Editor’s Note: Karen J. Lapekas, Haute Lawyer Network partner in South Florida and expert attorney in Tax Law talks about tax problems that have nothing to do with taxes.
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Since leaving my job as Senior Attorney for the IRS Office of Chief Counsel (Miami), I’ve helped hundreds of individuals and businesses resolve problems with the IRS. By representing them in audits, defending them against intrusive collection actions, or fighting for them in Court, more than finding ways to solve their problems, I’ve discovered ways clients could have avoided tax problems. Almost all of them have nothing to do with taxes. Here are a few.
- Being an eternal optimist
I love entrepreneurial clients. Being an entrepreneur requires a special set of characteristics—the most important of those is being optimistic. Entrepreneurs take on exceptional risk because they believe in themselves and their product. They take a loan today because they believe they will repay it, with interest, tomorrow. Yet, it’s this very optimism that causes tax problems.
(Before I caution how optimism causes tax problems, I must add a caveat. I have met several clients after they lost millions in their businesses. Then, I watched them make it all back—and then some. They had one thing in common: an unshakeable belief they would do it again, and again. A manifesting mindset is powerful.)
But optimism—the eternal, unwavering, indiscriminate kind—can be dangerous. Optimistic business owners facing cashflow problems prioritize growing the business rather than paying current tax liabilities. They essentially take a loan from the IRS. The worst of these “loans” is paying bills with amounts withheld from employees’ wages. They don’t postpone tax payments with the intent of avoiding tax. Rather, they have so much faith in their business that they believe they will easily pay the IRS (and every other creditor) very soon. However, that day comes too far in the future, and the loan at too great a cost. Interest that accrues on outstanding tax debt is often less than what a business owner could get from a bank, but the IRS imposes penalties. A “loan” from the IRS is oppressively expensive.
- Hiring “creative” accountants
If I was the IRS, I’d troll the internet for accountants or financial advisors advertising “creative” and “innovative” tax-reduction strategies. Then, I’d audit their clients. In my opinion, there are few such strategies that are well-vetted and supported by law. Further, by the time they have been reviewed and tested, they are no longer creative or innovative! Unfortunately, most small to mid-size businesses can’t afford to invest in the kind of comprehensive research and tax opinions needed before entering into a “creative” tax structure or deal. They also can’t afford the risk of being wrong or defending their position against the IRS. If you’re a small or mid-size business and a financial professional is trying to sell you a creative strategy, the person most likely to make money from such strategy is the person charging you to create it.
- Making your kids think you’re rich
There’s no law requiring parents to pay their children’s private school, college tuition, horse-riding lessons, or BMW payments. So why are so many parents putting themselves into debt to help their children avoid it? I see people owe hundreds of thousands to the IRS who are barely able to make ends meet but are acting like their children have rich parents. Their children are in their 20’s (and beyond) and they pay their rent and tuition. Why, when nary a wealthy person with successful kids will say their kids became successful by treating them like rich kids? Student loans are cheaper than tax debt. If you have tax debt, your college-age kids should have student loans — not a parent-financed education. It’s not only a smart financial decision, it’s smart parenting.
- Lying to your spouse
There are many forms of dishonesty. One of them is creating a lifestyle you can’t afford to sustain, not admitting it to your spouse, and continuing to maintain it long after your income can support it. When it comes time to sign the joint tax return, you don’t admit there’s no money to pay the tax. Your spouse doesn’t question it, because you always paid your taxes. You keep spending summers abroad, your kids keep attending expensive schools, and you don’t admit that you are paying those expenses rather than the IRS. When your spouse finds out, not only are they angry, they’re scared. They are also liable for 100% of the tax! I’ve seen marriages almost fall apart because spouses weren’t honest with each other about their income or their tax debt. Rather than cut extravagant expenses to which the family grew accustomed, the breadwinner stops payments to the IRS. The source of the money problems was not necessarily money—but the failure to be honest about it.
I often wish I could go back in time to advise my clients so they would never end up having to hire me. As much satisfaction that I get resolving clients’ problems, I would sleep even better at night knowing I had prevented them. Tax law is complicated. Avoiding tax problems isn’t. But it’s hard. It’s hard to choose the long road in business, to turn down an exciting scheme, to say “no” to your children, and to admit to your spouse you can’t afford XYZ. Yet, these hard—but uncomplicated—decisions can save untold headaches and tax problems.
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