Tax Trolls Podcast Episode 3- Why the IRS hates Entrepreneurs and Why Poor People are Audited? | CPA for Startups

Disclaimer- This podcast is for entertainment purposes only. If you have any questions about taxes or any financial matters please consultant a professional accountant.

Transcription:

Lenard: Alright, let's get into the podcast.

Argel: Alright, let's do it.

Lenard: In this episode, we're going to go over why it looks like the IRS hate entrepreneurs and also the IRS admitting it audits poor people because auditing rich people is too expensive. Another topic we’re going to go over is what is a fiduciary and are you getting screwed by your marketing agency?

So, let's go with this article from entrepreneur.com.

Argel: Okay.

Lenard: You know, it says the IRS hates telling entrepreneurs anything about taxes. And one of the things that caught my eye was there are actually businesses out there that will like bring in $100,000 then they’ll deduct like $80,000, whether it is like travel expenses or tax credit. Is this a common thing that you're seeing? You know, you work with clients all the time; is this something that comes out common or is legit? What's up with it?

Argel: I think it depends on the industry you're in. So, if you're in the tech industry, you'll see massive losses from the company because they have investments from, you know, they have startup investments. If you look at like professional services company, you'll see a lot of meals and entertainment expenses, building those relationships with clients. If you're looking at like retail, you're looking at big expenses on shipping and inventory.

I think what's important is that whatever industry you're in, that you're kind of in line with how the income and expenses are; like the ratio of those when it comes to like how is your bottom line compared to the bottom line of other competitors in the industry?

And more importantly, it's okay to have massive losses, but as long as those losses are for business purposes and you can back it up with some documentation, for example, if you're attending, say, Propelify like this, I mean, it costs money to be here and I'm here to build relationship and get clients; that is 100 percent deductible for businesses.

And so, for something like a travel expense, for example, if you're going to say a big convention in like Vegas, you want to be able to back it up with the schedule of the convention and how many days you're there. You’ll state like the business purpose of it.

So, deducting of those, you should be okay. It shouldn’t be about how much money are you netting? I mean, you look at Amazon, they're still not like profitable.

Lenard: Yeah, true. And this article like references like does the IRS comes out with dirty and the list of their for 2019. One of the things that caught my eye was, I get a lot of people… it says here; “Excessive claims for business credit.”

I guess enough people are taking these credits and sometimes maybe they interpret the publication wrong or is that something like that from CPA to CPA, where some CPAs are like, I guess, more like risk? Like they take the risk where they're like, “Okay, let’s take the credit” or some are on the other side who are risk averse. Is that from CPA to CPA?

Argel: So, most credits… A lot of regular entrepreneurs and business owners, they don't know a lot of credit. So, it's mainly they’d hear it from their CPA who might be specializing on that (like a specific tax credit) that they just go out and look for clients that would do, you know, they'll just do tax credit all day today. So, they know they're very specialized at that point.

So, you'll have a CPAs that maybe attempt to take on those credits that they might not be too familiar; they don't know the nuances. So, they could make a mistake there.

But you also have an individual that would run into credit or like they go in there talking and somebody’s talking about some sort of like startup credit and then they try to do it themselves. And most often do not, because of the nuances of credit, they end up making a mistake.

And credit is one of those things where it's dollar for dollar. Like whereas in deductions, you save a portion of that deduction. Whereas for tax credit, it's directly offsetting your tax liability. And so, it's more screwed…

Lenard: Oh, we broke up there.

Argel: Where you're taking tax credits, make sure that it's well documented that you can back up your claim that you qualify for the credits.

Lenard: Okay. So, then continue on the IRS thread. Something that fascinated me is the IRS, it admitted that it audits poor people because auditing rich people is too expensive.

And I guess their logic is that higher end people have attorneys then and CPAs who they pay a good amount of money to get through the loopholes, I guess. Because I guess, the IRS, I guess, dollar for dollar, it says here that they could audit poor taxpayers and they can use like low level employees to, I guess, collect on it.

That’s fascinating because it's like the background of this is that the Republicans, I guess, in a way took a lot of budget away from IRS. And is this something that you see a lot that is like it's unfair. And then like what are you supposed to do about it? Is there anything you can do about it?

Argel: Well, so just a little background; like for the longest time… This is a fascinating story because for the longest time, the IRS focuses on big businesses, rich people because it's a huge amount of tax that they bring in. Classic case was Wesley Snipes.

Lenard: Blade.

Argel: Blade, yeah. But like what's been happening is that like the Jeff Bezos of the world, they have a lot of tax lawyers that fight the IRS and so it takes a while to get that money for the IRS and oftentimes, they end up settling.

And so, because they're undermanned now, where they don't have a lot of agents on the field, they’ve actually implemented blockchain in the IRS, believe it or not.

Lenard: Oh, blockchain. Okay.

Argel: Where now, they're able to… what they're piecing together is like all your 1099, all your W-2, all of the claims that you're making for having a child tax credit or… Because in the long tail, because everybody is like making less than 100K, like… Little, they could collect more in those individuals, as a whole, rather than focusing on like… So, there's another thing; they're playing quantity, as opposed to quality.

And so, oftentimes, what you'll see is that poor people, middle class, they don't want to be audited; they don't want to deal with the headache. And so, they'll just see what the assessment is and they won't fight it and they'll just pay it. And then hopefully next year, they try not to make a claim.

So, that to me is an overreach by the IRS where every individual should be represented. I remember back when I was like in college, I got audited and I was freaking out and I thought, “Why were they targeting me?” Like, I didn't have much; I wasn’t rich.

And that's actually why I became like an entrepreneur and work for like the biggest company in the world; like Big Four, because I wanted to know what tax breaks and what the strategies rich people were doing and then I wanted to bring that to my community.

So, I guess bottom line is that like just because you can get audited, it doesn't mean that you're guilty. It's just them giving you an assessment and you're supposed to provide them with proof.

And so, that's why the other thing too is that if you're just using TurboTax, if you're just like hiring like a shady tax preparer, like maybe in the short run you're saving money, but like the IRS, they usually come back to you, two to three years later, which at that point, if they find you guilty of take taking too much deduction then they'll charge you interest in penalty. So, the longer they wait, the more interest and penalties accruing.

So, yeah, definitely it makes sense, especially if you're a business to have a CPA doing all these things for you correctly. And also, you need to get in the habit of like documenting or like saving receipts over $75 or like large item. I would also say make sure that you write down who you had like dinner with, what was the business purpose. And then like, you can use your iPhone just to take picture of those and then save it on a Dropbox folder. So, those are the ways you can kind of protect yourself.

Lenard: Yeah. Well, it's interesting because even the IRS runs a like a for-profit company because at the end, it's like it has to be cost-beneficial.

Okay. Let's sort of… just a couple more issues before you… because I know you're at the conference, you want to meet all those people and so on. So, when you hear this thing like fiduciary, right, like… because the CPA, you take on a couple of roles where you… the book keeping, the financials, the taxes… like the fiduciary, you have to also look at the client like marketing agency;

Right? How do you know… like I know we're talking briefly about on maybe a previous episode about metrics and KPI; like how do you know, like a marketing agency, like they’re screwing you over… screwing your clients over?

Argel: I mean, that's basically… in my job as a CFO, as a CPA for a company, is to make sure that they increase their bottom line. So, what I usually looked at is on the top line revenue, like how can I help them grow their revenue? And most often than not, if you an e-commerce company, you're going to rely on digital marketing company to get your name out there.

And so, what has happened where most people who don't have a CPA or CFO on their side is they would think that they have to spend X amount of money on an agency and then pay them the money to bring in the revenue.

Well, that's fine to begin with. But as an owner, you have to be accountable too of like you have to keep them accountable. You have to make sure that they're bringing the ROI; the return on investment, on your marketing spend.

And one of my job is to make sure that we're measuring what's the cost of acquiring a customer; that we're measuring like which channels are bringing ROI to the company. And it's my job to look at, for every customer that we acquire, how much money we're spending on our company; what's their long term value. And as long as that long term value is higher than the cost of acquiring them, then we're bringing ROI to the company.

So, when things like, maybe if I'm doubling the budget for our marketing spend and I'm not seeing it move the needle, then I'm going to question it and I'm going to ask the agency on why it's not moving the needle. What's the reason? Is it the website, is it the targeting? Like it could be multiple things.

But the more important thing out of all of this is that you need somebody who will look at the numbers, day in day out, that knows your unit economics. If you can't afford a CPA as a business owner, you need to learn how to make your unit economics work, not just from the products that you're selling, but also from the marketing spend that you're doing. Because you already have limited funds, and so you want to waste that on like an SEO campaign that's not bringing in revenue.

I understand that you have to test different channels, but you also want to always want to make sure you're paying attention in those channels and you're interpreting them correctly on the data that's coming in.

Lenard: Okay. I know we've got to let you go here, but in three words, what's a fiduciary?

Argel: A fiduciary? Why don't you tell us what a fiduciary is?

Lenard: Well, is a fiduciary someone like… I think it's like someone who’s got your back. That’s four words. When you hire somebody who's like… who, I guess, has your best interests at heart. If it's a professional like a tax attorney or if it's a CPA or it’s a consultant you bring in, sometimes people have their motive.

Alright, let's end on that. Let's get you back to the conference. You're not speaking there, are you?

Argel: I wish. You know, everybody needs to hear some knowledge of bonds, on taxes, accounting and finance.

Lenard: Alright, you're going to tell them all the good things covered up.

Argel: I'm just here to learn from other professionals and other e-commerce companies on what they're doing; the innovation that's happening. There's a huge talk about like text SMS messaging as like the future of e-commerce. So, I'm very interested in that space. But yeah, we should definitely talk online or offline about it.

Lenard: Alright, let's do that. Let's bring that up in another episode. So, thanks, everyone, who's listening. We’ll be back on the next episode soon. This is Lenard Guzman and Argel Sabillo of the Tax Trolls. See you later.

Argel: Alright.