to them before they do it to us.