Season 3 of The Kominsky Method is now streaming on Netflix
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IRS Problems Arise
In Season one of The Kominsky Method, Sandy Kominsky is an acting teacher who runs his own acting school. His daughter, Mindy, runs the office. Mindy calls Sandy while Sandy is on a days-long drive with his best friend Norman, (played by Alan Arkin) and informs him that she has opened the mail to discover a letter from the IRS. Over $300,000 is due. Sandy explains that his CPA passed away five years ago, and he just never found a new CPA to file the returns.
While driving home, Sandy and Norman visit an Indian Casino where Eddie Money is performing under a fictitious name. Money explains that under his real name, he owes the IRS money, so he performs as a tribute band to avoid paying the IRS. Sandy looks increasingly worried at the thought of what might be in store for him with the IRS. When he gets back home, he visits an IRS office to ask for a payment plan. The IRS agent opens a file and explains that the business owns the building where the acting classes are held, and if the IRS were to foreclose on that building, the matter could be cleared up in just two or three days.
Rather than hire an attorney or a CPA to assist, Sandy turns to his life-long friend Norman to for a loan. After much consternation, Norman decides to give Sandy the money, without any strings attached. The idea is that by giving the money, Sandy will be torn with guilt. Norman writes a check, which Mindy drives and delivers to the IRS agent in person, post-haste. Later, Sandy and Norman agree that Sandy will make monthly payments of $1,000 per month to repay Norman.
What’s Wrong with The Kominsky Method of Dealing with the IRS?
I can concede that there’s nothing more annoying than watching a legal drama with a lawyer, except perhaps watching IRS problems play out on screen with a tax lawyer. Even though I loved Suits and drooled over Jessica Pearson’s office furniture, I’ve never seen even the most profitable equity partner’s office adorned like hers, and I’ve yet to encounter an attorney who will both try a case and close a transactional deal. Quibbles with made-for-TV legal dramas aside, there are some key aspects about dealing with the IRS that the fictional Sandy Kominsky got wrong, and were I advising him, would have been handled differently.
- Sandy never questioned the amount due
When a taxpayer fails to file a tax return, for any reason or no reason at all, the IRS will contact the taxpayer and ask them to file a return. Each year around January and February taxpayers’ mailboxes fill up with notices from employers, banks, brokerage firms, and the like, stamped “Important Tax Documents Enclosed.” These documents are called Information Reporting Forms. Your bank, your employer, and your brokerage firm don’t just send you a copy of the information reporting forms such as a W-2 and a 1099-INT. They are also required to send a copy to the IRS. After the IRS contacts taxpayers and asks nicely for them to file their missing tax returns, the IRS will prepare a Substitute For Return, or SFR. In all my years of practice, I have yet to see an SFR that did not over-calculate the amount of tax due.
SFRs over-calculate tax because while payors are required to file information returns that give the IRS information about how much income a taxpayer received, no such obligation exists with regard to expenses or deductions. Take charitable contributions, for example. If you choose to donate $15,000 to the March of Dimes, the March of Dimes will issue you a receipt. But they are not obligated to and will not send any type of official “information reporting” form, either to the donors or to the IRS. So when the IRS prepares an SFR on behalf of a taxpayer who did not file tax returns, the IRS will have no idea whether and to what extent that taxpayer made a tax deductible charitable contribution. Therefore, none is accounted for.
Turning back to the example in The Kominsky Method, Sandy Kominsky runs an actor’s studio. Presumably the studio has expenses, such as paying for utilities, the use of scripts, furniture, etc. If the IRS prepared an SFR for the Kominsky Studio of Acting, it may have received Information Returns regarding gross receipts, or it may have estimated gross receipts. But the IRS would not have any information regarding expenses. Had the fictional Sandy Kominsky hired me to help him, I would have engaged an accountant to assist with preparing the past due tax returns. There’s a good chance that by simply preparing the missing returns, Sandy would have saved a significant amount of taxes by claiming the deductions that the IRS would never have known about when preparing the SFRs.
- Sandy never negotiated the penalties
When Mindy called Sandy to inform him about the big IRS problem, she mentioned interest and penalties. Interest on underpayments of tax applies by law to any underpayment from the date the tax was due, unless a (very rare) exception applies. And by very rare, I mean I’ve only seen two cases where an exception applies in all my years of practice as a tax litigator. Interest can’t be negotiated down, but penalties are a different story.
The IRS penalties applicable to most “Average Joes” are found in Section 6651 of the Internal Revenue Code:
- Late filing: Anyone who is required to file a tax return, but does not, will be assessed a penalty of 5 percent of the tax due for the first month, an additional five percent for each additional month the return is not filed, capped at a total of 25 percent of the tax due.
- Late Payment on Amount Reported: Anyone who files a tax return that reports an amount due that is not paid may also be assessed a late payment penalty, which is .5 percent of the tax due for the first month, with an additional .5 percent for each month the amount is unpaid, capped at a total of 25 percent of the tax due.
- Late Payment on Amount Adjusted: Anyone who files a tax return that is later adjusted by the IRS, and the IRS assesses the additional amount, who does not pay the full amount due within ten days of receipt of the notice and demand for payment from the IRS, will be assessed a late payment penalty, which is .5 percent of the tax due for the first month, with an additional .5 percent for each month the amount is unpaid, capped at a total of 25 percent of the tax due.
These penalties can be abated for two reasons. First, taxpayers who have not previously found themselves in trouble with the IRS may request to have penalties abated under the First Time Abatement policy. And for those taxpayers who don’t qualify for First Time Abatement, penalties still may be abated due to reasonable cause. Sandy explained that when his CPA died, he simply didn’t know what to do next. The show made a joke out this, displaying Sandy’s well-regarding acting skills when he spoke with the IRS agent about why he never filed his missing tax returns or got a new CPA after the old CPA passed away. But in reality, a taxpayer whose long-standing CPA passed away would probably qualify for reasonable cause penalty abatement for at least one year, especially if there was no easy way to transfer or obtain the records from the original return preparer.
Had Sandy engaged a professional, he would have had someone preparing his past due returns, likely significantly lowering his tax that serves as a basis for the penalties, getting penalties abated for one or more years, and reducing the interest due on the tax and eliminating the interest assessed on penalties that were abated. In non-filer cases in which the taxpayer owns a business and the IRS has prepared an SFR, once the taxpayer engages tax counsel and gets a team of professionals working on getting all filings prepared and submitted, the taxpayer should reasonably expect a reduction of between 25 – 45 percent below what the IRS thinks is due based on the SFR.
- Sandy Was Worried the IRS Would Seize and Sell the Actors’ Studio
At one point, Sandy meets with the IRS agent and proposes a payment plan. The agent opens a folder and suggests instead that the IRS could simply seize the building where the acting classes are held and resolve the past due liability in two days. Sandy, desperate to avoid this, finally gets up the nerve to ask his friend Norman for the money.
In real life, the IRS cannot foreclose on assets such as homes or buildings absent years of the taxpayer ignoring IRS notices. IRS seizure of real property is extraordinarily rare, despite Hollywood storylines to the contrary. While the IRS may issue a lien to protect its interest in taxpayers’ property, the IRS may not simply foreclose on that lien and seize a house. Taxpayers are afforded many, many chances to avoid IRS asset seizure, and this method of tax collection is used as a last resort. Readers who want to know more can read about how to resolve IRS problems without getting to asset foreclosure here.
- A Last Word About Eddie Money
Sandy got “scared straight” when talking with Eddie Money, who was performing as a tribute band to avoid paying the IRS amounts due under his real name. If anyone were to do this in real life, they would be facing up to five years in prison for criminal evasion of tax payment. The evasion of payment felony requires:
- An attempt to evade or defeat payment of a tax,
- Tax due and owing, and
- Willfulness.
If someone were to perform services under a fictitious name to avoid paying taxes under a given name for which an IRS debt has been assessed but is unpaid, the criminal investigation division of the IRS would almost certainly be seeking criminal charges.
Putting it all together
Watching television should be an enjoyable escape from the rigors of everyday real life. Watching legal television with a lawyer is, on the other hand, a chore. And while I’ve picked apart every aspect of the tax story arc on The Kominsky Method to an excruciating degree, I sincerely enjoy the show and I hope this article doesn’t ruin it for you. Just don’t ask the fictional Sandy Kominsky for advice on how to deal with the IRS.