How to Audit Proof Your Tax Strategy

Speaker 1 – 00:00
The IRS is not someone you want on your bad side. In the US if you’re accused of a crime, you’re innocent until
proven guilty. The irs, it’s the opposite.
Speaker 2 – 00:08
You got to prove your numbers, charitable.
Speaker 1 – 00:10
Gifts, business expenses, real estate activity. The documentation is absolutely crucial, especially if you get
audited. Do you have a cpa? Do you have a tax practice that’s working with you that’s going to be proactive, not
reactive? What about crypto?
Speaker 2 – 00:22
It’s very scrutinized by the IRS right now. They’re trying to find ways to get all that activity reported to them.
Speaker 1 – 00:29
Let’s talk specifically about how ewa as a firm helps, but I’m gonna give an example of why we tell executives your
company stock should be less than 10% of your net worth. It’s so important if you’re an executive. Tax planning,
diversification, balance sheet plan is so crucial. I think that’s a good framework for how to audit proof your tax
strategy. Over the past year, the IRS has reversed their layoffs for auditors and they’re starting to hire more and
more. So we do expect that audits on individual and business tax returns are going to increase in coming years.
Today, we want to help you audit proof your tax plan. We want to help you save as much in taxes, but also balance,
ensuring that you don’t have a pain and a time suck of an audit coming over the next few years.
Speaker 1 – 01:18
So, Nick, let’s get right into it. So give us the background of, you know, how many agents are they expecting to hire?
And I know some of these were layoffs. They’re coming back, but it was the lay of the land.
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Speaker 2 – 01:29
Yeah, so they, you know, a couple years ago announced that they’re going to be hiring 87,000 new agents, which I
know caused a lot of panic to a lot of people, as it should. No one wants to go through an audit. No one wants to
deal with that headache. They’re trying to kind of strengthen their workforce and get more audits out there. It
sounds like that seems to be the goal over the next, you know, five to 10 years.
Speaker 1 – 01:47
I looked up some statistics at 266 million a little bit over in 2024. Tax returns are filed, includes businesses. So out
of that, 163 million in 2023 was individual returns. And so audit rates are, generally speaking under 1%. But you put
some statistics here, like under 500,000 about it, like 0.3% of that category. 500 million increases to half a percent,
a million to 5 million increases to 1.6% and then 5 to 10, it goes from like 2 to 3 and then over 10, it’s like 9 to 11.
Speaker 2 – 02:17
Right.
Speaker 1 – 02:18
So some of the things that we talk, we’ve talked about previously, like QSPs, real estate, professional status, these
huge tax savings, we just really have to make sure that they’re documented and legitimate. And if they’re
legitimate, it’s an amazing strategy. You should do it if you’re really stretching. If they consider is it worth getting all
that recaptured in aid or if you’re not in it and they decide you don’t qualify for these strategies.
Speaker 2 – 02:41
And the headache audits can drag out months over a year.
Speaker 1 – 02:45
In the US My understanding is, and correct me if I’m wrong, with the US if you’re accused of a crime, you’re
innocent until proven guilty. With the IRS it’s the opposite. You got guilty until you prove your zeal.
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Speaker 2 – 02:56
You gotta, you gotta prove your numbers. Basically.
Speaker 1 – 02:58
Yeah.
Speaker 2 – 02:59
Yep.
Speaker 1 – 02:59
The IRS is not someone you want on your bad side, bottom line. So. Okay, let’s talk about some of the red flags that
the IRS sees. I’m gonna start to say low hanging fruit like you have. The IRS gets a transcript, right? The transcript
shows every W2, every 10, 99, every K1.
Speaker 2 – 03:22
Yep.
Speaker 1 – 03:22
Like spend the time, get that transcript yourself. So what we do for our clients is we get a power of attorney signed
and we’re able to go and see that transcript. And so just as simple, like if you forget to report a K1 and this
happened to me, the tax firm that I hired to do my tax in the business no longer use it. Now we do it all in house.
Yeah, they prepare the business return, they prepare the K1s and my individual return. They just left my K1 off. My.
Speaker 2 – 03:46
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Off your individual return?
Speaker 1 – 03:47
Yeah, so I actually didn’t get off yet, but the IRS is like two years later, they’re like, you owe this and it request and
penalties.
Speaker 2 – 03:53
Correct. Probably came down pretty hard on you.
Speaker 1 – 03:56
Yeah, it was really tough. So. And you know, you had to pay. There’s no asset around. So I would say that would be
number one is do you have a cpa, do you have a tax practice that’s working with you that’s going to be proactive,
not reactive? What I mean by that is reactive would be you get a letter in the mail about your tax return three years
ago and say, where is this? Well, proactive is when you go to file the tax return. Here’s what the IRS is expecting A
glow hanging fruit. Give them actually. What. Because it’s one thing. It’s an automatic flag, right?
Speaker 2 – 04:26
Correct. Yeah. Had clients at the past forget to give us something small like a 1099. You know, not. Not a huge
amount of money showing on that 1099. But guess what? You still get that letter in the mail. You still get the letter
saying, hey, we’re going to adjust your return by this. The biggest one that I’ve seen is for gambling. So if you’re. For
a gambler, you’re like going to the casino playing slots. If you win money, if you win a jackpot, you’re getting a W2G.
Even if you lose money throughout the year, you got to report that W2G. I’ve had so many clients have thousands
and thousands of dollars W2GS that they did not give to me because they just, in their mind, they’re like, oh, well, I
lost money throughout the year. I don’t need to report this income.
Speaker 2 – 05:06
You need to report that income and offset it with your gambling loss, and.
Speaker 1 – 05:09
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The losses don’t carry forward. So gambling is like the worst proposition you ever wrote. It’s after it’s exif. Because,
like, if you have a big year, there’s normally gambling like most people. No matter what you say, I know it’s
professionals net. Net, you are down like probably 10, 20%. If you look at your total bets you place, you’re probably
down at least 10% that if you’re good. Probably more if you’re like.
Speaker 2 – 05:30
Right.
Speaker 1 – 05:30
If you’re just throwing in a little chance, like Harleys. Yeah, yeah. So you got to keep track of that. You know, if you
won a hundred thousand on some lucky bet and then you bet 200,000, you’re net down 100,000. If you don’t have
those records, you’re paying income on 100,000.
Speaker 2 – 05:44
Right.
Speaker 1 – 05:44
When you lost a hundred thousand.
Speaker 2 – 05:45
Correct.
Speaker 1 – 05:46
The worst proposition in the world. So keep the records on the gambling.
Speaker 2 – 05:49
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For sure.
Speaker 1 – 05:49
So documentation, obviously, charitable gifts, business expenses, real estate activity. The documentation is
absolutely crucial, especially if you audited.
Speaker 2 – 05:57
Yes. So, I mean, again, just to further emphasize your point, make sure you have records. Right. Especially if you’re
going to. If you donated $100,000 to charity, don’t just throw out the little receipt. Keep that. Keep that in your
records. Okay. Because $100,000 charitable contribution might be scrutinized.
Speaker 1 – 06:14
Okay.
Speaker 2 – 06:15
If they come asking and they say, hey, can you please verify, like confirm, give us proof that you did actually
contribute this to charity. And you’re like, I Don’t have that anymore. They’re going to throw it out.
Speaker 1 – 06:24
What about the algorithm? The irs, obviously, like, if there’s huge income fluctuations up or down.
Speaker 2 – 06:30
Yeah.
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Speaker 1 – 06:30
So if you’re in this higher income, like 1 to 2, 2 to 10, you’re already at a high audit risk. But if there’s some huge
fluctuation where you went from 2 million of AGI to 1 million.
Speaker 2 – 06:40
Yeah.
Speaker 1 – 06:40
Because you left it a real. That’s immediately going to be.
Speaker 2 – 06:42
Right. That can be a red flag as well. So, again, goes back to good record keeping. Again, we’re not telling you, don’t
try to decrease your taxable income in a legal way, do it. You want to pay as less tax as possible as legally
possible, but make sure you’re keeping good records in doing so because again, the last thing you want and the
IRS is a little delayed in getting to it. So by the time they get back to you, it might be 18 months later. Guess what?
Penalty and interest just accrued on you for 18 months on top of the tax. Kind of like what you were saying in your
example. So it’s not something you want to deal with. You don’t want to get that letter in the mail. It’s not a fun
letter to.
Speaker 1 – 07:17
What’s the interest right now on.
Speaker 2 – 07:19
I believe it’s 7%.
Speaker 1 – 07:20
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Yeah. So it’s basically like what a mortgage rate would be, the current market rate. So you don’t quote me on it, but.
Yeah, no, I believe that’s right. But I want to say it was like a little bit over one and a half per quarter. We do a Roth
conversion. You don’t pay in the third quarter. You don’t pay it. It’s like one and a half or 1.7. The first, that third
quarter and the fourth quarter, if you’re waiting till. And the first quarter of the next year, if you’re waiting until April
15th to file a tax return. Yeah. So, yeah.
Speaker 2 – 07:42
So it adds up.
Speaker 1 – 07:43
Yeah, that’s a big number. Okay. So schedule Cs that consistently show losses and is used to offset other income.
IRS is obviously going to look into that and say, you know, what’s going on. Yeah.
Speaker 2 – 07:52
Is this a hobby? You know that’s the biggest thing because hobby income. Hobby or hobby. I’m sorry, Hobby losses
are not deductible. So if you have a hedge C where Maybe you’re making five grand in gross a year, but taking 25
grand to 50 grand in deductions netting that.
Speaker 1 – 08:06
You know, your sports events are there that are not deductible anymore.
Speaker 2 – 08:11
Exactly.
Speaker 1 – 08:11
You can do meals, but not like entertainment.
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Speaker 2 – 08:14
Yeah, right.
Speaker 1 – 08:14
Yeah. They’re going to see right through.
Speaker 2 – 08:15
They’re going to question that. They’re going to be like, hey, you’ve shown a loss on this business for seven years.
What’s the deal? And if you can verify it’s legitimate business activity, they’ll let you take the loss. But why are you
losing $40,000 a year at that point? No question.
Speaker 1 – 08:28
What about crypto?
Speaker 2 – 08:29
So crypto is something that over, obviously over the last few years has really been growing. It’s very scrutinized by
the IRS right now. So they’re trying to find ways to get all that activity reported to them. So starting this year, tax
year 2025, there is a new 1099 coming out. It’s called a 1099 DA. Obviously we’ll see if it changes. There’s still
months to go. But crypto transactions will be reported to the IRS for the first time.
Speaker 1 – 08:54
If they see some fisheries when they’re probably go back.
Speaker 2 – 08:57
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Yes, correct. Right. It might open up the door for them. Be like, oh, let’s look into this guy in the past.
Speaker 1 – 09:01
How far can they go back?
Speaker 2 – 09:03
So they can go back as long as the return has been filed. The statutes, three years.
Speaker 1 – 09:07
Okay. They’re typically three years behind. So 2025, they’re adding 2022 right now.
Speaker 2 – 09:11
They’re very behind.
Speaker 1 – 09:12
Okay.
Speaker 2 – 09:12
Yeah.
Speaker 1 – 09:13
So gotcha.
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Speaker 2 – 09:13
And I also want, if you are substantially understated, your income, that statute I believe stays open for seven years.
Speaker 1 – 09:20
Gotcha.
Speaker 2 – 09:20
So if you failed to report a million dollar gain from Bitcoin, they can probably take the stance that hey, this is a
substantial understatement.
Speaker 1 – 09:28
Yeah.
Speaker 2 – 09:28
The statute’s going to stay open longer.
Speaker 1 – 09:30
Gotcha.
Speaker 2 – 09:31
I believe.
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Speaker 1 – 09:32
Well, let’s talk some specifically about how ewa as a firm helps. I say this just educationally because these are all
steps, regardless whether you use a tax professional, this yourself, that you can take yourself of having the tax and
the wealth management, the financial planning already all buried is when you have a tax professional, you’re
scrambling in a SE like a separate firm, you’re scrambling the information. You’re one out of a couple hundred
returns. Whereas if you’re with a financial planning firm, you’ve had countless conversations throughout the year,
you know everything that’s going on.
Speaker 2 – 10:01
Right.
Speaker 1 – 10:01
If you hold the investments, most of the 1099s, investment income, even the W2s, we’re going to have access to
those right on the spot.
Speaker 2 – 10:09
Right.
Speaker 1 – 10:09
And we’re going to know maybe some things in the clients don’t even know that they have to report or proactively
go after that. And then the other thing too is caring for the tax returns and then also those power of attorneys.
What’s the number at the 32? The form number? Yeah. 28. 2848. Where we can go in and say hey, here’s what the
IRS is expecting this year. Here’s what Fidelity said you if you work at UPMC as a doctor. Here’s what they said you
at the W2. Here’s the K1 you got from this private mess. But you didn’t. And we can make sure before you file that
at least all that is at least we’re giving them everything expecting if we don’t immediately you’re the percentage of
like they’re going to look at you.
Speaker 2 – 10:45
You’re going to get a notice at some point. I want to. I do have an example of that. This, this is to show they are
behind in this to kind of further that tacking on a penalty and interest at who forgot to give me A inherited 1099 R.
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It was $40,000 they took out. They did not inform me of that until the next year. And in that year the IRS did not
even contact them. But they’re coming, right? They’re going to eventually. Second letter. Yeah, but I’m just saying
that’s what I mean. We’re so 12 months of penalty interest just tacked on.
Speaker 1 – 11:15
And so if they don’t catch it two or three, it’s about then it’s unfortunately the IRS that say hey, we’re sorry, we’re
behind. We didn’t catch this last year. We caught this three years later.
Speaker 2 – 11:23
Right. They’re going to.
Speaker 1 – 11:24
So you have to pay interest for three years.
Speaker 2 – 11:26
Correct. Yeah. Cause they’re going to be like hey, you failed to pay your tax. Here’s you know, 10, we’ll say 10,000
bucks in tax plus a couple grand in penalty and interest. Now you owe us 12 or 13 grand instead of 10.
Speaker 1 – 11:36
Speaking from experience. 2020. This is the year we started. You know Ewa as like a, as a private ria. So I was so I
was relying on the professionals. I checked over real quick and I was just like there’s no way this could have
messed up because they prepared the business return the K1 and right. It’s all. I think they were just overloaded.
They shouldn’t have taken as a client Great prior firm like love them but like yeah it was a big Mistake. But I
remember it’s like, let’s go fight. I was trying to find the interest. Let’s give them the story of, like, how we just
started business.
Speaker 2 – 12:04
Yeah.
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Speaker 1 – 12:05
They do not care.
Speaker 2 – 12:06
No.
Speaker 1 – 12:07
At all. No. The IRS gave me zero break. I had to pay full interest and penalty went to the prior firm. They were like, it
was a big penalty. So they’re like, we can’t afford this. I was like. So I was like, basically sus or insurance will cover.
I’m. I’m not going to sue you.
Speaker 2 – 12:22
Yeah, right.
Speaker 1 – 12:22
So then I think they covered a little bit of it. And then I had to. I had to pay it. So I just speak from experience, like.
And that was, I think, caught two.
Speaker 2 – 12:29
Years later, if you wanted to fight the interest at that point.
Speaker 1 – 12:32
Well, I went back and forth three or four times, so it was. I probably spent 30 hours on it to get.
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Speaker 2 – 12:37
Right.
Speaker 1 – 12:38
Nothing.
Speaker 2 – 12:38
Yeah. And that. That’s something to consider too, if, you know, some of these notices might be pretty minimal.
Right. With a little interest, a little bit of penalty tagged on. Keep in mind the time it’s going to take if you want to
fight the IRS. It may take you 12 months, 18 months.
Speaker 1 – 12:51
It may take you a month to.
Speaker 2 – 12:52
Get a response, to get a few hundred bucks.
Speaker 1 – 12:54
The response you get is like, hey, we got your response, but give out another 98.
Speaker 2 – 12:58
Exactly. Correct. Yeah.
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Speaker 1 – 12:59
It’s crazy.
Speaker 2 – 13:00
So is it worth your time at that point? And that’s kind of a, I guess, a feather in the IRS’s cap where you might just
be like, screw it, I just pay it.
Speaker 1 – 13:09
Yeah. There’s lots of ping pong games you can play.
Speaker 2 – 13:12
Yeah.
Speaker 1 – 13:12
I think the best ones to play if you can get tasks done quickly. Irs, I mean, you’re playing a ping pong day of
months.
Speaker 2 – 13:18
Yes.
Speaker 1 – 13:19
Here’s balls in your court a couple months later and you have to go, what were we talking about again? To open up
all your files and then. Yeah. Yeah. So the goal is stay out of the ping pong game with irs.
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Speaker 2 – 13:28
Correct.
Speaker 1 – 13:29
You know, if you get audited, you’re getting audited and have the records, Boom, let’s go.
Speaker 2 – 13:33
Yeah.
Speaker 1 – 13:34
Hopefully it’s a quick in and out, but missing payments, missing documentation, having the surprise. Because it’s
like, as a business owner, whether it’s like ten grand, twenty grand, a hundred grand, whatever it is.
Speaker 2 – 13:45
Yeah.
Speaker 1 – 13:45
You’re not expecting that two years later. That’s a huge.
Speaker 2 – 13:48
Yeah. It hurts a little bit.
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Speaker 1 – 13:50
Have an emergency fund, but it still. It sucks.
Speaker 2 – 13:52
Yeah, for sure. Yeah, for sure. And there’s no way to fully proof the IRS from asking for further information. Right.
So I actually, in my old firm, we had a client who had some loss from Hurricane Ian. Okay. Back in 2022, we
claimed a loss that was actually substantially under what they recognized, and that was what they wanted to do
because they didn’t want to go through all the hoops of getting it. You know, all the routers, all that stuff. Yeah.
Speaker 1 – 14:18
They’re like the easy snip test. If they come in, they’re like, oh, they could have.
Speaker 2 – 14:20
They could have done a lot more than that. Right. They just recently got a notice requesting verification and proof
of the. Of the value of the loss. We claimed we provided what we had, which was kind of like a little Excel
spreadsheet that was declined. So they actually had to go back and hire someone, an estimator, to value the loss.
Guess what? The loss they were allowed to take was twice over, twice as big.
Speaker 1 – 14:43
And so now the IRS going to audit is going to have to owe them money.
Speaker 2 – 14:46
Correct. But now this is going. It’s been, I think, close to 12 months. Now.
Speaker 1 – 14:50
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The IRS pays them interest. Right.
Speaker 2 – 14:52
They said they should automatically adjust their tax return to reflect that.
Speaker 1 – 14:55
Okay.
Speaker 2 – 14:56
And then they should give them a refund with interest. But now we just submitted that documentation a couple of
weeks before I had left that firm. We’re basically at 12 months as it is. They probably won’t hear back from them
for another three to four months, if not longer.
Speaker 1 – 15:10
So now you’re just such an unnecessary thing to take to have in your headspace for three to four months.
Speaker 2 – 15:15
Right.
Speaker 1 – 15:15
But the IRS is all. It doesn’t matter if it’s a dollar one hundred the minute. All stressful.
Speaker 2 – 15:19
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Yeah. And we’re not talking pennies here because, you know, several hundred thousand dollars of deduction.
Speaker 1 – 15:23
Yeah.
Speaker 2 – 15:23
It’s not just, you know, a couple of dollars here and there. It’s substantial tax savings.
Speaker 1 – 15:28
Yeah. So I think that’s a good strategy is like, if you get audited, like, be ready to get more money back. Cause, like.
Okay, I’m gonna. I’m gonna now show you the proof. And now it was a hundred thousand, not $50,000 reduction.
Speaker 2 – 15:38
Right.
Speaker 1 – 15:39
I just didn’t want to get odd then.
Speaker 2 – 15:40
Exactly. They didn’t wanna raise that red flag. They didn’t wanna jump through the hoops of getting the estimator.
Because at that time, everyone was getting an estimator. Right. So they’re like, this is. This is more than fair. This is
a lot less than we’re trying that we actually Lost. Let’s just go with this. And they still got questioned and now
they’re going to get even more money saved.
Speaker 1 – 15:58
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I wonder if they got questioned because they underdent it so much.
Speaker 2 – 16:01
I think it’s just, I think the hurricane losses are getting questioned. We had a couple other clients get scrutinized for
that.
Speaker 1 – 16:08
So just as a heads up, if you’re, if you think your returns are pretty simplified, like you’re high income, W2, we see a
lot of surprises and we’re even like a physician that’s coming out, you know, residency making like 70 grand. And
now they’re like making half a million dollars, let’s say orthopedic surgeon. The second year they’re getting like RVU
bonuses and so. Or this could be an executive as well. I’ll go through two examples. So like that physician. Now
let’s say that physician does a little bit of like medical malpractice opinion, like some 1099 income. Yeah, yeah. So
let’s say, you know, there are 500,000. They’re withholding the right amount. You need to double check that, by the
way, because it’s up the election after married, if you have kids, all that stuff. Yeah.
Speaker 1 – 16:52
So a lot of HR softwares, they’ll withhold like 24% of the bonus. And so if you’re making half a million dollars, most
likely if you’re single, married, you’re gonna be at a 32, 35, 37% tax bracket, depending on how high your income is.
And so if they’re withholding 24 and you owe 35, that’s 11% difference. So if that’s a $100,000 bonus, that’s 11
grand automatically that was paid in February. And you didn’t know that you’re going to owe 11 grand plus the
interest on that 11 grand. So now it’s almost 12 grand.
Speaker 2 – 17:21
Right.
Speaker 1 – 17:22
And you’re finally returning April and you’re like really pissed off because, like, yeah, I thought I paid my taxes
through my. And then let’s say you have 15 grand from the medical malpractice 1099, where you’re paying that
gets tacked onto your already all your other income. So that’s a 37 plus 3% state plus double Medicare double.
Speaker 2 – 17:40
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Right.
Speaker 1 – 17:41
So almost half of that’s gone. You didn’t pay it. So add that 7,500 plus the interest on that. So now it’s like a
$20,000 surprise. We see this all the time. Yes. And so then the other thing too is We’ve seen this with other CPA
firms. And then the other CPA firm will just go like, automatically into their, like, nerdy books and say, safe harbor.
And they’ll give the client homework to write a check for five grand every quarter. So now they’re writing a check,
like manually writing a check to federal, to the state and to local.
Speaker 2 – 18:10
Yep.
Speaker 1 – 18:11
For like five or six grand a quarter.
Speaker 2 – 18:13
Right.
Speaker 1 – 18:13
Giving the client homework. What orthopedic surgeons remember to do that?
Speaker 2 – 18:17
Exactly.
Speaker 1 – 18:18
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So we do. I think this is where the financial planning and the tax come together, is we’re going to know is that next
year, is that stuff relevant, like, how’s your production look this year? Is it going to be higher? Let’s. Let’s predict
that. Let’s go into your paycheck on a monthly basis. Because money is a temperature. 20 grand is surprised for
anybody.
Speaker 2 – 18:35
Right.
Speaker 1 – 18:35
And that can disrupt, you know, a financial plan, regardless of your income. Let’s go into tax software and let’s take
a little bit per pay. You know, they’re paid 24 times. Let’s take a thousand per pay. So 24,000, they’re not. I mean, it’s
going to be a little bit of a hit, but they’re not going to notice that a ton. And then come March, come April, there
you go.
Speaker 2 – 18:54
Surprise.
Speaker 1 – 18:55
They’re all square. Or you do that in like, if you’re making 500,000, let’s say. Cause Social Security gets capped out
of like 168, I think. Yep. So first three, four months, you’re going to be lower to 6.2% coming out for your Social
Security. So maybe then after that’s done. So if you’re 500, maybe your paychecks are like 21amonth, and then they
jump up to like 24amonth.
Speaker 2 – 19:17
Right.
Speaker 1 – 19:17
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Let’s do the 20. Let’s take the 21amonth. And then in April, let’s add an extra federal withholding for like
1,500amonth for the rest of the year. And then your cash flow is pretty about the same through the whole year. So
these are all strategies we can consider because budgeting, it’s. A lot of people don’t understand why has my
income been down in January and then back up in April? And it’s hard from a budgeting perspective. They can
throw everything off.
Speaker 2 – 19:36
Yeah, I can’t say it enough. Talk to your CPA throughout the year. Talk to your financial advisor throughout the year,
because nobody. I don’t care how much money you make, you don’t want that big surprise in April. And if you’re a
high earning W2 like you were saying earlier, it’s almost impossible for them to withhold enough wages. Yeah, it’s
on your wages you have to usually do a manual adjustment on your W4. And when you start that job, you probably
don’t know what’s going on. You probably just fill it out as mirror fine joint and that’s that. Or fill it out a single and
that’s that.
Speaker 1 – 20:03
Yeah.
Speaker 2 – 20:04
But most of the time you have, when you get to that level of income, you have to fill in that additional withholding
line item.
Speaker 1 – 20:10
So here’s the one I’m gonna give an example of why we tell executives like your restricted stock units like your
company stock should be less than 10% of your net worth and usually it’s like 60 or 70% because like let’s say an
executive is making like a $300,000 or half a million dollar base there. They get a cash bonus of half a million and
they get half a million of RSUs. So there’s like a top C suite executive, you know, and a half million of total comp.
The RSUs they get granted in year one, they don’t nest till year three. So there’s no taxes in year one or year two.
Speaker 2 – 20:37
Right.
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Speaker 1 – 20:38
Year three, they get taxed on whatever the stock price is worth. So let’s say that $500,000 are worth now worth a
million bucks. Well, they have to pay a million dollars. So most companies allow them to withhold like a minimum
24% of that. Right. Well if someone’s making one and a half million dollars, clearly that’s in the 37% tax rate. In 24
we’re at a 13% delta. So 13% delta. Now that stock’s worth a million dollars. That’s $130,000 of tax. This happens
all the time, by the way. Right. So now how the heck are we going to pay 130 grand? And so now they have
company policies, but we’re in a blackout, period. We can’t sell more.
Speaker 2 – 21:10
Right.
Speaker 1 – 21:10
Because we’ve inside information and it looks bad. Right. Because it shows I’m not. Now a couple years later, this
is a true life story by the no for sure. Now the stock that was worth, you know, it was 25 share, was 50 share. They
had to pay tax on the 50. A couple years later they can sell it. Now it’s worth 25.
Speaker 2 – 21:24
Yeah.
Speaker 1 – 21:25
So they just pay tax on that and didn’t see any of it.
Speaker 2 – 21:28
Right.
Speaker 1 – 21:28
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And now if they wanted the money, they’re like, I can’t sell it now because it’s down, it’s going to come back.
Speaker 2 – 21:33
Right.
Speaker 1 – 21:33
It’s so important if you’re an executive. Tax planning diversification, balance sheet plan is so crucial. If you’re an
executive. I cannot stress that enough. And you think, oh, make a million dollars. I’ve met so many people make a
million dollars that feel absolutely broke. Now they have assets, which. Right. But from a cash flow perspective,
because how those RSUs get taxed and they only with all the 24. I mean.
Speaker 2 – 21:55
Exactly. You don’t want to be scrambling in marching to find $130,000 in your example. I still want to be in it. No
one wants to be in that position. I don’t care how much money you really make. No questions, you know.
Speaker 1 – 22:05
Well, these are just some sample. I think the proactive nature of. Don’t start tax planning scrambling in January,
February, it should be. The tax plan should be 99% done before the end of the year because a lot of strategies
require the 1231 deadline. Some retirement contributions, other things you can do up until the tax filing deadline
after, like April 15th of 2026, you can do for 2015. But a lot of the big stuff you have to do a calendar year basis.
Speaker 2 – 22:28
Right.
Speaker 1 – 22:29
So 99% of your tax plan should be done before December 31st. That way you’re not scrambling.
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Speaker 2 – 22:35
Yeah. In those two, three months.
Speaker 1 – 22:37
Yeah.
Speaker 2 – 22:37
Again, I’m a CPA. I don’t know if I should say this or not. If you try to reach out to a CPA in March, February to talk
tax planning, at that point, that’s a little too late. It’s a little too late. They might not be super responsive. They
might try to their best to help you, but it’s almost too late to do anything. You know what I mean? The numbers are
the numbers at that point. So whether you have a CPA that gets back to you right away or not, the numbers are the
numbers.
Speaker 1 – 22:59
Unless you work with ewa. We didn’t talk about talking to everybody. And then it was like. It was. Yeah. A little
stressful. But now we have a couple more CPAs. Ex.
Speaker 2 – 23:07
That we’re grown. Exactly.
Speaker 1 – 23:08
So, yeah. Any. Any closing thoughts? I think that’s a good framework for how to audit proof your tax strategy.
Speaker 2 – 23:14
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Not a broken record here. Record keeping is huge. For anything you want to do, any sort of aggressive nature, even
if you don’t think it’s an aggressive nature, keep your records. No question. Talk to your CPAs. Okay. Don’t just drop
surprises on them in March when you drop off your tax file or send in your tax file try to keep that open line of
communication throughout the year. That way they can because you might be thinking you’re doing and they’re like
no, you should be doing this instead. Right. And that might save you thousands of dollars or in the W2 example,
the high earning W2s if you don’t talk to them until November, December, they can’t fix your W4.
Speaker 1 – 23:48
Right.
Speaker 2 – 23:48
Because at that point it’s too late.
Speaker 1 – 23:50
Yeah. The reacts have already been withheld.
Speaker 2 – 23:51
Right. So but if you reach out to them in June, July, August, there’s at least some time for that change to kick in and
help.
Speaker 1 – 23:58
Right.
Speaker 2 – 23:58
And then you just have to find some cash but again for the next year. So in this scenario 2026, you’re good to go no
question.
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Speaker 1 – 24:05
Well Nick, appreciate your expertise. Thanks for joining everybody. Look forward to catching you next week.
Speaker 2 – 24:10
Thank you.