This episode is Tax Sherpa Stories about people who have been hit with audits because of their tax preparers, and how you can avoid the same fate.
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Episode 3 - How Not to Get Audited Because of Your Tax Preparer
[00:00:00] It is three o'clock on Monday, which means it is time for tax Sherpas stories. Thanks everybody for joining us in the live audience, we got leap. We got crim, we got nurses. We've got Rhonda on our producer. Clay is saying he would join, but he's at work. So he can't listen to him. That sounds like a few system.
I guess I have no power to compel them. So that'll be the way it it's a Gabe is popping in for all the way from Australia, which is awesome. You know, it's funny. We have so many foreigners who listen in and you know, everything I talk about is us tax, but you know, we also talk about general stuff, you know, crypto markets and all that kind of thing.
Dropping my phone out of my pocket and making lots of noise. You know, so, you know, we got some Canadians, we got some Brits, we got some Australians but everybody's welcomed there. I think everybody, it have a good time. I'm your host, Neal McSpadden Tax Sherpa. What we do is help people save tons of money on taxes, through property, you know, entity [00:01:00] structuring, tax planning, and all the rest.
And yeah, it used to be a series 65 kind of advisor gave that up a while back one day. I'll do the story on that, but that's, that's who I am. I've been in the tax game for about a decade now done 50,000 tax returns or so, and you know, what this show is all about is the stories from the front lines of the tax world.
So like today I had planned to have a. No, the first set, the first segment of the show being about how not to get audited because of your tax preparer. In, in other circles I've, I've published is I'd love to get EFT by your accountant and we will go into that. But then today there's brand new news from the Democrats about the child tax credit, and we'll be hitting that as well.
So, you know, it's current events, especially now there's way more activity in the tax world than really there has been in decades. You know, on a daily basis even. And we'll do that, you know, [00:02:00] couple of stories about you know, some issues with the clients that have come to us from other places and the horse, or is that, that they bring, and then, you know, the second half of the show is all Q and a and interaction with the audience.
With people have sent in questions ahead of time, and then people who are in the audience. So you get priority. Cause you're the cool guys were showing up for the live show we robos in, in the house. Welcome. So yeah, so first I just wanted to hit on this. First I wanted to hit on this new child tax credit proposal coming from the Democrats.
So here is a link to, this is an MSN article, but you know, This has been floating around for the last few days, how the Democrats are going to unveil this today. And basically the way it works now is that there there's a couple different credits for children. There's the earned income credit, which is which is additional money for our families who are of certain sizes who make low amounts of money.
And the [00:03:00] federal government is going to help them out with payments on their tax refunds. There's also the child tax credit and the additional child tax credit, which two pieces of the same thing. So before the tax cut and jobs act in 20 and in 2017, that was up to a thousand dollars per child tax cut and jobs act, or, you know, the Trump tax reform doubled that to 2000.
Now what the Democrats are proposing is that. One, it goes up to 3000 and this is for children zero to 16 and you know, inclusive. So if you're 16, you have it. If you're 17, you lose it. And so bumping that up to 3000 for kids six and under they're talking about bumping that up to 3,600 and. The kicker of this proposal is that, so normally this is all just part of your tax return.
Once a year, you get a nice big shot of, of tax stimulus. But what they're proposing here is that starting in July, you'll actually get those payments monthly. So if you have, so I have a four year old here at home [00:04:00] and so I would get a $300 a month check for that on behalf of that four year olds tax credit on my, on my tax return.
So, you know, that is, that is a kind of soft UBI kind of element. But I don't know if you guys have been around for me chatting about yet UBI. Firstly, what I think is going to happen is that, you know, we're going to get this stimulus and we might get one more, but then after all that fails, we're going to go into some kind of flood UBI system, but that's down the road a bit.
So for this one, what they're, what they're saying is that, you know, for families basically for married couples making 150,000 or less or single head of household, kind of families making 75,000 or less. Then you're going to be eligible for these monthly tax credits. So I've got the one, four year old, I've got another six year old.
And so that would be a two 50 and 300. So I get five 50 a month in tech stimulus for, for the, for those [00:05:00] kid credits, which, you know, I'm not opposed to, I figure, you know, as long as they're putting the money, I might as well get some of it. Right. So yeah. So here, we're talking about 3,600 per child under the age of six and 3000 for six to 17.
But yeah. So Democrats are talking about 3000 for the, for the child credit and then 3,600 for the kids under six. And, you know, it's going to be interesting, cause this is if this passes we're looking at a monthly stimulus check for all these people, rather than an annual statement. Of course it will also be whatever else is on the, on the tax returns when they go ahead and file at the end of each year.
But you know, we'll be getting a good chunk of that money upfront over the course of the year. So you know, this really was, was the way for this was paved by actually Obamacare. So what happens with Obamacare is that, you know, people are buying a health insurance through a particular marketplace and they are [00:06:00] getting tax credits for that health insurance based on whatever, you know, projected income they have for the year, how many people they have and so forth.
So what a lot of people didn't realize until after the fact and people who are new to Obamacare still don't realize is that, you know, those are actually payments that you're getting from the government. And now it's not going to your pocket. It's going to the insurance company's pocket, but you are getting those, those payments monthly.
You know, from, from the government as a subsidy or the, or the health insurance. So now, you know, we got the stimulus one stimulus to you know, back in, in the spring and then right at the end of the year or slash beginning of the year you know, for, for the texture. And so it's going to be that same kind of.
Some kind of mechanism where people will get direct deposits into their into their bank accounts, if they have that set up, or if they don't, you know, it's like 80% of them, maybe 80% of those payments went through to peoples to be able to bank accounts. Then the other 20% were [00:07:00] sent out either as checks or as prepaid debit cards.
This whole stimulus mechanism was put in place by, by Obamacare and a Gabriel saying they have that too in Australia, a lot of health insurance you can buy simply for Medicar Medicare surcharge, Libby offset for your tax return.
And and yeah. So same kind of thing. So, you know, we'll see, you know, the Democrats have the house, they have the Senate, at least the Senate plus the tiebreaker and they have the presidency. So their chances of doing this are good, but they don't seem to be moving very fast when I, of this stuff. You know, so Biden's been in office for let's see, 19 days now.
So almost three weeks. And I don't know, nothing has been done considering that they had the planes you know, even before he was sworn in and they have the votes for everything. I'm kind of surprised that's it's been, it's been the way it's been. So, you know, you can, you can take what you want about that as far as, you know, government efficacy, but they are certainly, [00:08:00] there's just this.
Maybe they didn't think he'd be president maybe, but I mean, they had, they had the, the stuff all written up already, so I don't know. We shall see how long it takes them. You know? So in the bill, they're talking about July being when the first payments would go out, why it would take so long between now and then, I don't know.
But you know, we'll throw that in with the 2000 slash $1,400 additional statement that they promised and and we'll see how all that kind of shakes out. So hopefully that will. He kind of the last of our technical difficulties here, but, but going forward you know, I just wanted to hit all that because it was his, you know, stuff that's brand new in the news today, but going forward, I did want to tell you a couple stories about some people who are, who came to us after being, you know Let's say negatively affected.
That's a nice polite term by their tax preparers. So the first one Everybody's Alison Bob, just so you know. [00:09:00] So you know, Alice, Alison, Bob come in, there are brand new clients. So this was many years ago, probably about five years ago now. And they came in and, you know, we're doing their tax returns and they say, here's our papers.
And we say, great, we talked a little bit about their situation and say, Oh, and we got this letter from the IRS. And they show me the show me the letter and what it is is a it's a $5,000 penalty. And they said, yeah, we never got our tax return, our tax refund from last year. And I was like, okay, you know, there could be a number of reasons for that, you know, so if people owe child support or student loans or SBA loans or any kind of government type debts, you know, the IRS will see his taxes, refunds and apply towards those debts.
They won't do it for credit cards and things, but for, for things you owe the government they will So, you know, we go through all those who say no, none of that, none of that. And they S they have this letter saying, you know, we've assessed a $5,000 frivolous tax return penalty. [00:10:00] And I actually had to look that up because I'd never actually heard of it before, but but yeah, there is a $5,000 frivolous texture penalty and it's actually $10,000.
Cause there's two one for the husband, one for the wife, one for Alison one for Bob. And you know, they show, they show me their tax return and there's nothing on it that looked frivolous. So I was very confused. And so, you know, we always want to go to the source when there's issues like this and we can't figure it out.
Is that the penalty sovereign citizens get you know, it could be, you know, sovereign citizenship has been rejected in court many times. So yeah, it could be, it could be considered frivolous. So, you know, I tell them, okay, you know, what, what you're showing me here does not match this litter over here.
So what we need to do is we need to get the transcripts from your tax returns for that year. And then we'll be able to see kind of what's going on. So they go out, they order their transcripts from the IRS. These days you can do it fairly easily online where you go to irs.gov and say, get my what does it say?
Get my checks, transcripts, [00:11:00] or get my records, something like that. Let's see the, is you your account? Get your tax record. So that's, that's the one you can, you can set up an online account at, at irs.gov and you can log in and download transcripts for, you know, whatever they have on file for you for the, for the last several years.
And there's, there's actually four different transcripts. Which is great. You know, the, the only caveat with this system is that they use credit information to verify your identity. And it only works for about half the people. So like for me personally, I got identity stolen many years ago and I can't most systems, I cannot actually identity verify through credit information.
Just because that's ongoing stuff. But for the, for the half day, it does work for, it's a great convenient tool. You log in, you download stuff and you can see like, you know, filings of your W2's previous tax returns, all that kind of stuff. So they, they go and they, you can, you can call them though, and they'll mail you your, your transcripts as well.
And that's what, when I'm doing, they, they go off that [00:12:00] takes several weeks. They come back a couple months later and they show me their text transcripts. And you know, the transcript, the transcripts are not in a very readable format, but they you know, obviously if you're in the business, you can see what you're doing and what it was was that what they had in their hand, as far as the tax return that they had signed and walked out the door with was not what was submitted to them IRS.
And the the difference was actually only one, one line and it was on the federal fuel tax credit. So. The federal fuel tax credit. If you ever see this on your tax return, you immediately know it's a scam because this applies to very, very few people. Well, let me see if I can pull up a 10 40 here.
And what happens is that it is a refundable tax credit for the taxes that are paid inside of fuel. So like, you know, gasoline and stuff, and it's, you know, used in very specific circumstances, not just anybody can claim this. So Yeah, it's not on the 10 40 anymore, [00:13:00] but we needed to look it on schedule
and tenfold and with tax credits payments. Here we go at this line, 11 credit federal tax on fuels attach form 41 36. So what that, what that is saying is that I am owed a rebate from the federal government because I paid taxes on these particular fuels when I'm in a particular situation where I don't have to, and you know, 99% of the people out there, and this does not apply to.
And so they saw that, you know you know, Bob is an engineer and Alice is a I think she's a teacher. So clearly this is, this is false on the face of it. There is no way that you would qualify for this tax credit. And and meanwhile, you know, you're claiming a $5,000 credits that the government owes you.
So they the IRS slaps them with this with this frivolous tax return penalty, [00:14:00] because, you know, there's just no way. And, you know, from the IRS's perspective. Yeah, they're right. There's no way. So you know, a lot of places or a lot of people, they go to tax preparers and, you know, the taxpayers will advertise it as, you know, like, Oh, we can get you such and such a, you know, refund, which is completely not what they're supposed to be doing.
But you know, he do do that, you know, in, in the less, in the less reputable practices out there. I've had, I've had clients or former clients come to me and says, well, you know, Joe, down the Joe down in the world says he can get me 8,000 early in saying 5,000. I don't know what Joe's doing, but you know, it's not, it's not legit.
And I said, well, I want the 8,000 and mean, then they leave, you know, good returns because, you know, we don't want to be playing, you know, those kinds of games. Cause you know, you're just gonna end up with these kinds of penalties or audits or what have you. So this is number one on how to not get audited because your taxpayer look for these kinds of things on your tax [00:15:00] refund, things that make no sense for you situation you know, Basically when you're doing your tax refund or tax return, you know, it's, it's a give and take kind of process.
Yes. The tax preparer knows how to, or should know how to actually fill out all the forms and structure things, you know, for, for the best possible result. But you should be understanding what it is that's going on. And you know, you can, you know, cause when you sign off on tax return then you are agreeing to whatever's on there.
So, you know, if the tax repair is doing something shady, then you're doing something shady because you're the one. Yeah. Who's actually vulnerable for all the information. Top of that another sign that this was, this whole thing was a scam, was that the taxpayer was getting the tax refund being sent to his bank account.
First, and then he was going to distribute the money to the taxpayers, to Alison Bob. So that is that used to be much more common. And the IRS passing regulations are not pass regulations, but they [00:16:00] implemented some rules a couple of years ago where a tax preparers could not do that anymore. But that does not, I mean, it's all gone because, you know, you could have one entity doing tax, tax preparation, another entity doing, you know financial services or whatever.
And then, you know, there. You know, they're kissing cousins of each other. So this kind of stuff still goes on. But if you are, if you are having your tax refund, posited to your tax preparer and then pinging them a check or whatever that is, is, you know, a definite red flag that you want to be avoiding, because what ends up happening is these kinds of games where, you know, whether, whether you're in, in, on it or not.
This case, the Alice and Bob were not in on it. It was changed after they left. And still though, you know, that, that difference in the tax refund was going to go into that taxpayer's pocket. So Alison Bob are showing me this you know, these transcripts that I'm I'm talking to them about the federal fuel tax credit and, you know, they ha they have no idea what's going on.
I say, well, here's what [00:17:00] happened, you know, after you left them you know, the taxpayer went in and changed it behind your back and then submitted it. And obviously the IRS audit. So that's why you didn't get your refund, the amount that you were promised. And that's why, you know, they have slapped you with this, you know, two times, $5,000 penalty.
So they weren't too pleased with that. Fortunately, and, you know, I told them that, you know, you can't, you know, make your case, you know, there's the taxpayer advocate service, right. Advocacy service, the TAs. And what they do is they are kind of like the internal team for the IRS. That's supposed to be, you know, working on behalf of individual taxpayers who have issues.
So, I mean, there are appointments, there are their offices all over the country. You can make an appointment and you can talk to them. And, and if you have some kind of unsolvable issue with the IRS, like, you know, you just can't get through the bureaucracy. That's what the T that's what the TAs is for.
So I told them, you know, that you will talk to them, but then they had dropped me. You know, the, the truth bomb is that, Oh, [00:18:00] this particular taxpayer is Bob's brother. So they weren't sure if they were really gonna do that. And I said, well, you know, if you go to them, you know, it's possible that, you know, the Iris sides with you and sides against, you know, Bob's brother here.
And so they'll go after Paul's brother and you guys might get off the hook. So, you know, Alice was like nodding her head. Yeah. Yeah. That's, that's what we're doing. And Bob was like, Oh, I don't know. You know, so, you know, Thanksgiving dinner kind of tastes a little bit different. I think after. But, you know, they had just they just moved away.
They moved from Chicago down to South Florida. And and so I, I don't know what the relationship is like now, but I can tell you they're still clients. Man, but you know, I think of them often actually I actually, we actually just did there or started preparing their 20, 20 taxes last week.
And you know, every time I see their name on the schedule, so yep. That's 10 grand, you know, walking around right there that they could have had. But you know, it's, it's crazy stuff. [00:19:00] We see all kinds of crazy stuff. I just had a new client come in, we'll call her Alice and you know, they were, they were they came to me as referral and by the way, referrals are always great.
I talked to a new client today, also referral you know, she seemed very very excited to get working with you know, she had some problems with competency, I think in the past. As far as the texts are tax preparers being, being competent, but, you know, so I started looking through this new Alice's tax returns for the last few years.
And there's you know, compare to the level of income. They have huge losses on businesses for the last several years. And what that is is. On on your personal tax return on your form? 10 40 there's what's called schedule C, schedule C is profit and loss from businesses. This can be either an unincorporated business, just you out there under your own name or, or, or doing business as name, just offering whatever services or products that you offer, or it could [00:20:00] be a, an LLC.
That's just you cause the default treatment for that is as a schedule C kind of filing. So, you know, round numbers, let's say, you know, they come in, they they're making 60 grand on W2, and then they have a $30,000 loss C for chump. Exactly. Then they have a $30,000 loss of their schedule C and you know, that the ratios on that are a little bit off because you gotta think.
Yeah. Put yourself in the IRS as a point of view for a second, say, okay. You know, Bob and Alice, they are making $60,000 a year. They've got you know, they got to pay rent or mortgage or something. They've got a couple of kids and, you know, is it how likely is it that they took like. Cause, you know, we're talking about, you know, W2 income is, you know, before income tax withholding, before social security, Medicare tax withholding, before it kind of you know, retirement contribution.
Well, that's not true, but it depends on the type of retirement, [00:21:00] but you know, there's, there's living expenses you have with that. And the Irish actually has tables based on your income for how much average living expense that you're going to have. And so, you know, what are the chances that they took, you know, 60, 70% of their take-home pay and, you know, lost it in a business twice in a row.
Chances of, of doing that are actually low, just from a mechanics standpoint. You know, so then I look a little bit more. After I schedule C and they have these have these huge losses, lots of, lots of mileage expense, lots of lots of other expenses. And the income for there for these businesses is zero.
So now they're basically, they have told the IRS that they've had, I had this business for two years, they're spending 60, 70% of their, of their day job income on this business. And literally had $0 in sales. That is challenging to believe. And, you know, so, so Alice had sent me an email and said, Oh yeah.
And we had gotten some [00:22:00] notices from the IRS. I was like, yeah, I bet you did. Because you know, there are, there are things to do. There are structures to put in place that can help you, that can, that can bring in a business expenses that you might have not, might not be able to think on a personal level.
But you gotta, you gotta Bouton out fraudulent about it. You gotta, you gotta do the paperwork. And I tell clients all the time, it's always about the paperwork, you know? So you know, these kinds of things were like, you have, you know, crazy write-offs in comparison, especially in comparison to your income level.
You have to, you have to be mindful of this kind of thing and realize that is probably going to lead to an audit. So I had, I had another client Bob, he had moved in from New York and brought in his his, his old tax returns. Now, before the tax cut and jobs act, there was classification of deductions called the 2,160 election.
And what that is is basically you work a day job, which you were having to [00:23:00] pay for somebody kind of expense that could be covered by your job in ism. So it's unreimbursed employee expenses. And so like if your day job requires you to use your personal cell phone you know, in order as a condition of employment, that could be an unreimbursed employee expense, and you could deduct that potentially on your tax return.
So he comes in and he says, Oh, you know, here's my, here's my old tax returns. And that was all got rid of by the way, with the Trump tax reform. But, but Bob comes in he's he shows me his, his tax returns. I think it's like 2016 or something. And he's got huge, six expenses. When I look at it, I look at the details and he's claiming just enormous numbers.
Like, you know, again, making, you know, $70,000, but spending $10,000 on transportation costs And and I, you know, we, we talk a little bit about it and it turns out that whoever he was using up in here York was, was counting unreimbursed expenses, his his commuting tolls. Cause you know, there's the bridges and the [00:24:00] tunnels going into and out of New York city.
So, you know, it's, it's expensive, you know, and that adds up over a year. But you know, They were trying to, they're trying to say that this is an unreimbursed employee expense because it's, you know, it's a total, but you know, you have to, I think to yourself is every person in New York city or who works in New York and lives in or works in Manhattan and lives.
If not in Manhattan and pays these tolls are, is every one of them entitled to deduct their, their bridge. And the answer was no, because your commute, your regular commute from your home to your work is not a deduction. No matter what. So, you know, it's it's, it's things that are, that are out of whack you know, in comparison to, you know, your life that you really have to watch out for.
And these are the things that are going to get to get people audited. No 2106, we've gotten rid of with the Trump tax reform. You know, a lot of things that were people were, you know, playing games with have gotten rid of, had been gotten rid of over the years. [00:25:00] So it's harder, but there are still things like this federal fuel tax credit and you know, people I've seen people bring in tax returns from, from prior bears they've made up Made up education credits was a good one.
Cause again, that's refundable in that the government will give you money for going to undergraduate school, you know, in certain, certain certain situations, certain qualifications. Even if you never paid a dime in federal facts. So that's extra money that the government rent could potentially give you.
So, you know, you wanna, you want to be aware of what's going on in your tax return and, you know, ideally, you know, every person who who's filing a tax return would understand every single number that's on taxes. Realistic terms. If you see large deductions that you don't have an explanation for just question it ask your taxpayer, they should be happy to explain what's going on.
So, you know, it's, you know, we're, we're deducting this because XYZ and no, if you agree to it, then you're sign off on it. If you don't. Then don't, [00:26:00] that's really the bottom line. You know, a lot of, a lot of tax repairs they're out there they're trying to compete for, for business, just like anybody else.
And they they are promising the moon to people. So, you know, if it sounds too good sounds too good to be true. You might want to look into it if there's a reason then. Sure. You know, I've had huge swings on, on, on clients coming in, either as as new New new referrals and coming in and saying, well, if you structured your business this way, instead of that way, then we could do XYZ.
And then we could save, you know, a whole bunch of money. You know, my biggest turnaround was about $300,000 in terms of client coming in, showing me his tax return and then we recognize some things were done wrong and we amend it and he got back. Well, he went from owing a hundred to getting back 200.
It was a 300,000 swing between the federal and state. And you know, that was that was the biggest one. But you know, those kinds of things, especially [00:27:00] huge, huge changes like that are relatively rare. But, you know, they do happen. So everything that, that seems odd to you as, as a customer of a tax preparer, you want to be questioning and, and finding what, what the explanation is.
Cause there should be an explanation. Now in the case of the first Ellison, Bob, where has changed after the fact obviously they had no way of knowing that, but they didn't know that the refund was going to go to the brothers' account rather than their own. And that should've been a tip off that something fishy was going on.
So those are, those are the tech stories for today? Yes, I, I did three. I only meant to do two, but you know, so we've got Alice and Bob with their frivolous tax return penalty. We got a new Alison Bob that are spending 70% of their, their take home pay on some kind of business that makes $0. Then we've got another Bob who was deducting you know, incorrectly deducting his, his daily commute.
You know, these are just [00:28:00] things I want you to be aware of so that you don't come so that you don't come to me next year and you say, Oh we did this thing now I owe, you know, thousands and thousands of dollars to the IRS because of some frivolous or or incorrect thing, because, you know, just know when you sign off on it, you're signing off on it.
So. So those are my stories for the day. And you know, I, I did want to touch on a few things. But you know, if anybody in the chat has questions, comments, things they want to talk about, hit me up with it. Otherwise I will go into the people who send in questions ahead of time. Cause there are a couple, couple of good ones.
So one thing I wanted to hit I've meant to hit the last couple of weeks and I haven't had the time is the PPP and, and who's eligible like, so what is it, how does it work? Who's eligible and all that kind of stuff. So PPP stands for a paycheck protection program, and this was developed through the coronavirus stimulus and cares [00:29:00] package and everything.
And what it is is the government trying to prevent businesses from laying off people. So they're saying, okay you know, we will give you money or responding to, you know, your, your payroll costs, you know, for two and a half months worth of payroll. And what did it, the way it's structured is that it's alone.
It's young people, so it's a loan through the SBA. So the SBA provides funding through a bank and the bank turns around and gives you the money at the bank makes a fee along the way, because of course they do. And then you now have this loan from the government. Now, if you use the money for qualified purposes which has payroll, which is it's gotta be mostly payroll.
But payroll mortgage interest utilities covered this expenses with the most recent stimulus they added personal protective gear. Like if you have to have masks and, and whatever for coronavirus purposes that counts if you have to rebuild after looting, that's a new thing that That is qualified inertia.
We'll get to that in just a second, I guess. [00:30:00] As far as who's eligible, basically any business is eligible. If you are a schedule C filer, you know, C for chump, like inertia says then you are qualified based on your net profits because that's the portion that's paid, social security tax and Medicare tax on.
And if you are another kind of filer then it's going to be dependent on whatever's covered from, to payroll, which again involves social security and Medicare taxes. So you th that's really the key to the amount of funding that is available for people. So how much payroll tax did they pay? So, you know, it's, and again, they, they average it out and they look at two and a half months worth of, of those expenses.
And that is the maximum loan. You can do a couple of other things like refinance your, you have an Eid economic impact, impact disaster loan from the SBA, but by and large, just, just the payroll amounts. So then you go through the year and Later on you apply for forgiveness [00:31:00] for this loan. So in order to, for the loan to be forgiven, you have to show that you use the funds for the qualified purposes and they say, great, you don't have to pay it back.
So then it becomes a tax-free grant. Now, what was interesting with that PPP is that originally when it was passed back in March or whatever of 2020 whatever you used the money for was not going to be deductible for tax purposes. So if you, if you got a tax-free grant, then whatever you use that money for was not a tax Pence which actually makes sense in an accounting sense.
But, you know, with the most recent version that was passed December 22nd, I think it was right at the end of the year. They actually changed that language so that you can get the money, get the loan, get it forgiven. So now you have tax-free money and you can spend that money on qualified purposes and you can deduct those those expenses on your tax return.
So you are effectively double-dipping for tax purposes and that you, you have [00:32:00] no tax income, but you do have taxes. And and yeah, so people are going after the PPP. So round two is currently open. You have to apply by March 31st in order to get around two of the PVP. If you didn't get any in the spring then you could apply for the first time now, or if you've got some in the spring, you can apply again.
If you had. A quarter in 2020, that was more than 25% lower than similar quarter in 2019. So if this was just so terrible, they still need more money than it's available for you. And obviously there's, there's details to be, to be worked out on there. There are special rules for seasonal businesses.
There's special rules for if you have a venue I'm kind, cause those were hit especially hard, you know? But, you know that's, that's the basic idea behind the PPP. It's you know, it's interesting in that. So the, the, the U S has pursued a very different strategy when [00:33:00] dealing with the economic problems of, of the reaction to coronavirus compared to other countries.
So like in Canada, in New Zealand and a lot of other places, they just sent out checks to people, you know, either monthly or, or most of them were monthly actions. And so then you, as the individual of that particular country, you can then choose to spend your money or not, or do whatever with it, because now it's what the U S government has done and is doing, is focusing on focusing on businesses, Abel, and their ability to continue to pay payroll.
There are a couple of things tied in with that, in that they have the employee retention credit and the social security deferral, and all kinds of things. But they're, they're focused on that business level rather than the individual level. And I think you might've noticed that people are not terribly happy with it.
You know, It's a, I think it's a mistake to go that way. I personally, if you could just wave a magic wand and you know, I was in charge, I would just send out a stimulus payments [00:34:00] to individuals and then they can patronize whatever businesses that they want. And if you have a business, let's say your restaurant or whatever, they got shut down and you weren't able to make ends meet.
Well, you've got. You're covered by the individual stimulus rather than trying to go through this business that is not allowed to operate because you're in some area where the government is not allowing you to. So it's kind of a, a hodgepodge sort of approach that I think is not working terribly well.
But you know, obviously they didn't ask any of us about how to do it. You know, part of the Biden tax proposal. Is also tied in with that is you know, extending their, their bonus to unemployment compensation. So a lot of people millions and millions of people started applied for unemployment over the past year.
And you know, the government wants to be minimized that as much. So, yeah. The idea, being that well, if you can fund the PPP, then you won't need to go on unemployment because you [00:35:00] won't lose your paycheck. But we have seen that, that has not really worked out in practice as there's ever many people on unemployment right now.
In fact, how many people are on unemployment right now. So let's see. Apparently according to department of numbers, we have that's the unemployment rate, but here we go, 10 million unemployed persons, according to department of numbers.com. So that's a lot and, you know, Had they gone the individual route of just the student that's direct to people's pockets.
I think a lot of this could have been avoided, but we are well down the road of where we are. So I don't think that's going to be changing any you know, on top of the Democrats proposing the $3,600 a child credit, [00:36:00] you know, that same package. I don't know if it's going to be in that same in that one.
Bill, if they're splitting into multiple bills, they're talking about extending the, the, that federal Purchase surplus on top of your state unemployment. So the way unemployment works in the U S is that, you know, as, as each employee is paid, the employer pays a, you know, a tax towards the state or unemployment insurance, and it's called different things in different places.
Like in Florida, a couple of years ago, they changed it to reemployment as opposed to unemployment. But, you know, it's the same thing. So and that, that fund is supposed to build up in the event that that worker is unemployed later on and needs the help of the state government and different States have different levels of coverage and different amounts that they pay.
So like typically your Southern States will pay a lot less than your Northeastern or California kind of States. So I I've seen people who are on an unemployment from Massachusetts, let's say, [00:37:00] and you know, they're bringing in. $16,000 a year. And that same person who, who were, were to be unemployed in Florida might make $3,000.
So it's going to be huge differences. But on top of that, the has been clicking on and off, depending on the status of the various stimulus packages you know, $600 on, in addition to secretary with per week, in addition to whatever the States were paying. Probably cause cost of living, you know, I don't think so.
I think it's just the way they have their, their, their fun structured. There are plenty of places in, you know, New Hampshire that aren't all that expensive. But you know, they still pay out quite a bit and, you know, it's, it's tends to be a percentage based on salary under a certain amount.
So like So, like, it'll say something to be effective on the first $7,000 you pay an employee in each individual quarter, then you owe unemployment tax. So, you know, it's, it's [00:38:00] not It's it's we, if you follow the math, it doesn't really work out. Basically the employers tend to seem to pay a lot less and unemployment tax then people collect in unemployment benefits, but that might just be because they're spreading it out over multiple people who don't get unemployed.
But then when we have issues like coronavirus and the entire economy being shut down, obviously that does not work so well. But inertia had a fun question to the grace commission really proved that U S income taxes only pay interest on the national debt. Not exactly. So what what you can look at is you can S you can look at the total federal taxes.
Well, we can federal extra do 2019. Hopefully the numbers are published by now. Fred and alice.com. Oak of X revenue. Okay. So here is a, well, this is [00:39:00] estimated for 2021. So individual income taxes account for a 1.9 trillion payroll taxes, 1.3 trillion, miscellaneous other stuff all adds up to $3.8 trillion.
So then if you look at Federal expenditures got here. Budget proposals. It's not too helpful. I want to start.
That's just discretionary versus parishioner net interest. Okay. So these, these numbers are a little bit off. This is 2018, but you can see that net interest is 8%. So 8% of 4.4 trillion or, or 4.1, 4 trillion is going to be 330 billion. [00:40:00] And so that number is gonna be higher. Now it might be 500 billion of like that, but it's, it's well short of the No, the total taxes collected.
Now, what you can do is you can look at a federal tax revenue versus the discretionary and non-discretionary non-discretionary is social security, Medicare, and the military. Primarily those three things make up the vast majority of it. And that makes up the vast majority of the. Both the taxes collected and the, and the amount of dollars spent out of the federal government.
So, you know, those are, those are much, much closer to break even. And obviously the federal government spends more than that. And that's where the the annual deficit and then all of that deficits added together. Add up to the national debt. In fact, if you look on the livestream perhaps have to drop those links earlier.
We've got MSP ways. We got VIM that's data with the technical difficulties we had earlier. [00:41:00] I'm not sure that those are actually working. But you know, I keep this, I keep the U S debt clock up on the on my screen, which you can see here. They're working for playing jukebox. So they're not showing my screen really the thing here.
So this is us debt, clock.org which is a fun little site that you can see all kinds of fun stuff. So there's federal tax revenue. They've got at 3.4 trillion and U S national debt. Is that 27 trillion. Now that's a quite a bit I mean, and then we can see largest budget items. Right here. Oh yeah.
There's some timing issues with with getting the feedback, but people on the replay will be able to see it, which is not. So looking at 3.4 trillion in us, federal revenue, we're looking at interest on the deficit as 393 billion. So, [00:42:00] you know, the, the tax review far exceeds that You know, so, so no, the greatest commission did not, did not prove that taxes told me, pay the interest.
You know, you also have one thing, a lot of people don't understand about the federal reserve. The way it works is that. So the federal reserve buys bonds simplified this a bit. They're going to buy bonds from banks. Those bonds are issued by the us government. The us government creates a bond.
They say, we're going to sell you a billion dollars. Worth of bonds and you, you pay us a billion dollars. We'll give you the spot. And in return, we'll pay you interest in for time banks turn around. They sell that to the federal reserve. The federal reserve creates new money, a billion dollars worth, and then handed over to the banks, the banks then use that money to do whatever they want to do.
So that's, that's kind of the, the two-step mechanism by which the, a government bond ends up on the asset sheet of the federal reserve. So those bonds carry interest and [00:43:00] the U S government pays the federal reserve interest. Federal reserve uses that interest income to pay their staff and the buildings and everything.
But then the surplus at the end of the year, it goes back to the treasury. So you know, they, and don't get me wrong. They're the, the owners of the federal reserve and sharp member banks you know, take a cut along the way. But a lot of that ends up going back to the the U S government. So that's what they talk about, you know, net interest on debt and not just total interest interest is saying, why do libertarians still say this then?
Well, you know, talking points are, get out there and. You know, it's take on a life of their own, like rundown says libertarians say a lot of things. That is definitely true. Well, yeah, I mean, check out, check out the numbers for yourselves, you know I like us debt, clock.org. It has a nice kind of, it's got a lot of numbers on the screen, but it's got a nice Nice view on, on the whole thing.
You know, it's got the population numbers, it's got a workforce it's got official unemployed. It [00:44:00] has an actual unemployment, 18 million. I'm not sure how they calculate the difference there, but you know, all kinds of interesting little statistical pictures of the, if the economy and our case is wondering what the Australian debt is.
Well, it'd be find-able right. The Australian national debt. Trillion let's look up the Australian X payments
for Australian national debt is putting to commodity to ca.com is 611 billion Australian dollars as of yesterday. No, not, not anywhere near 3 trillion. And let's see. Taxes do, I'll tell you that tech wages testing failure, and you'll find that if you travel around a lot, [00:45:00] the Australian or the us, the taxation mechanisms are pretty uniform.
The numbers change depending on, on different countries, but the general approaches are pretty much, pretty much the same. Let's see history. It's rural personal income taxes. Well, they're saying 27.8% of GDP in 2018. So how much was Australian GDP
being was 1.4, 3 trillion.
So we take 1.4, three 14 on time eight. So according to Wikipedia, Australians paid 400 billion in taxes in 2018 and their national debt is 611 [00:46:00] billion. So not too terrible. In terms of like, if you looked at that as a business saying they're carrying 120%, 130 present of their of their income as debt.
It's not a great position, but it's not a terrible position. And obviously when you control your own currency things things get a little bit more skewed. So that's one of the things that the Euro made the mistake on. Where they thought that if we combine everything and we have one currency, then we'll have, you know, easier trade between things.
So that's true to an extent. Yeah. But then, you know, you have the countries of the EU that have lost control of the currency. And they got into, you know, just more and more problems. I always see, we've seen the splits between, you know, Greece and Germany and the UK saying, no, thanks. We don't want you to grow.
And then they were able to, we've sort of, it's, it's a whole it's a whole you know, issue where you're, where you're trying to maintain political power, but you gave up monetary power. Very difficult to make that work. Incidentally that's, that's [00:47:00] the threat that crypto puts on all governments worldwide.
Why we see places like Nigeria just banned. Okay. You know over the weekend, I think it was, might've been Friday a Gabriel saying they have a trillion in foreign debt. That's possible. Interesting. Is the Euro still backed by 25% gold? I don't think it's backed by anything explicitly. Let's see.
So we got the TB reserves
in central bank. Let's see what they got there. Yes. I understand cookies legal acts funds just want a table. We management. 2006 might be a little dated. This QA is just having to look up stuff for us. Hey, whatever works. This is a reserve assets, ropa.edu. Okay. There's some gold [00:48:00] how much we got serve assets, monetary gold and like zero, hopefully, either seasonally adjusted millions of Euro.
So basically, no it looks like they had gold at some point and all beyond.
Yeah, I know right. Where to look. That is true. I do a lot of economic kind of research that is that is something not about knowing the right terms, but we were actually coming up on the hour here. And obviously if you're watching the replay here, it's going to be shorter simply because we had to cut out a bunch where my internet connection cut out and B all that all that work.
But there'll be some editing in my future here. It's only, I started using the script as my video editor. It's fantastic. I recommend it. It's pretty cool. You can you can, it creates an auto transcript and then you can edit the transcript and then it'll, [00:49:00] it'll that editing of the transcript we'll edit the video, but if you cut out a word, it'll cut out that clip of the video.
Awesome stuff. I'm using it for all my, all my videos for editing purposes. Let's see. Do we have time for any other questions? Well, this is a related question to what we start. We talked about earlier. Do I need form a company to start a business you don't need to and you know, in the very beginning, depending on what you're doing, it might be.
Better slash easier to, you know, try some things out. Like if you wanted to go out and be a consultant, great, go out and be a consultant. You don't need a whole business for that. Once you start making money and things are like this, isn't just a passing fancy. Then you do want to look at an engine company because I mean, it's liability protection you know, from, I call it two way liability protection.
One is a protects. If you have something in your personal life, like a car accident or something protects your business assets from the personal life. But on the other hand, if something happens in your business life, it protects your personal assets from, from you know, attack [00:50:00] vectors from that side.
So, I mean, that's, that's basic stuff. It's a good idea to have, but then also, you know, once you're in business and you're taking it seriously, which I recommend everybody do you want to be doing all the things directly in a business form because you know, on, on the one hand you know, finding a schedule C versus filing any other kind of business entity increases your audit risk by about 10 times.
And that's because of what the IRS calls the tax gap. Maybe we'll get into that on another show. But literally 10 times higher chance of getting audited from the IRS. And then also there are some tax planning strategies that you can't do a as a schedule C filer, which is unincorporated, but you can do, if you are a S-corporation or corporation or even a partnership, all those file, external returns that, that then flow through potentially into your tax return.
So like Partnership or an S-corporation, the net profit will show up on your tax return, equal operation. The dividend will show up on your tax, your individual tax. So [00:51:00] so yeah, business setting up a company is not required, but it's often good idea that brings us down to the last 10 seconds of the show.
I want to thank everybody for showing up for working with me through the technical problems that I've had because at and T has been, I know a problem lately, but thanks for coming. See you next time.
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