When not reporting/under reporting taxes can rear its ugly head

short+sassy · May 2016

I had something a little odd happen and I thought you all might get a kick out of it.

One of our neighbors, who is also a good friend and my "go to" plumber, went to my H the other day with a business proposition. He wanted us to buy a piece of land and then rent it to him in a "rent to own" type of set-up. What he wants to do with the land is build one of those wacky "small houses", that are created from things like an old shipping cargo container or whatever and then live in it.

So, the obvious question I asked my H, "What's the problem he can't get a loan from a bank for the land?" Do you see how smart I am, lol?, I just cut right to the chase and know there must be a story as to why he isn't going the traditional route for his land.

My H: A bank won't give him a loan because he doesn't have two years of taxes returns.

Me: (Totally misunderstanding, maybe I'm not so smart) "What? So what? If he is late filing his returns. Why doesn't he just get them filled out and then apply for the loan.

My H: "No, you don't understand. He doesn't file taxes."

WOW!!! The basic gist is, since he works for himself and is primarily paid in cash by homeowners and businesses, there is no one reporting his income to the IRS...so he doesn't either. In fact, doesn't even file returns at all. Well, obviously that saves a lot of money (eye roll). But now isn't so grand when you want a loan from a bank.

Needless to say, I put the kibosh on any idea of buying land for him. I mean, if things went south, what I'm going to do with a piece of land? It's not the type of real estate I deal with. Sell it. Probably at a loss after fees. No thanks!

formerlyjessica490 · May 2016

I don't blame you! I wouldn't work with him at all! Amazing he gets away with that....

hoffse · May 2016

Yeah this guy could have issues if/when the IRS ever finds out who and where he is. The thing people forget is that a LOT of institutions report to the IRS - even your basic checking accounts report to the IRS. Just making cash deposits in a bank account can alert them to you.

Failing to file a tax return is a criminal offense if the IRS can show it's intentional (ie: you know you are supposed to file and you don't). There are civil penalties too, but the criminal penalties include a year in prison for every year you don't file.

Failure to pay is another set of financial penalties.

And tax crimes are interesting because they tend to merge into one another. Failure to file is technically different than criminal tax evasion (which is a felony), but a lot of people who do one are doing the other too.

Also, the IRS has a whistleblower program. So telling your neighbor you never file a tax return is a monumentally stupid thing to do:

https://www.irs.gov/uac/Whistleblower-Informant-Award/

short+sassy · May 2016

hoffse said:

Yeah this guy could have issues if/when the IRS ever finds out who and where he is. The thing people forget is that a LOT of institutions report to the IRS - even your basic checking accounts report to the IRS. Just making cash deposits in a bank account can alert them to you.

Failing to file a tax return is a criminal offense if the IRS can show it's intentional (ie: you know you are supposed to file and you don't). There are civil penalties too, but the criminal penalties include a year in prison for every year you don't file.

Failure to pay is another set of financial penalties.

And tax crimes are interesting because they tend to merge into one another. Failure to file is technically different than criminal tax evasion (which is a felony), but a lot of people who do one are doing the other too.

Also, the IRS has a whistleblower program. So telling your neighbor you never file a tax return is a monumentally stupid thing to do:

https://www.irs.gov/uac/Whistleblower-Informant-Award/

I made the same comment to my H. Yeah, someone can get away with that for awhile. Probably QUITE awhile. But eventually you are going to get caught.

I wouldn't whistle-blow on him, but I didn't even realize there was a program with rewards for that.

Years ago I worked for a small company, owned by a fairly young guy (early 30s). I knew his father had been in the business before him and assumed he had sold it to his son to semi-retire.

I found out later, that was not the case at all! For something like 25 years, the father had been paying his employees under the table...and then he got caught. He filed taxes for his business, but I think there were some shenanigans with that also. It was disastrous financially. He had to liquidate his business and even sell off some of his personal assets, including his house. He was able to avoid going to jail, but barely.

Plus there is always the old, but true joke, about all the years the FBI tried to put Capone away but never had enough evidence for trial in regards to his criminal crimes. But it was the IRS that was able to finally send him to prison on tax evasion.

hoffse · May 2016

Oh man when it's at the employer level that's when it can get really bad. I know a guy whose dad owned a company and "borrowed" from the company's trust fund for backup withholdings - that's the account your employer uses to pay taxes on your behalf that are withheld from your paycheck.

You want to talk about bad news... The IRS has 0 sympathy for people who do that (and frankly, I feel the same way). This guy wasn't just defrauding the government, he was defrauding and stealing from his own employees, including his own son who worked there. The only saving grace is that the employees aren't penalized for it. The IRS knows it's not their fault and they have no control over whether their employer pays that tax bill or not.

This guy actually did go to prison for a short time, and his penalties and back payments were in the hundreds of thousands of dollars.

Dumb, dumb, dumb.

Honestly, I don't understand why people think it's a good idea to try to beat the IRS. You might get away with it for awhile, but if they find you the consequences are going to really suck.

MommyLiberty5013 · May 2016

So, will you still use him as your plumber now that you know he's shady?

Erikan73 · May 2016

I know someone who hasn't filed taxes in at least 10 years. He claimed more dependants then he had (he technically had zero) so that he would get more of his paychecks. Knowing then he would owe if he filed, he didn't file. It will come back to haunt him. If he ever tries to buy a house, he won't be able to for the same reasons.

Also it will come back to haunt him if and when he tries to go file for Social Security benefits when he is 65. Since it's federal funds they will see that he hasn't filed. He will probably be looking at jail time for tax evasion & all the fines & interest to go with it. They may keep some of his social security check but they won't keep all of it as they have to give you a little something to be able to live based on the rules/laws I've found. Fines and interest are paid enough when you have to do payments for owing, I can't imagine what it would be like for not filing for 10+ years.

smerka · May 2016

I have two stories related to this. In the summers during college I worked at a quilting store. The owner had been not paying withholding for the employees for a long time. One morning about 20 years later, the IRS showed up and took EVERYTHING in the store. My friend then saw the owner's daughter working at Starbucks (she's in her 40's).

smerka · May 2016

And about 15 years ago I was in a bad car accident. I turned left without yielding to oncoming traffic. I paid the ticket and moved on. Several months later I was sued for damages. My insurance company is notorious for not settling. So at the deposition I find out the plaintiff was suing for lost wages but had been on workman's comp at the time of the accident. So then my attorney asks for tax returns to try to figure out what the lost wages figure should be. The plaintiff's attorney says they don't have them. My attorney says you know I'm going to request a transcript from the IRS and that's probably going to result in a letter from the IRS asking where they are. The case was settled soon after that and I'm sure it was a lot less than if the guy had just filed his taxes.

smerka · May 2016

And this plumber will probably get caught soon enough. Companies now have to issue a 1099 to any subcontractor they pay more than $600 a year. And that includes people who own rentals, which I'm guessing this guy probably does some work for.

hoffse · May 2016

Yeah the penalties are really high. The amount varies based on what proportion you did (or did not) pay, but it can go as high as 50%.

Even if things are tight and you can't pay, you should always file.

I have very little patience for people who evade or get really creative on their tax return. Some of the stuff I see is really appalling, and I usually don't enjoy tax litigation for that reason.

But on a brighter note...

I did have one case as a student that was really rewarding. I spent all summer working on a pro bono tax appeal for a woman whose husband basically stole her identity, kept her in the dark about their finances, and then did shady things on their tax return. Because they filed jointly, the IRS went after her when they couldn't find him. By the time she got the notice she had gotten divorced and had just gotten free of him. Then she gets this bill for literally hundreds of thousands of dollars.

We fought it with the innocent spouse rules. It was incredibly educational for me as a lawyer, but also as another woman. She was amazing to talk to, and she had a lot of insight about the way finances should work in a marriage and what can happen when it goes wrong.

I ended up joining a different firm, but I got a call the day I finished the bar exam about her case... and the partner told me we had a complete win. The IRS forgave every penny of it. I think I was the only person who left the bar exam smiling, lol

lbonga1 · May 2016

It's sad when people like that teach their kids to be like that too. There was a girl in my high school economics class that casually mentioned that it wasn't her parents' year to pay taxes, and when everyone asked what she was talking about, she said, "you only have to pay taxes every other year." She thought that was how it really supposed to be. I don't know if her parents were truly avoiding or if there was some other weird situation going on, but it made the girl very uncomfortable to find out that filing taxes is an every year thing.

vlagrl35 · May 2016

that's so super shady! Also when he goes to retire he basically won't get much SS because don't they base your SS payout on your income every year?

julieanne912 · May 2016

vlagrl35 said:

that's so super shady! Also when he goes to retire he basically won't get much SS because don't they base your SS payout on your income every year?

Well, he shouldn't get to collect SS if he's not contributing to it anyway.

short+sassy · May 2016

julieanne912 said:

vlagrl35 said:

that's so super shady! Also when he goes to retire he basically won't get much SS because don't they base your SS payout on your income every year?

Well, he shouldn't get to collect SS if he's not contributing to it anyway.

I think when you're totally self employed, which he is, SS is handled differently. It's the same idea, but it has a slightly different name/form. But, yes, totally self employed people are required to pay their version of SS into the system.

I never even thought about the SS angle. If he's not paying income tax, I highly doubt he is paying into the self employed SS bucket. I doubt he has much in the way of retirement plans and plumbing starts physically becoming a tough job to do long before your 60s.

Lots of interesting stories on here!

julieanne912 · May 2016

short+sassy said:

julieanne912 said:

vlagrl35 said:

that's so super shady! Also when he goes to retire he basically won't get much SS because don't they base your SS payout on your income every year?

Well, he shouldn't get to collect SS if he's not contributing to it anyway.

I think when you're totally self employed, which he is, SS is handled differently. It's the same idea, but it has a slightly different name/form. But, yes, totally self employed people are required to pay their version of SS into the system.
I never even thought about the SS angle. If he's not paying income tax, I highly doubt he is paying into the self employed SS bucket. I doubt he has much in the way of retirement plans and plumbing starts physically becoming a tough job to do long before your 60s.
Lots of interesting stories on here!

Yup I was self employed for years. When you're self employed, you pay not only the usual percentage into SS that people pay as pre-tax deductions through their paycheck, but you also pay the employer percentage too.

short+sassy · May 2016

smerka said:

And this plumber will probably get caught soon enough. Companies now have to issue a 1099 to any subcontractor they pay more than $600 a year. And that includes people who own rentals, which I'm guessing this guy probably does some work for.

I don't think that's true, at least in this case, because he does own his own business. So he is neither an independent contractor nor a sub-contractor...at least for the jobs he has done for me. Technically, I've hired his business, not him personally. Though certainly if the IRS ever audited me, I have a stack of receipts from his business for the work he has done for me.

@MommyLiberty5013, despite my rolling my eyes at people who don't live up to their end of society, I'd still use him for plumbing work. I'm not saying I'm proud of that, but you roll some SERIOUS dice with home repairs. So, when you find tradespeople who are reliable and great at what they do (he is both of those things), you hang on to them for dear life.

vlagrl35 · May 2016

julieanne912 said:

short+sassy said:

julieanne912 said:

vlagrl35 said:

that's so super shady! Also when he goes to retire he basically won't get much SS because don't they base your SS payout on your income every year?

Well, he shouldn't get to collect SS if he's not contributing to it anyway.

I think when you're totally self employed, which he is, SS is handled differently. It's the same idea, but it has a slightly different name/form. But, yes, totally self employed people are required to pay their version of SS into the system.
I never even thought about the SS angle. If he's not paying income tax, I highly doubt he is paying into the self employed SS bucket. I doubt he has much in the way of retirement plans and plumbing starts physically becoming a tough job to do long before your 60s.
Lots of interesting stories on here!

Yup I was self employed for years. When you're self employed, you pay not only the usual percentage into SS that people pay as pre-tax deductions through their paycheck, but you also pay the employer percentage too.

we are self employed as well - we have a cpa that does our taxes every year. I know there is a self employment tax in there somewhere. So even if he is self employed I doubt he is claiming it on that form and will be so screwed when I goes to claim SS - that is unless he had a decent paying corporate job before this pluming business.

smerka · May 2016

short+sassy said:

smerka said:

And this plumber will probably get caught soon enough. Companies now have to issue a 1099 to any subcontractor they pay more than $600 a year. And that includes people who own rentals, which I'm guessing this guy probably does some work for.

I don't think that's true, at least in this case, because he does own his own business. So he is neither an independent contractor nor a sub-contractor...at least for the jobs he has done for me. Technically, I've hired his business, not him personally. Though certainly if the IRS ever audited me, I have a stack of receipts from his business for the work he has done for me.
@MommyLiberty5013, despite my rolling my eyes at people who don't live up to their end of society, I'd still use him for plumbing work. I'm not saying I'm proud of that, but you roll some SERIOUS dice with home repairs. So, when you find tradespeople who are reliable and great at what they do (he is both of those things), you hang on to them for dear life.

So there's a lot of debate about this, but I think it is safe to say you are 'in the business of renting properties'. I think you might be required to file 1099's for the service providers you pay more than $600 (but not if they are incorporated). Ask your tax professional. Here's some links. But maybe Hoffse has an opinion. https://ttlc.intuit.com/questions/2624495-do-i-need-to-issue-1099-misc-to-my-investment-rental-property-manager https://www.irs.gov/businesses/small-businesses-self-employed/am-i-required-to-file-a-form-1099-or-other-information-return

hoffse · May 2016

smerka said:

short+sassy said:

smerka said:

And this plumber will probably get caught soon enough. Companies now have to issue a 1099 to any subcontractor they pay more than $600 a year. And that includes people who own rentals, which I'm guessing this guy probably does some work for.

I don't think that's true, at least in this case, because he does own his own business. So he is neither an independent contractor nor a sub-contractor...at least for the jobs he has done for me. Technically, I've hired his business, not him personally. Though certainly if the IRS ever audited me, I have a stack of receipts from his business for the work he has done for me.
@MommyLiberty5013, despite my rolling my eyes at people who don't live up to their end of society, I'd still use him for plumbing work. I'm not saying I'm proud of that, but you roll some SERIOUS dice with home repairs. So, when you find tradespeople who are reliable and great at what they do (he is both of those things), you hang on to them for dear life.

So there's a lot of debate about this, but I think it is safe to say you are 'in the business of renting properties'. I think you might be required to file 1099's for the service providers you pay more than $600 (but not if they are incorporated). Ask your tax professional. Here's some links. But maybe Hoffse has an opinion. https://ttlc.intuit.com/questions/2624495-do-i-need-to-issue-1099-misc-to-my-investment-rental-property-manager https://www.irs.gov/businesses/small-businesses-self-employed/am-i-required-to-file-a-form-1099-or-other-information-return

**********SIB***************

Without looking at this too much, I think it depends on whether you are engaging in a trade or business based on your activities. Most rental properties are considered passive investments (and not a trade or business), but there are exceptions.

One thing to consider is whether you are taking business deductions or subject to the passive activity loss rules for your rental properties. You would want to file your other paperwork to be consistent with whichever one you are doing.

That being said, it's possible you are treating it as an investment when it should be a business or vice versa. A tax pro would need to advise you on which one is more appropriate for your situation. Obviously I can't do that for many reasons.

Real estate is sticky.

**Not legal advice.

short+sassy · May 2016

@smerka and @hoffse, thanks for your all's input. I guess this is something I need to double check on, just to be safe. Also, even in the example in the link, it does state that if the property management company is a corporation, than the property owner does NOT need to file a 1099 back to them.

I've always thought of 1099's as being almost, but not quite, an employee of a business. Until this discussion, it never even occurred to me I might have to file 1099s for businesses I hire to do work. It just seems weird I might need to start querying "mom and pop" type businesses I hire on how they have their business set up? Or maybe it might also depend on how I have my business set up?

And here I thought I knew all about 1099s, because I've been on the receiving end for 1099s for years!!! Some from companies where I see myself as being a service they have hired...like mystery shopping. And some companies where I see myself as being very close...but not quite...their employee. For example, one company that pays me, I do very specific work for them on a very regular basis...versus the "one-offs" that are mystery shopping. I even think of them as a "part-time job". But I am an IC for them. Just like I'm an IC for my mystery shopping companies.

smerka · May 2016

I know it's confusing and complicated. Unfortunately because of people like your neighbor, the IRS is having to use other entities to try to catch the people not paying their taxes. That's why they want the 1099's so they can match it up with the receipient's return. That's why I said above he will eventually get caught.

LillibetteV · May 2016

smerka said:

And about 15 years ago I was in a bad car accident. I turned left without yielding to oncoming traffic. I paid the ticket and moved on. Several months later I was sued for damages. My insurance company is notorious for not settling. So at the deposition I find out the plaintiff was suing for lost wages but had been on workman's comp at the time of the accident. So then my attorney asks for tax returns to try to figure out what the lost wages figure should be. The plaintiff's attorney says they don't have them. My attorney says you know I'm going to request a transcript from the IRS and that's probably going to result in a letter from the IRS asking where they are. The case was settled soon after that and I'm sure it was a lot less than if the guy had just filed his taxes.

I work in litigation and have seen SO many people screwed on lost wages because they didn't report it on their taxes. Oh you are missing out on that under-the-table side gig that paid you $500/week? Prove it. Oh you got fired for refusing to sleep with your boss and now make less money because you don't get tips? Well according to your tax returns you make MORE money now since you never claimed your tips so those damages are out. The fact that so many people want to recoup money they never paid taxes on drives me bonkers.

short+sassy · May 2016

LillibetteV said:

smerka said:

And about 15 years ago I was in a bad car accident. I turned left without yielding to oncoming traffic. I paid the ticket and moved on. Several months later I was sued for damages. My insurance company is notorious for not settling. So at the deposition I find out the plaintiff was suing for lost wages but had been on workman's comp at the time of the accident. So then my attorney asks for tax returns to try to figure out what the lost wages figure should be. The plaintiff's attorney says they don't have them. My attorney says you know I'm going to request a transcript from the IRS and that's probably going to result in a letter from the IRS asking where they are. The case was settled soon after that and I'm sure it was a lot less than if the guy had just filed his taxes.

I work in litigation and have seen SO many people screwed on lost wages because they didn't report it on their taxes. Oh you are missing out on that under-the-table side gig that paid you $500/week? Prove it. Oh you got fired for refusing to sleep with your boss and now make less money because you don't get tips? Well according to your tax returns you make MORE money now since you never claimed your tips so those damages are out. The fact that so many people want to recoup money they never paid taxes on drives me bonkers.

Although I was speaking about my plumber friend specifically, anyone who underreports their tips is another example of where that can bite one in the butt if they go to buy a house. Or are involved in a lawsuit that involves lost wages.

It's tough to prove to either a bank or an attorney/court that your income is REALLY "X", even though it's always been reported to the IRS as "Y".

brij2006 · May 2016

People like this make me mad.

SMIL collects disability because she has MS and could no longer work her job when she was diagnosed (cook in a restaurant). Now she cleans houses and gets paid cash under the table for it. She won't take on a job if they want to 1099 her, and she's not shy to tell them that it will mess with her disability income if she makes too much money.

It takes everything I have to not whistle blow on her. She makes just as much as me working 40 hours/week as she does with her disability from the government and cleaning 5 houses (paid under the table).

Xstatic3333 · May 2016

brij2006 said:

People like this make me mad.

SMIL collects disability because she has MS and could no longer work her job when she was diagnosed (cook in a restaurant). Now she cleans houses and gets paid cash under the table for it. She won't take on a job if they want to 1099 her, and she's not shy to tell them that it will mess with her disability income if she makes too much money.
It takes everything I have to not whistle blow on her. She makes just as much as me working 40 hours/week as she does with her disability from the government and cleaning 5 houses (paid under the table).

Ugh, that is so completely infuriating. That type of stuff puts these programs in jeopardy for people who really need them, in addition to driving up all of our taxes.

smerka · May 2016

And in my experience, people who do this crap are the first to complain about 'welfare queens' and people on food stamps but don't see their own actions as wrong. They pat themselves on the back for working the system. Again this is my personal experience. Not saying your SMIL is like that.

brij2006 · May 2016

smerka said:

And in my experience, people who do this crap are the first to complain about 'welfare queens' and people on food stamps but don't see their own actions as wrong. They pat themselves on the back for working the system. Again this is my personal experience. Not saying your SMIL is like that.

*****************************

FIL is this way. He will complain about people abusing the system. It takes everything we have to not say, "like your wife?"

They're the same ones who have flat out told us they aren't worried about retirement because their kids will take care of them. Which means H and I, because BIL is an alcoholic and is a 27 year old still living with mommy.
It's sad, but if FIL were to pass away, SMIL would be screwed. They also aren't thinking of long term in this at all. Her disability check at age 55 may not be that bad, but when she's still receiving that same amount when she's 75, that money won't go very far.

smerka · May 2016

Well she will get switched to regular social security at 62 (I think). I would suggest you make them sit down with someone and talk about the best way to handle that. Should she claim spousal benefits, her own, etc.

LillibetteV · May 2016

brij2006 said:

smerka said:

And in my experience, people who do this crap are the first to complain about 'welfare queens' and people on food stamps but don't see their own actions as wrong. They pat themselves on the back for working the system. Again this is my personal experience. Not saying your SMIL is like that.

*****************************

FIL is this way. He will complain about people abusing the system. It takes everything we have to not say, "like your wife?"

They're the same ones who have flat out told us they aren't worried about retirement because their kids will take care of them. Which means H and I, because BIL is an alcoholic and is a 27 year old still living with mommy.
It's sad, but if FIL were to pass away, SMIL would be screwed. They also aren't thinking of long term in this at all. Her disability check at age 55 may not be that bad, but when she's still receiving that same amount when she's 75, that money won't go very far.

Have you told them you can't (or won't) take care of them? If those were my parents or inlaws I'd sit them down and say "sure I'll help with your retirement - give me control of your finances now and I'll make sure you save enough". Ugh. And yet the younger generation feels entitled?

hoffse · May 2016

LillibetteV said:

Have you told them you can't (or won't) take care of them? If those were my parents or inlaws I'd sit them down and say "sure I'll help with your retirement - give me control of your finances now and I'll make sure you save enough". Ugh. And yet the younger generation feels entitled?

Yep. I have a feeling this might be a fight in H's family too. Thankfully his parents will have a pension from MIL's federal job, but I don't think it will support the Whole Foods obsession or eating out multiple times per week.

I'm generally willing to help family, but it will be on our terms.

When not reporting/under reporting taxes can rear its ugly head

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