Why a Tax Litigator Says IRS Audits Turn Criminal

All right.

“That's not true in tax in order to convict someone of tax evasion.”

The government must prove intentional violation of a known legal duty.

There's nothing patriotic about paying more taxes than our deal. We shouldn't have to pay more taxes than our deal. But that's where the difficulty comes in because our tax code is very complicated by any measure. And even even people who have somewhat simple tax situations feel more comfortable hiring and advice or to help them.

One of your more is a formidable experience and client-focused tax litigator Recognize for representing taxpayers and high stakes disputes with the IRS Department of Justice and state taxing agencies while advocating for each client's individual needs. I really like solving tax problems. It's a puzzle and there's such a great feeling when you're in your office and it's two in the morning

and you're reading case after code after case after code and it's like the light bulb and you think this is how I'm going to beat them. Here's how a lot of cases turn criminal. Let's say you have an audit. The IRS agent says, "I would like proof of all of your business expenses."

But what happens is the IRS selects you for examination and they audit you and then people do something really stupid. The living your legacy podcast for those who live to leave a legacy. You can live your dream. Hey, welcome back everyone to another episode of Living Your Legacy Podcast.

I'm your host again, Jay Slangen. And yeah, we got the new podcast set up in the new studio.

You're actually my first guest in this actual setup before it was over there.

“But yeah, we have a special guest in for America's top lawyers, right?”

It's actually my honor. So let me, what's your name? What do you do? And yeah, what kind of attorney are you? My name is one of your more.

I am a tax controversy in tax litigation attorney. Okay. And I represent taxpayers in significant civil and criminal tax dispute. So explain civil and criminal tax disputes. What gets them to need a tax attorney?

A civil tax dispute is a letter that you get from the inter-revenue service, or whatever state tax authority you're dealing with that says,

we've decided to select you for examination.

It can be for an individual, a partnership, a corporation. But a civil tax dispute is something that is about money. Yeah. Do you owe more money than you said you owe? A criminal tax dispute is where there's a risk of potential criminal penalties,

which could be jail, it could be a large fine, or it could be both. Okay. So you may have heard the expression in a sense of the law as no excuse. All right. That's not true in tax.

In order to convict someone of tax evasion, the government must prove intentional violation of a known legal duty. We all agree taxes are complicated. And in the United States-- Very complicated.

Very complicated. Great. And our tax laws are so complicated that many people hire professionals to help them prepare their tax returns. Even if it's like a simple W2,

people still feel the need to go down to H&R block or Jackson Hue at any number of bomb and pop or large-- Realty. I'm like Johnny Depp, like creative, right? I just want someone to handle all that stuff.

Because it's scary. Yeah. So you can think-- Also, your brain doesn't work that way. You know?

Yeah. I'm on the creative spectrum. Finance is on all that. Of course, having been an entrepreneur, I'm more on top of end and giant debt.

I'm not as that super far-right creative spectrum that he is. So I have some sense. But I also know what I like and what I don't like taxes. I don't like.

“Yes. And I think we all in this country feel very firm”

about our right to pay no more taxes than the amount that's due. Yeah. And there's a famous case that says there's nothing patriotic about paying more taxes than our due. We shouldn't have to pay more taxes than our due.

Yeah. But that's where the difficulty comes in because our tax code is very complicated by any measure.

more comfortable hiring an advisor to help them.

Of course. Because they're also scared. They don't want to mess up. Exactly.

“Everyone's scared because in the back of our minds,”

we know that filing tax returns is the one thing that every US adult must do potentially subjects you to criminal penalties. Yeah. We can rest a little bit easier because

it is true that it's subjects you to potential criminal penalties. But it's also true that most disputes with the IRS or state taxing authorities are civil. And in order for it to be criminal, as I said, the government has to establish

intentional violation of a known legal duty. So you knew what you were doing was wrong. Yes.

I mean, you understood the tax law to begin with.

Yeah. And you violated it in any way. Yeah. And it's interesting because in most, if you think of a crime, right?

That's a very small sector of people. It's a very small sector of people. Yeah. Because if you think of a crime, you think of, say, for example, law and order.

There's a dead body. There's a broken window. There's some evidence that a crime actually took place. But in tax cases, it's in the defendant's mind. Did the defendant actually understand the tax law?

Mm-hmm. Did the defendant actually violate the tax law? And did the defendant do it on purpose? Yeah.

And that requires literally getting it.

That's a lot of people with a lot of money then. Because they're trying to evade taxes and not pay taxes. So did they kind of try to, you know, screw around it and purpose? Is that what you're doing?

Yeah. So there's a very big difference between tax avoidance. And we're quick. This is like getting audited, right? Or an audit?

Yeah. Yeah. So here's how a lot of cases turn criminal. Let's say you have an audit. And the IRS agent says to you,

I would like proof of all of your business expenses. Yes. Which they do often? Yeah. And let's say that you put down on your tax return that you traveled

170,000 miles per car. I was just going to say that the car example is one common example. Yeah. Yeah. Can you get that?

Do you think that there is anybody who travels 170,000, 4,000 miles per business who's not an over the road trucker? Almost certainly not. Yeah. I think that's like maybe going to the moon and bat.

So maybe too much entertainment? Yeah. Is that another? It's like this like too much entertainment or claiming business use of things that are not in fact business.

Gotcha. But what happens is the IRS selects you for examination and they audit you. And then people do something really stupid. They lie or they make up documents or they make up things that didn't exist. And if you're in a civil audit and all of a sudden it gets really quiet,

don't think oh yeah, it's over and they just didn't tell me. Yeah. Because that's not what happened. Yeah. What happened is the civil auditor said I'm going to package up this case and I'm going to make a referral

to the criminal division because this person sent me something that was false. I'm getting conflicting information or I think this document is made up.

“That's how a lot of criminal cases come about, not all, but many.”

Most of the time disputes with the IRS are civil. They should be civil. So it's against the normal person. Not the billionaire is trying to not pay taxes or whatever. It's against the normal people that maybe they charge too much on their travel expenses

in terms of gas or something. Let me give you an example of the most common exam. I guess a normal person, normal person meaning like a done entrepreneur. I think it was a friend that was like, I think he was feeling up his snowmobile. Right.

And putting that on like company and then it was actually, you know, the IRS was like, well, did you drive all these places? Can you prove that you went that much mileage? I don't know. Okay.

Yeah. I think it would be very difficult to prove that it detests for whether something as a business expense is whether it's necessary and ordinary. Yeah. Yeah.

And I'm going to go out on a limb and say that your friend's snowmobile is neither a necessary ordinary business expense unless to see operate a snowmobile. No. Yeah. No.

“Is he giving clients rides to exotic places on a snowmobile?”

No. No. And he has to pay more. Thank your friend should not have deducted the snowmobile.

So he had to they like caught him out on it. He had to pay more or something like that. That's typically what happens is they'll ask you questions.

“The most important thing and we've all heard this over and over.”

It's not the crime. It's the cover up, right? So don't do anything stupid. Don't lie. Don't try to cover up.

You can say I shouldn't have done that and let me take it off voluntarily. Yeah. Then nine times out of ten it's over and you just pay whatever additional amount is due. The one thing most people don't necessarily know is that when you pay the additional tax, you also have to pay interest and maybe penalties.

Yeah. It's like a two percent a month or something. And federal. Oh, under payment interest is three percent above prime. Okay.

And it compounds daily. Okay. So that's there's no crime. What do you mean about that? Above prime.

So prime is published. Okay. You could look prime up on your phone right now and see what what prime is. And the federal rates are published on a quarterly basis.

And it's always set to three percent above prime.

There's no way that someone unless they are a very savvy investor. It's almost impossible to imagine someone who's getting a better rate of return on their money. I hear that you like the litigation part. I love you. You love the courtroom battle.

Yes. Yes. I like the courtroom battle. I like the strategy that leads up to the courtroom battle. Gotcha.

I love this thrill of being in front of a jury because of these. These cases don't really go to mediation and settle, right? Two different things. They sometimes mediation is a different animal in when you're dealing with the government that it is with private parties. Yeah.

Yeah. And that's what I'm asking. So a lot of private parties have in their contracts. Like if you, if we entered into a contract, it would most likely have a mediation and/or an arbitration provision that would say any dispute between us has to be resolved first by sure any go to mediation and if we can't resolve it there, then by arbitration.

Yeah. The government doesn't work that way. Yeah. So it goes straight to straight to battle. And what happens is the commissioner of the internal revenue service, the commissioner of the IRS makes a determination.

And the commissioner says, I think your tax return was wrong. Yeah. And once the commissioner makes that determination, the determination is presumed to be correct. Okay.

“So taxpayers who want to fight that, if you can't settle, the best thing to do is to try to come up with a settlement that you and the IRS can agree on either at IRS exam or if you can't reach a agreement there and IRS appeals.”

Yeah. So it's all still administrative at that point. And if you can't reach an agreement there, then they issue this notice that gives either right to go to court. But once you get to court, the IRS is presumed right. And it's a tax buyer's job to prove that they're wrong.

So you're always the underdog.

Yes. You're always, yeah. Yeah. That's a shaft we write. Yeah.

But it's good to be the underdog. Yeah. And so why I mean, people must really, Oh, a lot because they're presumed, you know, they're going in as the underdog, right? And they have to hire a lawyer.

Yeah. So the expenses are already mounting. So it, it almost seems like isn't worth it, right? So you do go to court very seldomly. Your point is very well taken. And this isn't analysis I have with every client about is the juice worth a squeeze.

Yeah. Right. Because a lot of times the juice isn't worth a squeeze. Now if it's a pro bono case, I'll fight to the death. I'll take it to the Supreme Court.

Yeah.

“If I think our position is sound and it's going to further advance tax justice, which I care very deeply about.”

Mm-hmm. But if it's not a pro bono client and it's somebody who's making this everyday calculation of what are my litigation costs?

And the other thing that I always want everyone to think about is what are your opportunity costs?

Yeah. Because as you know, successful entrepreneurs are best at doing whatever it is they're best at. But their time and their teams' time is going to be not well-spend. Absolutely. Yeah.

It's like you can go to battle on this, you know? Like just kind of put your ego aside because would you rather be doing your business and making money and just kind of settle it, right? Or do you want to go to court spend all your time and your mind away from your business also, right? Because now you're now focused on that. Yeah.

Yeah. That's exactly right. So there has to be a lot at stake. And you have to have a solid strategy. And so what are these high stakes?

Give us an example of some of these high stakes tax, you know, court cases that you go to war on.

And this is really important for entrepreneurs because anything that is like a hobby, you are limited in the amount that you can deduct. So let's say you love horseback riding. Yes. You love it.

And you're like, oh, this is so relaxing. This is my happy place. I'm going to buy a horse and I'm going to put my horse in this stable. And I have to pay for the food and all of the things. But I dream of being a question and like a professional a question.

Gotcha. Okay, no, you can't deduct the horse or the food or the stableing fees or any of that up to anything over $3,000. Because at this point, it's a hobby. Yeah. I mean, it sounds like a hobby.

That person. You cannot deduct expenses associated with your hobbies.

“Unless they take that horse to work once a month, right?”

Or something. There's no business use of a horse deduction. And unfortunately, like, there is for a vehicle. Okay. But the idea in this case was whether the taxpayer was materially participating in his business such

that he could deduct the loss that he had because he had a huge loss.

We're talking upwards of 20 million.

Right. So you wanted to duck that. Yeah. For sure. Well, you can only do it if you're active and you're not passive.

It's the same if think about it. If you buy a share of Microsoft and the share of Microsoft declines and value, you can't like deduct that decline in value. You are not an active investor. You're not actively participating in that business.

Okay. So in order to deduct certain business expenses and many entrepreneurs have multiple businesses. Right. So if you say that they're secorbed. They got their LLCs.

Yeah. Now multiple of course. Yeah. They're doing several kind of credit games on several businesses. You know, it's what we see.

Let's say you spend 70% of your time in business A and 10% in B, 10% in C. And then you have a whole bunch of other businesses that you're just a little bit. You're not actively participating in all of those businesses. Almost certainly. Yeah.

But what you could do is make an election. And group them together. If those businesses go well together. So for example, a podcast company and a filming studio. Right.

You can make an election to group those together and say losses for one can offset the other. I'm actively participating in both because I've grouped them together. Yeah. But in this case, the question was whether the taxpayer was materially participating because he had multiple businesses.

Had he done enough in the business that experienced this 20 plus million dollar loss in order to take the deduction.

And we had to prove that he was working.

“How do you prove active particip prove to me that you're that you work?”

Yeah. Prove to me right now. How are you going to prove to me that you do your job? Emails. This was an older guy.

He didn't email. He wasn't an emailer. Witnesses. That's right. Receipts.

Yes. Thinking like a lawyer, I like it. So what we did was we went and talked to all of the people who he worked with. We won by one March them into the courtroom and then they testified about how they saw him working and what a hard worker he was. Yeah.

And how the value that he brought to this company and ultimately we won. But it's kind of hard to if you think about it. What was that guy's cost of opportunity and how much did he save on this? I mean, because we were talking about that before and then he said he's an older guy. So was the government trying to take him to town?

“And well, the government wanted to disallow a $20 million deduction.”

So, you know, that's worth the fight. That's worth the fight. That's worth the fight for sure.

20 million dollars of horses.

A horse food. Or maybe he was buying the whole entire horse track. Yeah. It's not exactly. Yeah.

Well, that's amazing. I ask everyone, what are you? Well, usually I ask everyone what you're so excited about. Well, honestly, two things. How do you get so into taxes?

That's just how your mind works. I really like solving tax problems because it's like a puzzle for you. It's a puzzle and there's like such a great feeling when you're in your office and it's two in the morning. And you're reading case after code after case after code. And it's like the light bulb.

And you think this is how I'm going to beat them. Okay. Because tax is exhilarating. So you're trying, when you read tax code, you read the code.

That's one way to interpret it.

And that's how I'm going to win. Like you're kind of in between the lines. And sometimes between those lines. Yeah. Yeah.

Right on. Very interesting. And then what are you most excited about? Yeah.

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More more tax law. No, you don't want. We want MWRE tax law. And I'm sorry. M-O-R-E. M-O-O-R-E tax law group.com.

Exactly. We don't want more as an additional. Yes. Slaw. Less would be better.

Or you can find me on LinkedIn. One of your more. G-U-I-N-E-B-E-R-E. It's how you spell one of your.

“I mean, I can sit here and actually talk to you for a while on tax law.”

And it's actually quite interesting. So, and I'm sure a lot of our viewers will find it interesting as well. We have a lot of entrepreneurs here, actually a ton of entrepreneurs here. And they're all wondering, "Am I going to get selected one day?" Well, hopefully not, but if you do, just make sure you've got a strong team in place,

ready to defend you. And do you only deal in Chicago, Illinois, or... Oh, my clients are all over the world. No, because US taxpayers have to pay tax, regardless of where the income is derived, and where in the world they live.

So, you don't have a job. You're not just like, your jurisdiction is only a particular state. You don't have to pass the bar in several states. No, because practice before the IRS is a national practice. And I'm admitted to courts throughout the country.

I've tried cases in Florida, Atlanta, New York. Perfect. Yeah, sure. If you got that tax issues, if you got that letter and facing any civil or criminal tax charges, like one of your no.

And she can help you worldwide all around the United States. But, yeah. If you're interested in that, check out her episode on America's top lawyers. And, yeah, I hope to see you again here on Living Your Legacy Podcast. Thank you for joining us.

It's been a pleasure. Thank you. All right, cheers, everyone. (upbeat music)