Click Here To Listen To The Retirement Tax Services Podcast
Are you trying to learn how to deliver massive tax value to your clients? Then look no further. Retirement Tax Services Podcast, Financial Professional’s Edition is a show hosted by Steven Jarvis, CPA. Steven aims to bridge the gap between tax professionals, financial advisors and their mutual clients in their quest for reducing tax expenses in retirement.
Communicating with the Internal Revenue Service (IRS) is not something your clients should ever feel they need to do. IRS agents are prepared to perform their job duties and ask questions that, if answered flippantly by your clients, could lead to incriminating evidence. Because of this, it is essential that tax planners and financial advisors are involved in every conversation with the IRS to avoid any mistakes being made. In this episode, Micah Shilanski, CFP, will be joining the show to discuss this topic in-depth, specifically explaining what to do if your client receives a letter from the IRS.
Listen in as Micah shares the importance of setting expectations with your clients about the IRS, including how long it will take to have a resolution with them. You will learn why you need to be as respectful as possible with the IRS, what a letter back to the IRS should generally look like, and why you should always ask for evidence from the IRS.
Steven and his guests share more tax-planning insights in today’s Retirement Tax Services Podcast. Feedback, unusual tax-planning stories, and suggestions for future guests can be sent to firstname.lastname@example.org.
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We’re not overpaying. No, we’re not overpaying. We’re not overpaying anymore. The tax code’s complicated, boring, and overrated. You don’t want that, you want a pro. One thing that you should know: this is a radio show. It’s not tax advice, don’t take it that way.
Steven Jarvis: Hello everyone, and welcome to the next episode of the Retirement Tax Services Podcast. I am your host, Steven Jarvis, CPA. And today, with me on the show, we have a returning guest, Micah Shilanski. Micah, welcome.
Micah Shilanski: Steven, thanks so much for having me back. I really appreciate it.
Steven Jarvis: Yeah, this is the first one you and I have done in person, I believe. We’re sitting in your mostly completed house in Wasilla, Alaska, having a lot of fun.
Micah Shilanski: That is correct. Wasilla, Alaska is now on the map because everyone, when I say we’re just north of Anchorage. “Well, where is that?” “Wasilla.” “Oh, Sarah Palin.” Yes.
So, no, she’s not my neighbor to answer that question. But yeah, mostly completed. We’re supposed to move in, in boy, eight days or so and there’s a few things I have to get done.
Steven Jarvis: Couple of things. Well, that’s really exciting. Well, Michael, we want to record this episode because we actually have a shared client, we’ve worked together through.
You’re an RTS Premier member. And we got an email from the client that really excited email that basically said, “Hey, I opened my mail and I got a $13,000 check from the IRS. Hooray! It’s finally over.” Something to that effect.
Micah Shilanski: Fantastic, deposit it quickly.
Steven Jarvis: Yes. Deposit it quickly because this was the resolution of nearly two years of fighting with the IRS.
Micah Shilanski: Yes, and this brings up such a good story about how you need to effectively communicate a good process to a client. And so, we’re going to learn some examples of how I failed to do this — but a good process to a client on the best way for them to deal with things with the IRS.
And one of the things that I have noticed is my federal employee clients and I said, “Hey, look, it’s a government process. We got to be a cog on the wheel.” They’re like, “Okay, I get it.” And then they can kind of let that happen.
But then I get more my self-employed clients, my more executive clients that we have. And they don’t understand that. They’re like, “No, I’m just going to call them and I’m going to resolve this.” Yeah, you’re already laughing.
It’s, “I’m going to call them and I’m going to resolve this issue right now over the phone. It’s going to be so much easier.” And I’m like, “Oh, for the love of God, please don’t call them. All that’s going to happen is you’ll spend all day on hold. You’ll be super irritated and make zero progress whatsoever.”
Steven Jarvis: Yeah. Zero progress. Now, before we dive into this specific story, because it certainly relates. We need to talk about how, as an advisor, as a tax preparer, if you want to add lots of value, massive value, even to your clients when it comes to taxes, before any of these kind of stories even come up, you’ve got to set the precedence with your clients that you want to be involved in everything.
No matter what it is, no matter what they’ll see, what kind of communication it is; that their first step should be calling you. Because all too often, clients will get these communications, especially like you said, if they’re on the self-employed side. If they’re more that “I’m just going to do it myself” kind of a person. “It’s going to be easy. I’ll just resolve it. I’ll tell Micah after it’s done. I’ll tell Steven after it’s done, it’s fine. I’ll take care of it.”
No, no, no. We want to be involved from the moment they get that letter. And so, as much as I don’t like dealing with the IRS, there’s part of me that gets excited anytime a client immediately sends me an IRS letter because I know this is going to be a better experience for them. Not a great experience, but I can take some of the pain out of it.
Micah Shilanski: Yeah, they don’t know just yet. It’s going to be a better experience. So, we got to work on that one. But yeah, so the client — now, we had an 8821 on file, which is fantastic with this client. So, we get copies of all IRS letters. So, which wasn’t the intent when we started down the 8821 process.
It was a great byproduct. And now, for that reason alone, it’s totally worth getting this system set up and using it through Retirement Tax Services. So, you guys get the copies of them first. So, you come up with the answer and I don’t have to — love that one.
So, the client, long story short, is she got a divorce. She was the breadwinner, and she was expected to get her refund. They had filed the tax return and because the taxpayer was putting everything under his name, the refund was under his name.
They got the divorce. In the divorce decree, it says she’s supposed to get the refund, then he dies. And so, now this thing already gets complex. Now, in my opinion and the attorneys’ because they wanted to settle things kind of quickly, I would’ve preferred that we not wait for the IRS to give the refund.
You debit it out in the beginning, you say, “Hey, there’s already a refund coming of this dollar amount. We already know what it is.” Just debit the estate to begin with. And just let that other person have it so you’re not having to pass checks back and forth after separation. It’s just a nightmare.
And then he passes away unexpectedly. And now, this complicates things even more because did the IRS give a refund? Where was it applied? Where was it at? Et cetera. And this particular individual, the guy that passed away, wasn’t on top of finances.
So, then it was like, did he even put that as a carry forward? Was there a refund check? I mean, we had no idea what was taking place in these particular circumstances. And then the client, rightfully so, Sue, wants to get the money. She’s like, “No, that $13,000 is my money. I want to get that money.”
And then she starts getting love letters from the IRS about this and brings us into the mix, which is fantastic. Actually, we called her when we got a copy of that letter but she had got it right before us.
And so, she had already called the IRS so she was already fired up. And so, I had failed to somewhere in my communications expressed to the client, “If you ever get an IRS letter, call us first.”
But she’s like, “No, I saw you guys were copied on it to get the letter, but I just thought I would call them and I’m just going to take care of it because it’s not that complex.”
Steven you’re laughing right there. That’s exactly it right there. You say it’s not that complex, but all of a sudden, it’s like you’re dealing with the IRS. It’s not the matter of it’s complex.
The right hand has no idea what the left hand is doing. And there’s a third hand somewhere that we don’t even know where is at, but is off doing something completely different.
Steven Jarvis: Yeah or 80,000 different hands. And I mean, to the client’s credit-
Micah Shilanski: I thought that was going to be a political joke with 87,000 new agents. No, we’re not going there. We’re not going there.
Steven Jarvis: I was just going to assume the audience knew what I was referring.
Micah Shilanski: Oh, fair enough. Alright.
Steven Jarvis: So, I mean, in this situation, if it wasn’t the IRS, I would totally agree with the client. It was actually laid out pretty well. I mean, as I went back through the documents, the tax returns, honestly, it was pretty clean.
It was pretty obvious to me exactly what should have happened. That it was all in the divorce decree. Like a rational person could think if they don’t have experience with the IRS, a rational person could think, “Oh, there’s the $13,000. It should have gone to me. Great. I’m going to give this simple communication to the IRS and they’re going to send me $13,000.”
And now, seven letters and two phone calls and two years later, it’s finally-
Micah Shilanski: Two years.
Steven Jarvis: Yeah. And probably to me, to kind of think back through that process, some of the most frustrating parts of it, of talking about the left hand not knowing what the right hand is doing, is the sequence of these letters that would come in.
Because a letter would come, your office helped Sue with what the response should be, the support to include, how to outline this in meticulous detail, here’s exactly what happened and what needs to happen next.
And then a new letter would come from the IRS months later. So, plenty of time to do something about it if the IRS had a good system-
Micah Shilanski: Don’t apply logic to government process.
Steven Jarvis: Don’t apply logic, please. And so, then the next letter would come almost as if that last letter had never happened which is exactly what the IRS letter is reflecting. They have no idea that letter came in.
And so, you also have to set expectations for clients that anything with the IRS is not going to get resolved quickly. It’s not going to get resolved painlessly. There’s going to be these times.
And this is a story I’ll use to set expectations with other clients, of, “Hey, we’re there for you. We’re on your team. We’re going to help you see this through to the end. But so you know, here is what likely will happen along the way.”
Micah Shilanski: And that’s really good. So, the short answer is, two years later, we resolved this with the client. But Steven, what is that process that needs to be there?
So, clients get a love letter — and this is actually how I tell my clients about it. I say, “When you get a love letter from the IRS, takes a little bit of the sting out of it.” And everybody knows it’s not a love letter, but it says, “Alright, I got a love letter from the IRS, what does that mean? Like what do I do when I get that?”
Steven Jarvis: Yeah. If there are RTS clients listening, please call RTS. Premier members, the first thing, if you have a tax preparer, tax professional in your life who’s proactive with all this stuff, that should be your first call.
For a lot of our advisors, they’re the first call for their clients. If they’re not working directly with RTS, they don’t have a tax professional who’s going to do something about it. But getting really clear for the client of here is who you call first. And it is never the IRS. The IRS is never the first call. Hopefully, we don’t call them at all.
But it’s let’s get the letter to a professional who’s going to help in this process and let’s make a plan together before … like I said, hopefully, we never call the IRS, but we need to have a clear idea of what this letter is actually saying.
Is it asking us to take action? Are there payments we need to make? Are there things we can dispute in here? We need to have a plan of action before we ever send a response. And my preference is going to be that I’m involved from the minute they open that letter.
Micah Shilanski: And one of the things we always want with our clients too is documentation. So, I never want to say anything about a love letter until I see the love letter. I’ll talk about the process that we’re going to go through, but I don’t want to assume that what the client is telling me it says is what it actually says.
And again, this is not because I have incompetent clients, they’re very well-educated. These letters trigger a lot of emotion. And when we’re highly emotional, we’re not very logical about things. So, we have that going against clients in this state.
Plus, we have … you and I recording a video the other day, Steven, where I talked about when we get a letter from the IRS, and it could be like an EFIN update. And it comes to our home address, not the business because why would it go to the business?
And then my wife kind of doesn’t freak out about it, but she’s like, “We got a letter from the IRS, you need to deal with this.” And I’m like, it just says that we have an EFIN.
She’s like, “I don’t know what that is, but you have to…” I mean, just the font, the format, the whole nine yards triggers this emotional response. So, we got to deal with that. So, I want to see that documentation before I say anything.
And then I want to encourage the clients how to best communicate with the IRS. Because if we leave them to their own devices, they’re going to apply normal logic on how to deal with something and it’s just going to be wrong in this process.
So, I want to say, “Hey, great news.” And I want to set some time expectations. Which is probably where I failed with this one because I did not set a two-year time expectation.
I set between 8 months and 14 months, 15 months maybe to get this sucker resolved, then somebody died. And so, it made it more complicated after that. So, anyway we had that process in place.
So, I want to set time expectations with the client. I want to set communication standards with the client as to how we’re going to communicate with it.
But let’s go back to your example. The client got a letter, we sent off a response to that letter. Then the client got a same letter, relatively the same letter back. What do you do with that? Do you just ignore it?
Steven Jarvis: Yeah, that’s a great question, Micah. We definitely want to pay attention to the timelines and the dates that are in those letters. One thing to add on about your comment of making sure you get the actual letter kind of like getting the tax return — make sure you get all of the pages.
I have clients who will take a picture on their cell phone and send them the first page of the letter and say, “What’s the response?”
Micah Shilanski: That’s all you need.
Steven Jarvis: And there’s part of me that says, “Oh, I got this figured out.” But get all the pages. But, yeah, when we start getting those duplicate letters, and love to hear your thoughts on this as well, Micah; if I’m getting a second copy of the exact same letter and I’ve already sent a response that I know the IRS hasn’t processed yet, I wait.
Micah Shilanski: Okay. So, that’d be great. So, I’m learning something here today. So, I always tell clients I want to respond to almost every letter we get from the IRS when it’s asking for some type of action. Even just to say, “Hey, I already sent this to you.”
And my rationale behind that — so I could totally be wrong, is not an IRS rationale, but a client rationale. Clients are freaking out that I’ve never responded to this and there’s a due date.
If you don’t do something by X date, all of a sudden, a SWAT team’s going to kick in my door. They’re going to evict our family, they’re going to arrest us in handcuffs, they’re going to take all of our money. I mean, that’s mentally where our clients are going with this.
You and I are like, “Yeah, whatever, I could get six letters.” Until it says that they’re going to levy my account, now, I really got to respond to this thing.
And so, I want to empower the client to be able to take some type of action that they can feel they’re doing something because I don’t want them to feel helpless in that situation. What are your thoughts on that?
Steven Jarvis: Yeah, Micah, I love that from the client aspect of that, of making sure it’s clear, “Here’s what we’re doing and here’s how we have you taken care of” even if it doesn’t change the process or accelerate the outcome.
I mean, it’s so odd because it’s really almost impossible to know what the status of these things are through the process. Because I wouldn’t have guessed that we were going to get that email yesterday. I didn’t know they were about to resolve it.
Honestly, I thought we probably had a couple more rounds with them. Because there’s no way to check the status or where they’re at in the process because it’s not a consistent process.
Micah Shilanski: Yeah, that makes it really fun when it’s not consistent. And then being able to explain it to a client and how it goes through.
And then Steven, you get this is great news about being the CPA, you get a lot of credit because you came in at the … and I’m not putting it down at all, but you came in at relatively the ninth hour in the ordeal.
So, it was basically I was going back and forth with the client with letters trying to get stuff done, et cetera. And then in this particular case, again, the husband, ex-husband, had passed away and we’re like, “Well, did he get the money or did he not get the money?”
And no one on the estate side knew if he actually got the check. Because it’s like, alright, now, we’re going to the IRS and saying, “Hey, we should get this $13,000 refund.” But did they already give him the $13,000 and we just don’t know about it? That was a little bit of an unknown question in this particular case.
Steven Jarvis: So, if you’re familiar with the timeline of RTS, you’ll know that we couldn’t have been involved at the very beginning of this process.
Micah Shilanski: Not with that attitude.
Steven Jarvis: Not with that attitude (if only). So, Micah, I think you’re saying that a little more gently than I think is what happened. Because as I went back through the letters, there was a letter from the IRS that definitively said this went to the deceased spouse.
It wasn’t just “Hey, this might have happened.” At one point, it’s like, “Oh no, no, we already paid it to someone else who is now deceased and we’re working through an estate.”
And so, when RTS got involved, we said, “Okay, let’s go ahead and file an 8821 for the estate of the deceased taxpayer.” Which you can do but you get into all sorts of other fun messes with the IRS.
This is actually where the two phone calls came in because as a general rule, don’t call the IRS. If at all, possible, never have your clients call the IRS. But if at all possible, you don’t want to call the IRS.
The reason we ended up on the phone with the IRS is because when you file an 8821 for a deceased taxpayer, it gets flagged for identity theft, which I see where they’re coming from, if you’re suddenly doing new activity for someone who’s deceased.
Micah Shilanski: Looks a little suspicious. Fair enough.
Steven Jarvis: I get it. But the only way to resolve it is over the phone, and calling the IRS is an absolute nightmare. If you haven’t called the IRS recently, lucky you. It’ll take days.
You’ll call in. They have a two-or-three minute prerecorded message you have to listen to every time before you get to the part of the message that says, “Hey, no one can answer your call. Try again some other time.”
So, there are actually services that have sprung up that you basically pay for a spot in the IRS’s line. Questionable how those work, haven’t experienced it myself, but that’s how bad it is.
But so we had to call the IRS to get this identity theft issue taken care of to figure out if the deceased spouse had ever received this money. And then kind of still in the middle of all this, again, because you can’t check the status in any way, I still thought we were trying to keep fighting this.
And lo and behold, the IRS goes ahead and sends the check. Hopefully, the client will cash it quickly so that they can’t change their minds. But prior to the checks showing up in the mail, we had no indication we’d even made progress.
And so, it’s just this fun little process of we’re doing everything we can to keep it detailed, to keep it in a letter so that we have records of what happened so that we can go back and say “Here’s where we’re in the process” and avoid the phone at all costs of the IRS.
Micah Shilanski: And one of the big reasons, and Steven, I mean this is the layman point of view, so I’d love your professional point of view on this.
I say to clients, “Don’t call the IRS” not just because the wait time, but because the person that answers the phone can’t do a bloody thing. And I’m not putting that person down as a person. But they are not empowered to make any decisions or give you any helpful information.
Steven Jarvis: Now, I kind of have to regroup myself right before I actually get on the phone with a person after I’m done waiting on hold to like literally remind myself, okay, the person on the other end of this call had nothing to do with creating this disaster of a situation.
It is not their fault. They have scripts they are reading from. It’s almost comical if it wasn’t so frustrating. Because you’ll ask a question and they’ll say, “Can I put you on a brief seven-minute hold?”
I don’t know how they even come up with the minutes, but it’s always a different … It’s “Can I put you on a brief 9-minute hold, a brief 13-minute hold …” I don’t know how you’re-
Micah Shilanski: How’s that brief?
Steven Jarvis: Well, and they’re never right. Because they’re putting you on hold to go look through their database of pre-answered questions of things they can say.
They have no power to make decisions. They have a limited library of answers they can even give you. And so, yeah, it’s not only going to be really frustrating waiting on hold, but when you get through, you’re going to be back to, we’ve got to do this through the mail anyways.
Micah Shilanski: So, Steven when I’m dealing with retirees and they have to deal with the OPM, Office of Personnel Management, one of the things I tell my retirees, because it can take anywhere between 6 to 18 months to adjudicate, which is finalize, finalize your retirement.
I would say at some point if your retirement is not being processed quickly, you are going to be tempted to call OPM, which you can do. Don’t highly recommend it unless we get past the 12 month marker and then allow me to call them.
But you’re going to be tempted to call them. And if you call them, the only advice I would really like you to keep in mind is whoever you talked to on the phone did not create the snafu but they can make it worse.
So, you really need to be cognizant of how you’re talking to them and what it is, and those things because they’re just randomly answering the phone and it wasn’t them that was processing or not processing the return, but they know who is.
And guess what? Just like if a coworker, somebody else just went off on one of your coworkers, you’re not really inclined to help them out too much.
Steven Jarvis: It’s like dealing with any kind of official; whatever their capacity is, you’ve got to accept that they have all the power, that all you can do is be as friendly and specific as possible.
You don’t need to be best pals with them. You don’t need to ask about their dog or their kids. But you need to be respectful. You need to understand what the situation is. And really, this is all just to reinforce, if at all possible, don’t call the IRS.
Micah Shilanski: So, don’t call them, which is just I think solid advice. So, and the other thing I would say, when you’re doing IRS letters, and I think you guys do a fantastic job of this, and let me know if I’m summarizing this correctly.
But when I see your IRS responses, what I see inside of them is a slight recap of the letter, what you agree or disagree with in polite language and then evidence to how you disagree with things.
So, it could be, and one of the things I think in like several of the letters, they’re like, “Well, don’t send in your tax return.” I’d send that thing exactly with the letter stapled together, by the way.
And so, I love the screenshots. When I saw screenshots in there, I think they’re fantastic of saying it’s not just give them the return, but you guys took it to the next step and say, “Hey, here’s a screenshot of this. Here’s the screenshot on this page. Here’s this information that’s there.”
And really trying to compile all that together, and I think there’s two reasons I like it. In my mind, I hope it helps with the IRS issue, which I don’t know if it does or doesn’t, but I think it really goes to the client that says, “No, no, no, this was a well-put-together piece of information that clearly walks you step by step through it. And it’s a lot better than the client’s one-page response, which is you are wrong, I’m right. Give me my money.”
Steven Jarvis: No, you’re spot on with how we approach that. The other thing I think we need to point out for listeners is that the letter is coming from the client. We help write the letter, and in fact, we draft the entire letter and say, “Hey, let us know if you have any questions about this or if you’d be comfortable to go ahead and send this.”
And we put that whole packet together. We do everything for them short of mailing it. I’m not going to mail it without their approval and it’s got their name on it. But we want it to come from them.
And most of the time, I’m going to have them, I’m the one who wrote it. It’s going to reference in there that they worked with their tax professional on this. And the reason we have the client send it instead of the tax preparer even though we have an 8821 on file, even if we had a power of attorney on file, it’s one less step that the IRS has to go through.
Because if the letter comes from me, now, I’ve got to trust somebody on the other end to go through the verification process correctly that I am in fact allowed to communicate with the IRS on their behalf.
Whereas, if it just comes from the client, we’ve already skipped some steps and we’ve gotten right to the important things. I’m still helping manage the message and the details, but coming from the client, that’s just how I’ve always approached it.
Micah Shilanski: I really like that. So, the other thing on IRS letters is setting time expectations, which I think is great. And then probability expectations. And this is where you can get into a little bit of trouble. Steven, you can speak more to this than I can, but be very careful about what’s the probability of this being successfully resolved.
And that needs to be a discussion. And let’s say the dollar amount comes in and we have a low probability of this being successfully resolved. Okay, well then how much is it just to fix it, make this problem go away?
Like if a client gets an IRS letter for less than a couple hundred bucks, 9 times out of 10, I’m going to say write the check and send the money off because it’s not worth the time and the months and the hassle to go back and forth.
And most of the time, clients are in agreeance with that. But what are your thoughts on that, with telling them kind of the probability of where we stand?
Steven Jarvis: As you talk about probability, I’m assuming you don’t assign a specific number to it either.
Micah Shilanski: I run a Monte Carlo with about a hundred thousand scenarios. No.
Steven Jarvis: Well, if it’s not 200,000 scenarios, you’re doing it wrong. So, I describe for the client what the process is going to look like. If we’re going to contest this, if we’re going to push back, here’s what the steps that we’re going to have to take are, and here’s been our experience with how well this goes.
And I kind of outlined for them that here are possible outcomes. That it’s possible that we send in a letter and it gets disregarded. That we’re going to get this letter a second time, that they’re going to disagree with the facts that you provide.
And I always love it when clients say, “Wait, how can they disagree with the facts?” I say, “Well, you might be surprised.” So, I lay out what the process looks like and say, “Okay, this is going to take a lot of your time, it’s going to take a lot of our time.”
Ultimately, it’s up to the client. If the client wants to fight for a $10 penalty on a tax return, as long as we’re not getting into this is now my team’s whole life, it’s their money, I’m going to help them with the process. But I’m going to make sure they clearly understand what it is they’re asking for before we dive in.
Micah Shilanski: I really like that. So, when I was talking the probabilities, I would look at it and say, “Hey look, this is cut and dry. You’re going to get this money back. I mean it’s really clear.”
So, like an estimated tax payment, easy example of that. Of saying, “Nope, we have evidence the IRS deposited your estimated tax payment. They didn’t put it on your return. This is just a communication issue, this is going to get resolved.” I feel very confident in those ones.
When it’s a little bit more subjective, like in this particular one, with the client like I wasn’t really … from the IRS’s perspective, it doesn’t matter that you got divorced and what the divorce decree says. The IRS doesn’t care about the divorce decree. There’s nothing to do it.
Correct me if I’m wrong on this. Does the IRS really care about the divorce decree and, because of that, would they change where an allocation and where the money would go?
Steven Jarvis: Well, so it was interesting going back through the letters on this one because honestly, I didn’t even feel like there was a consistent kind of theme from the IRS on this.
Because at one point, they were asking for the divorce decree even though the client had already provided it. And so, I think really what it came down to is finally getting to the right person at the IRS who knew which area to check to see whether the funds had gone out.
And so, that’s what it came down. And back to your probability of success; at the onset, we couldn’t tell if the funds already had gone out to the estate of the deceased taxpayer.
It was really just trying to provide as much information as we could to get the IRS to tell us was the money sent somewhere? Do we need to keep fighting with the IRS or need to go fight with the estate? Who do we need to fight with?
But yeah, it wasn’t even consistent whether the IRS was asking about the divorce degree or not, but at one point, they were. So yeah, it’s so tough because like you said before, you’ve got people on the other end of this who it’s the left hand has no idea what the right hand’s doing. They’re doing the best they can but it’s not a simple process.
Micah Shilanski: And that’s another thing I would say about these IRS letters. Again, this is just from my layman point of view, is I don’t trust the information provided in those letters because somebody typed it up.
Even the CP 2000 notices, which are automated notices which the computer just matches stuff up and kicks them out. I don’t trust that, I want to see evidence for these things. So, in this case, the letter read like the money was sent out.
But this is a discussion that you and I had. I was like, “I don’t know if the money went out. Like show me evidence.” We were talking with the executor of the estate, and they had no idea if the money was there or not.
But again, IRS is prone to make a few mistakes. So, just because they said something happened, it wasn’t super inclined to believe them. So, I love your thought of getting the 8821 on it. Let’s go pull the payment history, what has been made in this account so we could figure out did that money get paid or not?
Steven Jarvis: Yeah, that’s a great point, Micah. And you and I have dealt with you so many times that we’re skipping over a lot of important details in the process because anytime I get a love letter from the IRS that a client has forwarded me, the first thing I do is pull the related tax returns.
I am not trusting that letter for anything. I’m going back to the actual return we filed to the IRS. That’s, I mean, one of the very first steps we take. And so, yeah, don’t take for granted that that letter is correct even if it looks computer-generated.
Micah Shilanski: Steven, ever since we started reviewing client’s draft tax returns and applying the 37-point checklist that RTS has on client returns, then the client love letters have dropped off for like the CP 2000 notices, the automated ones.
That says, “Oh, you forgot to put a rollover on there. You forgot to do a transfer. You forgot to do these other things, or you’re missing your basis. You don’t have a 1099 on there.” Like those little ones that are just a pain in the butt.
So, ever since we started doing that, those have dropped off for clients considerably, kind of a pro and a con. We’re saving a client from a lot of pain that they don’t know about, by the way. Versus when they get it, we can fix it, but I’d rather be on the front end of this thing.
So, let’s change it from a direct IRS letter to like a CP 2000 notice. So, that CP 2000 notice again, the client received an automated letter from the IRS. My opinion, correct me if I’m wrong, but nobody at the IRS reads these CP 2000 notices. They’re just computer-generated and kicked out.
Steven Jarvis: Yeah. That’s my understanding.
Micah Shilanski: So, you get a CP 2000 notice, it says X information isn’t on your return. Do you do your process any different for that CP 2000 versus a love letter that is a little bit more detailed?
Steven Jarvis: The process doesn’t start any different. I would say more commonly, those CP 2000 notices end up with, “Hey, yep, that needs to get paid and we need to move on.” Several that we saw this year related to like stimulus checks because the timing of them threw a lot of people off.
And despite our best efforts to confirm with people whether they had received their third round of stimulus payments in 2021, we had clients, “Nope, absolutely. I did not receive that.” Turns out they did. So, I get this, the CP 2000 notice, but we’re still going to go through.
We’re still going to go through the same process as far as what we’re communicating to the client, as far as double checking the details, as far as coming to a conclusion what the next action is.
So, I would say it’s more common on the CP 2000 notices that that final action is you need to pay it, we need to move on. But the process still starts the same.
Micah Shilanski: And a huge part of these have dropped off ever since custodians have required … of course, IRS is required … what does it say? The custodians are required to send cost basis now to the IRS. Which is fantastic, I freaking love it by the way.
And that’s also whenever we get a new account that comes in, we make sure the custodian has the basis and we have to sign a letter that says, “Nope, this is the basis, et cetera.” So, they can report it.
Because if something gets missed, now all of a sudden, the IRS is actually doing a pretty good job of the investment side when they have the basis of telling you what the actual taxes which is before when they had this, they said you owed $10 trillion and the client freaked out.
So, you were a little bit more heroic and came back and says, “No, you only owe 1,500.” But you’d almost have to redo the entire tax return to figure out what they owed or didn’t.
And in the CP 2000 … this is tax geeking out on this, I apologize listeners. But on the CP 2000 notice, it said, “Do not send in an amended return on this notice.” You’re like, “That’s the only way I can figure out what I owe is if I do an amended return and figure this out.”
Steven Jarvis: Yeah, I’m laughing that you tell that story because that was the first love letter I ever personally got from the IRS, was the basis hadn’t been reported.
And so, I’m in between my bachelor’s and my master’s degree. I’m a stereotypically poor college student. I don’t have money to send to the IRS of any kind. And I get this love letter that says I owe like $4,000 or something to the IRS, just absolutely soul crushing.
Because again, and this is really early in my career, so I don’t have all this experience that we’re sharing from now. I get this letter that it looks like it’s pecked out on a typewriter by a serial killer in their basement. I’m just convinced that, well, I owe the IRS …. something got screwed up somewhere.
I owe the IRS $4,000, I’m taking out loans. I don’t know what I’m doing to even pay that. Take a deep breath, kind of take a step back and say, “Okay, what’s really going on here?” And then I see that, okay it’s tax on capital gains and I’m thinking capital gains, like what do I even have that I got to have capital gains on?
And what it had turned out is that at some point, there was some money in essentially a money market account, something that wasn’t quite cash but wasn’t actually stocks. But since no basis was reported, all the IRS saw was that I took several thousand dollars out of an account and no basis was reported.
So, they said, “Well, that must all be a gain. And then they sent me this nasty letter, that didn’t explain any kind of possible alternatives. It just said, “Here’s what you did, here’s how much you owe. And by the way, here’s the penalties and interest on this because it’s like two years after the fact.”
Micah Shilanski: And it’s all taxed to the highest tax rate possible, in your scenario, so it’s not like it’s long-term capital gains or anything else.
Steven Jarvis: No. It was short-term capital gains, and it was a mess. I definitely freaked out so I can empathize with clients’ emotions when they get those letters.
Micah Shilanski: And I think that’s a real big takeaway when advisors get these letters — when I’m coaching other advisors, the same thing, is they have to empathize with the client and understand their fear in this letter, and then also be able to come out and say “Great news, we’re going to be able to help you with this.”
And maybe if you don’t know what the resolution is, you don’t have to come out and say like a lot of times, I can kind of look at it, and I can have a really good idea what the resolution’s going to be, the same with you.
You’ve done this for so long, you can look at the letter and you kind of know what’s going to happen. The client doesn’t. But even if you don’t know, you need to reassure the client of things you do know.
What do you know? That you’re going to help them through this entire process. That you’re going to communicate with them, with the IRS. That you’re going to bring in RTS or whomever that CPA’s going to be to help make sure this gets navigated and that they don’t overpay the IRS.
100% of that is inside of your control. So, at the very least, you need to be reassuring the clients of the things you can do.
Steven Jarvis: Absolutely. And pro tip here, the dollar amount on the notice has nothing to do with whether or not you’re going to empathize with the client. If it’s a $10 penalty, you are still empathizing with the client.
At no point should you be dismissive, “It’s only $10, just pay it and move on.” Maybe in theory, that’s how it gets resolved. That is never how we communicate that.
Micah Shilanski: So, when I get these notices, if it comes up with the client, they’ll bring it up, talk to us in the process, “I can’t believe they sent me this notice.” I’m like “Yeah, it probably cost them 50 bucks to send it to you.”
And we’ll laugh about that and this is great. You have a couple options here. Number one is we’re going to go to bat for you. We can really research this, we can look at it with you, we can help you correspond with the IRS. I can bring in a CPA if it’s going to be needed, and we can make sure that this gets resolved and see if you actually owe the money.
Then we could also look at it and say “It’s $10, do we just want to write a check and call it a day? It’s your call. Like either way, I’m a hundred percent ready to go to bat for you, but if you want to write a $10 check and make this thing go away and not have to worry about it, that’s the cost for it going away.”
Steven Jarvis: And that might seem like a silly distinction, but it’s not. This is a game-changer in how the client sees you as a professional on their team. If you’re ever dismissive of their money, regardless of the dollar amount, you’re setting yourself up for, they’re not going to bring these letters to you.
Really, you’re setting yourself up for another advisor asking whether or not their advisor’s helping them with taxes. And them saying, “Oh wait, that’s an option?” That’s really what you’re setting yourself up for. But yeah, you got to empathize with the client.
Micah Shilanski: Yeah. 100%. Man, I feel like we talked about these letters a little bit scattered here and there with this story, but really impactful for advisors. Because if you haven’t got them already, you’re going to get them with clients.
And if you’ve never gotten one and you’ve been doing this for a while, I would almost guess it’s because you’re not doing tax planning effectively with your clients. Your clients are getting these letters and they’re not telling you about them.
Steven Jarvis: Yeah. It’s inevitable. Well, Micah, let’s make sure that we turn great information into value and recommend some action items here. You’re the guest, I’ll let you go first.
Micah Shilanski: Oh you are so sweet. Number one, I’m going to say as you’re getting to this, whether it’s this next tax season or when this podcast airs, go back and let your clients know that you wish to be active in helping them resolve any IRS issues.
Let them know that this is a service that you have. It’s a dishwasher rule. Even if they don’t need it, it’s nice that they know it’s there. Even if you got wirehouse, even if you’re out somewhere else and saying, “Hey look, if you get …” My biggest thing is in the cash flow.
If a client has any big expense, I want to be in the loop. Well, a big tax bill is a big expense and I want to be in the loop in what that is and what’s going on to help guide them in these cases. So, make sure your clients know about it.
Steven Jarvis: Yeah, and Micah I know you’re really big about value adds. Appreciate the Perfect RIA. And so, for advisors listening, if you haven’t been involved in the tax planning process, this is a solid value add to communicate to your clients.
Give them some information about how this stuff can kind of go. And then really the solid value add is making it clear to them that you can help with this.
So, another action item that you need in here as we talk about this, is there’s got to be a process, there’s got to be a checklist, there’s got to be something you use for how you respond to these. You can’t take them all on a one-off basis.
Even if each one is slightly unique, although a lot of them are very similar, make sure you have a process for how you’re checking the details, how you’re communicating with clients, how you’re setting expectations, how you’re ultimately getting this resolved.
Micah Shilanski: We have a blueprint in our office because we have our own custom-built CRM, and that walks through what happens when we get this. That’s the extreme level of what you can do and I’m sure somebody is doing a lot better than I am.
What’s a super basic level of that? Your process could be call Steven at Retirement Tax Services and get help in this process. That could be the process. And there’s nothing wrong with that as the process.
And you could be the person just following up to make sure Steven or whatever CPA is communicating with the client, you’re staying in the loop and these things are happening. That’s still a solid process that adds value to clients.
Steven Jarvis: Yeah. Because almost guaranteed. You are welcome to reach out to me if you think you are the advisor who has clients that will never get these letters. Almost guaranteed, your clients will get these letters at some point if they haven’t already. So, you absolutely have to have a process.
Micah Shilanski: Awesome. Any other action items?
Steven Jarvis: Well, the only other action I’m going to selfishly throw out is that if you’ve made it this far, you’re clearly enjoying the podcast. Be sure to give it a five star review and leave a comment so the audience keeps growing.
We keep having a lot of fun sharing this great information that we can use to impact clients.
Micah Shilanski: Man, I love it. Steven, thank you so much for having me on the pod. I love nerding out and talking about taxes, especially with somebody like you as an expert in this field to really learn things as I’m going through it. And I really appreciate your time.
Steven Jarvis: Yeah, Micah, thanks for being here. It’s been great. For everyone listening, good luck out there. And until next time, remember to tip your server, not the IRS.
We’re not overpaying. No, we’re not overpaying. We’re not overpaying anymore. The tax code’s complicated, boring, and overrated. You don’t want that, you want a pro. One thing that you should know: this is a radio show. It’s not tax advice, don’t take it that way.
The information on this site is for education only and should not be considered tax advice. Retirement Tax Services is not affiliated with Shilanski & Associates, Jarvis Financial Services or any other financial services firms.