366. AI vs. The IRS: What Every Investor Must Learn from This Tax Court Case

Summary

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Tax Smart Real Estate Investors Podcast

Episode 366: AI vs. The IRS – What Every Investor Must Learn from This Tax Court Case

Release Date: February 24, 2026
Hosts: Hall CPA team (Tom Wheelwright, Nate)

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Episode Overview

This episode centers on a cautionary tale emerging from a recent tax court case (Clinko v. Commissioner), where a real estate investor (also an attorney and restaurant owner) found themselves in hot water after self-preparing tax returns, underreporting income, and, notably, referencing AI-generated (hallucinated) case law in court. The hosts draw out practical lessons for real estate investors around tax compliance, the dangers of AI “hallucinations” in legal research, the paramount importance of good bookkeeping, and why specialist CPAs matter in real estate investing.

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Key Discussion Points & Insights

Podcast Updates & Announcements

[01:41]–[04:08]

• The show celebrates reaching 36,715 downloads per month, qualifying as a top 1% podcast globally—remarkable for a niche real estate-tax program.
• Hall CPA team announces upcoming mailbag-style live Q&A sessions and a new podcast: Major League Real Estate.
• Emphasis on providing value: “Our goal is to save you thousands of dollars per episode.”

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The Tax Case: Clinko v. Commissioner

Case Background
[07:56]–[09:40]

• The subject: an attorney, entrepreneur & restaurant owner who self-prepared late tax returns (often 3+ years late) from 2015–2019.
• As a result, he was audited—”a recipe…for disaster” (Host 1, [08:57]).
• The taxpayer had two rental properties and managed both a restaurant and an attorney’s practice—multiple activities, increased reporting complexity.
• IRS flagged underreported income, focusing on both 1065 partnership (restaurant) and Schedule C/E filings.

Key Errors Found:

• Late Filings: Submissions were years overdue, raising audit likelihood.
• Bank Statement Mismatch: IRS discovered major discrepancies between reported and actual income (over $228,000 in unreported cash receipts for the restaurant).
• Documentation Lapses: The taxpayer failed to provide requested paperwork (closing statements, invoices, etc.) to substantiate losses and depreciation claims.

IRS Audit & Bank Deposits
[09:40]–[12:22]

• IRS reconstructed income based on 1099s, bank records, and taxpayer claims that only 10% of restaurant receipts were in cash—a claim the IRS proved false.
• “If you get selected for audit…you could potentially have a substantial underpayment penalty coming into play here.” (Nate, [09:40])
• Taxpayer attempted to classify a gap of $600,000 as a capital contribution, but documentation only supported $80,000.

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AI Hallucinations in Tax Research

[12:49]–[16:30]

• Facing the audit, the taxpayer (an attorney) cited several tax court cases to defend their position, but “a few of these…were actually fake. They didn’t exist. That’s what they found.” (Host 1, [12:49])

  • Quote: “It was a classic hallucination item where this attorney clearly used AI to help him try to fight the IRS... and it did not go well because someone’s doing due diligence… and this attorney did not do that.” (Nate, [13:11])

• Loss of credibility was immediate: “Once they realized that this was hallucinated…how are they going to take anything you’re saying seriously?” (Host 1, [13:35])

• AI tools like ChatGPT or Gemini can fabricate plausible-sounding but fictional case law or IRS guidance.

  • Example: Host tested AI with a query about “Patterson vs. Commissioner”—AI cited a case that didn’t exist. Similarly, “IRS guidance” cited by AI was nowhere to be found.

• Takeaway: Verification and professional skepticism are vital. Even “professionals” (like attorneys) can be misled. AI is not a substitute for actual research and experience.

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Core Lessons for Investors

[17:07]–[22:11]

• Recordkeeping & Documentation:

  • IRS requests for depreciation documentation were ignored—no closing statements, no invoices. “If you have paper copies – great. Save it someplace you will remember or save it digitally.” (Nate, [17:07])
  • In tax court, burden of proof shifts: “You are guilty until you prove yourself innocent or you could substantiate your positions.” (Host 1, [18:49])

• Bookkeeping:

  • “Bookkeeping is everything. Recordkeeping is everything. Rather, that’s key.” (Host 1, [23:28])
  • Many business owners underestimate the IRS’s access to third-party info (e.g., 1099s, 1099Ks). Poor bookkeeping leads to underreported income, overpaid tax, or disastrous audits.
  • Amateurs “get cooked by the IRS… they don’t know how much money they’re spending… grow up. As a business owner, grow up. You need bookkeeping.” (Host 1, [21:06])
  • QuickBooks (or comparable software) increases your audit survival odds compared to spreadsheets or nothing.

• Specialist vs. Generalist Tax Preparation:

  • Generalist preparers often make basic mistakes (e.g., handling short-term rental income classification, 1031 exchange reporting, bonus depreciation elections).
  • “Not all tax preparation is created equal, especially when you’re getting into the real estate space. It usually makes sense to work with a specialist.” (Host 1, [05:10])

• AI Limits:

  • “AI is not there yet contextually to be your own CPA. You need to verify the information there. If you’re not a CPA or tax attorney… you need to work with a professional who can verify that.” (Host 1, [15:10])

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Notable Quotes & Memorable Moments

• On self-preparation & late filing:

  • “You’re not a runaway rogue maverick who’s going to change the tax landscape… file your tax returns, do it the right way, do it on time.”
    (Host 1, [08:57])

• On tax preparation as a commodity:

  • “A lot of people…think, ‘Oh you’re just filling out forms, right?’ And…that’s just not the case. There is value to working with a specialist, especially as you get into more sophisticated strategies like real estate.”
    (Host 1, [05:10])

• On AI in tax/legal research:

  • “…clearly used AI to help him try to fight the IRS…someone’s doing due diligence and looked over their references…they wound up losing almost everything.”
    (Nate, [13:11])
  • “Here’s another use case of this risk [AI hallucinations] right here in a tax court case.”
    (Host 1, [13:35])

• On documentation:

  • “You are guilty until you prove yourself innocent or you could substantiate your positions…simply an argument, ‘I got away with it last year’ is not going to cut it.”
    (Host 1, [18:49])

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Timestamps for Key Segments

| Segment | Timestamps | | ----------------------------------------------| ----------------- | | Podcast & Major League REI Updates | 01:41 – 04:08 | | Tax Prep as a Commodity – What’s at Stake? | 04:28 – 07:26 | | Clinko v. Commissioner: Case Facts | 07:56 – 09:40 | | IRS Audit Process & Bank Deposits | 09:40 – 12:22 | | AI Hallucinations & Legal Research Failures | 12:49 – 16:30 | | Recordkeeping, Documentation, Bookkeeping | 17:07 – 22:11 | | Importance of Specialists in Real Estate Tax | 05:10 – 07:26, 23:28 | | Closing Takeaways & Calls to Action | 23:28 – 25:14 |

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Core Takeaways

• Bookkeeping and documentation are foundational for audit defense and business success.
• The IRS knows more than you expect—third-party data often exposes misreporting.
• AI is a dangerous shortcut for tax/legal research—never rely on AI-generated citations without verification.
• Specialist tax preparers save investors (potentially tens of thousands of dollars) and drastically reduce risk.
• Treat your real estate activities as a real business: professionalize your records and your advisory team.

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Final Advice

• Never rely solely on AI for tax/legal research or court case citations—always verify with original sources.
• File tax returns on time and keep impeccable records.
• Use proper bookkeeping systems; QuickBooks or reputable alternatives are vastly superior to spreadsheets.
• If audited, retain a competent professional experienced in real estate and tax representation.
• For those scaling beyond 6+ rental units, consider outsourcing your bookkeeping to a specialist firm.

“Are you a sophisticated business owner? Or are you an amateur? Amateurs get cooked by the IRS, as we’re seeing here.”
(Host 1, [21:06])

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This episode distills concrete, real-world lessons for every investor—and should serve as a wake-up call on the costs of shortcuts, ignorance, and over-reliance on unverified technology in tax compliance.

Transcript

[Tom Wheelwright]

You're now listening to the Tax Smart REI Podcast, the number one tax podcast

[Host 1 (Possibly Tom or Co-host)]

for real estate investors,

[Nate (Co-host)]

your source for

[Show Outro/Producer]

all things real estate, accounting and tax. Here we reveal our secrets that can save you thousands in taxes, streamline your accounting process and help grow your business. Stay tuned to hear insightful interviews with industry experts, successful real estate investors, and current clients on what strategies they use to grow their business and how they steer clear of Uncle Sam.

[Tom Wheelwright]

Hey everyone, thanks for tuning in to

[Host 1 (Possibly Tom or Co-host)]

this week's episode of the Tax Smart REI Podcast. Today we're going to be discussing some updates to the Tax Smart REI Podcast. Going to be exciting, but we're also going to the meat of today's episode is going to be a very recent task court case where there's multiple flaws in this taxpayers case, including using AI hallucinated task court cases that didn't really exist. In their defense, there's a whole bunch of mistakes including misreported income or under reported income. A really good case study on why bookkeeping is so important and all of this good stuff to be a case that you're not going to want to miss. If you're out there investing in real estate, we dive into all of that in just one minute.

[Tom Wheelwright]

You've probably never found a real estate

[Host 1 (Possibly Tom or Co-host)]

newsletter worth reading, and that's because we

[Tom Wheelwright]

hadn't created ours yet. The REI Daily is a newsletter you actually want to read whether you own one property or 100. We created this for you. Each issue delivers crucial tax saving strategies, legislative updates, as well as real estate market insights and everything you need to stay sharp and ahead of the game. Get the real estate and tax news that actually matters straight to your inbox. Subscribe to the REI Daily newsletter [e-mail] subscribe. That's it for now and right back into today's episode.

[Host 1 (Possibly Tom or Co-host)]

All right, thanks everybody again for tuning in. As one of the segments we're going to be adding to the podcast here is going to be updates, whether it's tax related updates or upcoming deadlines, as well as just some updates as it relates to the taxpayer REI podcast, so on and so forth. So let's dive into that segment here today. I want to first thank everybody who's been tuning in to this podcast on a regular basis. Thank everybody who's been tuning into the show. Thank you everybody who's left a rating. I was listening to a podcast this weekend and in the podcast they're saying

[Tom Wheelwright]

that in order to be a top

[Host 1 (Possibly Tom or Co-host)]

5% podcast in the world, you have 4,000 downloads per month. So I was like, hmm, that's interesting. And I went and did some research and to be a top 1% podcast you need roughly 35,000 downloads per month. I checked our information and we are not including Spotify, not including YouTube listens. We are at 36,715 downloads per month per today's review. And you know, we're officially, I think we've been for a while, but we are a top 1% podcast. So again, that's incredible for us being such a niche podcast. We're not like a Joe Rogan or we're not like a general type of podcast here. It's very niche focus. So one again, thank everybody for tuning in sharing, leaving us a rating on Spotify or Apple Podcasts. Wherever you're tuning in from. Really, really want to be a top 1% podcast without everybody who's been tuning in. So that's, that's just a major update. Another major update I I want to give is that I'll be co hosting, in addition to co hosting this show, tsi the TSI podcast. I'll also be co hosting the the Major League Real Estate podcast along with Nate, where we dive into topics whether it be tax or how people built their business and other things coming up as it relates to syndicates, funds and other large scale operators out there in the marketplace. So super excited for that. Nate. Do you know when my first episode is going to drop?

[Nate (Co-host)]

Tom's first episode is going to should be dropping next week. So FYI everybody, if you ever wanted a bio on Tom, he's done it once before many years ago. So you haven't gone back to that episode. Now you can get a refreshed and renewed version of that in 2026.

[Host 1 (Possibly Tom or Co-host)]

Yeah, yeah, yeah. I remember back in episode, I think it was 13 of REI podcast.

[Nate (Co-host)]

Just go back to that.

[Host 1 (Possibly Tom or Co-host)]

Back in Sept. Sept. 2018 I did my original intro, but then we're doing another one refresh one like Nate said. So super excited about that. Nate, I know there's a few more things you wanted to mention here before we dive right into this new task for Case Clinko v. Commissioner and all the lessons that we can unpack from that.

[Nate (Co-host)]

Yeah, Tom, one thing I wanted to say is that hey guys, don't forget that we just like be on the lookout for this. We have not officially announced it yet when it's going to happen, but each month we're going to be doing a live Q and A session that is basically a mailbag, right? It's like we want to interact with you guys more often. So we'll be more, more announcers about that. But just keep that in the back of your minds that we're going to be doing that more going forward.

[Host 1 (Possibly Tom or Co-host)]

For sure there'll be more information about that. I'm sure we'll be linking it up in the show, notes and stuff once it's ready. But if you want to make sure you stay in tune to that, obviously stay tuned to this podcast. You can also join our email list, our email newsletter, the link to that's already in the description to this, to this video, or to this podcast, wherever you're listening. So it's another way to stay informed. And yeah, we're about to dive into this case. But you know what me Nate, were talking about kind of what we alluded to on a previous episode not too long ago, tax filing mistakes and how a lot of taxpayers tend to view tax preparation. So the filing of your tax returns, the ones you submit to the IRS and state authorities as a commodity. And I think it's really easy to view it that way. A lot of people sometimes think, oh, you're just filling out forms, right? And you know, one tax preparer is equivalent to the next tax preparer. And you know, as we went through in the episode before last, the tax filing mistakes, we consistently see, that's just not the case. And there is value to working with a specialist, especially as you get into more sophisticated strategies like real estate. And we're going to see that as we get through this episode today. But the reality situation is generalist CPAs often make a lot of mistakes that cost you tens of thousands of dollars on your and we see it every time. And you can go back and listen to the episode Me Nate recently did where we break down all those mistakes. But electing out a bonus depreciation, right? That's like if you're going to do that, you really need to understand the implications, the potential downsides of doing that. General CPAs do that all the time. And it costs literally cost investors tens of thousands of dollars in tax savings. Generalist tax preparers not correctly filing the short term rental loophole. Generalist tax preparers misreporting 1031 exchanges and, and just all these little mistakes that we constantly see that cost you big time. Not all tax preparation is created equal, especially when you're getting to the real estate space. So it usually makes sense to, to work with a specialist. And I'm not just saying that because we are specialists. I'm saying that because I'm tired of seeing people, I tell you that there's so many case studies I could give, yes, but losing tens of thousand dollars in potential tax savings as a result of working with the generalist just because people think it's a commodity.

[Nate (Co-host)]

Tom will not name names, but there is a relatively large person in the podcast space for real estate. I was reviewing their return the other day and they have had their return done by a relatively large CPA firm. Right. One that you would assume would be the best in the business. Right. Made the simple mistake of putting a short term rental on a schedule C and not a schedule E. And sure, maybe year one that doesn't create any issues, but any other later years that can absolutely create massive issues and massive questions, whether it's the irs, whether it's when you start producing income. Right? So like, just like you're saying, Tom, we unfortunately we have so many case studies where this happens. So while it feels like it's just putting information on a form, it's more than that. So that's like Tom is saying. So we know and we hear you guys. And hey, with the coming of AI even more so everybody's like, oh great, I don't even need to do right. And even I need CPA even less now. AI is my tax coach. And it's like, whoa, let's back up the brakes on that one a little bit. Right, Tom?

[Host 1 (Possibly Tom or Co-host)]

Yeah, we're going to see that in this tax core case today. And I also have my own. I did that the short term rental podcast, beginning of the year. Why Short term rental loophole is still the number one strategy for high income W2. And business owners are working full time, can't do real estate full time. And a lot of the research I did through that actually produced some errors in tax court cases and it fabricated stuff that didn't exist. So we'll get into that as we talk through this episode. But without further ado, and we spent enough time on updates and stuff, let's talk about this episode. Nate, I know you brought this one to the table, so kick things off.

[Nate (Co-host)]

Yes, let's kick this one off. Just create a little bit of buzz in the tax community. We let's go into this case background. Just like I, whenever I read a tax court case, I always like to figure out the facts, right? I wanna figure out the facts. I wanna find out who this person is, what they did. Because then as a tax professional, I get to see how that applies to my clients. And then clients can see, hey, does this apply to me? Right. Does it apply to my fact pattern, what I'm doing right now? So to start, this individual was attorney, entrepreneur, restaurant owner. Right. And they had their own business. Right. They had their own restaurant that they managed while they also had their own attorney practice. And so they did a lot of entrepreneurial things. Awesome. The next thing they did, of course, which is where I think the mistakes start to happen. They self prepared their own tax returns, Tom. And so we see all this. A lot of times people think, I can figure this out. I can do it on my own. And so they go after it and do it this way, starting in 2015, all the way through 2019, which not great. And so they start doing this, and then they, all of a sudden they get picked up for audit by the irs. And then, Tom, you can probably figure out how things go after that.

[Host 1 (Possibly Tom or Co-host)]

So, Nate, you know, one of the things, as I was kind of prepping for this episode today, I was looking through this. There's kind of two things that went on. First of all, this taxpayer, they filed returns late, and I'm talking about three years later, I think it was in this case. And they self prepped it, which is a recipe, in my opinion, for disaster, which we're going to see here. And, you know, it's just really interesting. Again, we talked about this on a recent episode, like file your tax returns. File them on time. You're not doing yourself any favors. You're not a runaway rogue maverick who's going to change the tax landscape. I promise you, the United States is way too big for you to solve that problem. So file your tax returns, do it the right way, do it on time. Have a professional do it so you do it the right way. But what were some of the things we can unpack from this case, Nate, that might be relevant for listeners?

[Nate (Co-host)]

Yeah, so we'll start with the tax turn specifically first. Right. So he had two different tax returns. He had his 1065, which is a partnership filing tax return. Right. That was of his restaurant. And then he had a schedule C. Schedule C was a restaurant. And. And then he had his own partnership. I believe that that was his attorney's income. And then he also had two rental properties as well. There's gonna. That's gonna be important here that we get to that in a second. So he files late. Right. And look, when you file tax. Translate. Look, there's no science to how you get picked up by the IRS or how you don't get picked up by the irs, but when you file late, there's A higher likelihood there's a chance you can get picked up. Right. So they begin an audit of his tax turn after he's filed late. And so they start taking a look at different items. They say, hey, do you mind sending us your bank statements? We would like to see what your income is. We think there's a mismatch here. And so he sends us bank statements. He says, oh, my restaurant revenue, it's only do 90% credit cards, right? Only 10% cash. I don't have much cash at all. No one pays me cash. She goes, okay, okay, well, I'll look at the bank statements and we'll get back to you. They had, well, they had to summons the bank statements. That means he did not send them over to them. So they summons them and. And then they find out this massive discrepancy between what was reported and versus what wasn't. Right? I know people love talking about, oh, if I just take everything, cash, the ira, I'm going to report it to the irs, which, and I say, be careful with doing that because if you get selected for audit now, you've got a substantial, you could potentially have a substantial underpayment penalty that coming into play here. So there was that first issue of not estimating statements correctly, right. So this guy had all kinds of 1099s that were being reported. And so, hey, he reported those, but he did not report his cash receipts, which was $228,000. And so that's not going to go good for him. So we have the bank statement analysis, right. Where IRS reconstructed income. And they can do that. Well, they will reconstruct your income and look over everything that's going on there. So just be careful with that. Right? Just be very, very careful. And the other thing too, that I didn't mention before is they had a pretty large loss they estimated in the restaurant, right. However, once the IRS recreated all those bank statements, that loss turned into taxable income. So again, not a favorable situation there. Right. And then, of course, the taxpayer starts referencing all these cases for these legitimacies that they, they like for these case citations, right? Where he talks about the validity of a notice of deficiency. So what is the notice of deficiency? Basically, it's what the IRS sends you and they say, hey, you got to have this taking, right? You, this is this. Basically you owe the government and you can go to tax court. Now, he questioned the validity of the notice of deficiency, right. By citating all these cases. And of course, the tax court did their due diligence. And looked at these cases. What do you think they found? Tom?

[Tom Wheelwright]

Hey, real quick, if you've been a

[Host 1 (Possibly Tom or Co-host)]

long time listening to the show, then you know we give everything away for free from how to use the real

[Tom Wheelwright]

estate professional status and the short term rental loophole to save tens of thousands of dollars on taxes to upcoming tax changes. We don't hold anything back. And the only way we're able to help more real estate investors is if you rate, review and share the show. It just takes 15 seconds to leave a quick rating review or share with a friend who may find this information useful on their real estate journey. That's all for now. We'll dive right back into today's episode.

[Host 1 (Possibly Tom or Co-host)]

So this is unfair because I've read this tag court case or read your outline of it, at least they found that AI had hallucinated or, excuse me, they find that they concluded that. But what they found out was that a lot of these, a few of these tax court cases that the taxpayer tried to use as evidence or as case law to defend their position was actually fake. They didn't exist. That's what they found. Yep. Yep.

[Nate (Co-host)]

Tom. It was a classic hallucination item where this attorney clearly used AI to help him try to fight the irs. Fight the good fight, per se. Right. And it did not go well because someone's doing due diligence out there and look over their references and see what's happening here. And this attorney did not do that. And so because of that, they wound up losing almost everything, Tom.

[Host 1 (Possibly Tom or Co-host)]

Yeah, I mean, they lost credibility. I mean, the irs, once they realized that this was hallucinated, how they're going to take anything you're saying seriously. So first of all, a few things here. How does attorney not like, at least verify their research? Right. They're a professional and they're supposed to be defending you in task court case. And they didn't do their due diligence. I would have fired that attorney, maybe sued that attorney. Right. Secondly, this introduces something familiar. We've been talking about how AI is not there yet for it to be your cpa. And we've done episodes on this and we talked about this. Here's another evidence of this. Here's another use case of this risk is right here in a task force case. So this brings me to something I did.

[Tom Wheelwright]

Right?

[Host 1 (Possibly Tom or Co-host)]

So when I did that episode again, why short term rents are still number one, I tried to pull the most relevant task for cases, the latest ones, and it produced. This is Google Gemini, by the way. Did this Google Gemini told me that there was a task for case called Patterson vs Commissioner, where in that task court case, Patterson vs Commissioner, they had concluded that 7.1 days or more that the task court would not round down as 7.1 days or more was going to make you fail at seven days or less test. And we already know that that there's multiple task force cases that do exist that was able to prove that. But I decided, hey, another one of these. Let me take a look into the task court case because I'll just throw this onto my stack of task court cases. For this I looked up Patterson versus Commissioner. There is no Patterson versus Commissioner that relates to seven days or less. The Patterson versus Commissioner I could find had to do with Social Security income, had nothing to do with seven days less. But it gets better. It also said that there was an IRS guidance that came out in December 2025 that the IRS determined which is its own question mark there, but it determined that all cleaners from the same company must be aggregated as one individual for the purposes of the individual, you know, no one other individual spending more time than you. So I said, hm, that's interesting. If that's true, that's groundbreaking. Right? And I went and looked in for that IRS guidance and I could not find it anywhere. Not in any other AI platform, not in any tax research tools, not in Google searches, not anywhere. So I came to the conclusion that AI had hallucinated that. Now, the difference between me and this attorney and is I went and tried to verify this information was correct because it seemed very fishy to me. But it's called professional skepticism, which obviously this attorney has not. So I just found that very interesting. The point is, and we'll get back to this House court case, the point is, and we're not just saying this for our own benefit, I promise you guys, AI is not there yet contextually to and we just discussed this on the MLRE podcast with a guest is not there contextually yet to be your own cpa, you need to verify the information there. And if you're not a CPA or you're not a tax attorney, or in some cases even if you are a tax attorney, you need to work with a professional who can verify that. Because if you would have just took that at its word, you would have been flat out wrong. Right? Whoever's reading that as a, as a non tax professional, but you have to work with someone who's qualified enough. I'll get off my soapbox for now, Nate, back to the tax court case.

[Nate (Co-host)]

No, you're totally right, Tom. Look, if you guys, if you get a scary IRS notice in the mail, which, hey, I guess let me know. Sometimes I like, I. Let me tell you, I don't know. I get mail from the IRS and mostly just saying, hey, here's your like PTN or something very innocent like that. My heart starts skipping a beat. Right? So just FYI, you guys too are like saying, hey, I get interest income. Just FYI, like, hey, we help with people doing this all the time. We successfully defended many people with using the short term rental strategy in this. So just FYI, we are out there and we can help you with you guys. And I recommend doing that because you don't want to be like people like this who then say, I'll just use AI to go take care of it.

[Host 1 (Possibly Tom or Co-host)]

Right?

[Nate (Co-host)]

It's the context, like Tom was saying, that's missing. So we'll go back to the case. So the hallucinations, a big deal, big misnomer. Here's the other thing that's really important to me in my opinion. Depreciation. So they had 50,000, $57,000 of depreciation on their Schedule E. Right. We're not even going to go into talk about whether it was passive, non passive, etc. We'll just focus on the actual depreciation deduction. Shows they placed these properties in Service back in May 2015. Right. This tax return that's being filed. And so the IRS goes, hey, can you please provide us with the closing statements, invoices, those types of items. Right. That type of stuff. Right. The paperwork that a lot of us think don't really want to keep or don't do good jobs of keeping, holding on to. And that guy said, you let me do it in 2017, why can't I do it now? He didn't provide any documentation. He gave nothing. And so what I'm saying with that sounds like you guys, you guys go, what do you mean? I always say that type of stuff. I get it and that's good. But I'm using this just as a warning, is make sure that if you have paper copies, great. Save it someplace that you will remember or make a note where you'll remember it or save it digitally. And you work at the cpa, we save all that stuff digitally for you and then we can re pull it back out if we need to. Right, Tom? And so it's like just an FYI in my opinion, from, hey, you have to show evidence to the irs. Unfortunately, you're basically innocent until proven guilty. When you count when it comes to IRS audits in tax court, you have to be able to produce and show all of this. It's the way the tax code is written. Right. It's just the way a tax is written is saying that like it's. Tax codes are essentially a self reporting system. And if you lie on your self reporting or don't have evidence to show what you're doing, you're going to be sol. Right, Tom?

[Host 1 (Possibly Tom or Co-host)]

Yeah. This is not criminal court. Again, when you're dealing with tax court, it's not criminal court where you're innocent until proven guilty. You are guilty until you prove yourself innocent. Or you could substantiate your positions. And in this case, you know, simply an argument, oh, I got away with it last year is not going to cut it. You need to have your information. Right.

[Nate (Co-host)]

So depreciation and bank deposits. Tom, I know we talked about bank deposits at the top of the episode, but like again, it's like I think 2.29 million of gross receipts versus 1.6 million have reported. That's kind of a big gap. And like again, they had an $80,000 capital contribution. They tried to claim that the entire $600,000 gap was a capital contribution, but clearly that was not the case.

[Host 1 (Possibly Tom or Co-host)]

Yeah, and this is significant because you know, the IRS, they had all of the 1099 miscs, the 1099 KS which are reported to the IRS. So they have that information and all that information combined. First of all, just that alone, that the IRS had exceeded their reported income. So they underreported their income just based on that alone. And then the IRS imputed, based on the taxpayers estimate of their of their cash receipts even more so they materially underreported their income. And I can't tell you guys this enough. Documentation, documentation, documentation. We've had episodes on this. It's not the most sexiest part of running a business or owning a rental portfolio, but it is critical for when you are running a business because it's critical for the irs. It's critical for you to make business decisions. And I can't tell you how time and time again do we have real estate investors and business owners not keep their bookkeeping record. They don't know what their current income is. Here's why you need good bookkeeping. First of all, again, Nate and I mentioned this on the show. You are more likely in an audit, more likely to be picked apart for bookkeeping than even some of these more sophisticated strategies. Because the IRS have so much to unpack. If you don't have your bookkeeping in order. So you need bookkeeping for taxes. Right? You need bookkeeping to make better financial decisions about your business. I was just at a networking event, one of the Miami Chamber of Commerce networking events. I was speaking to a recruiter, no less. She was trying to put me in contact with one of her clients. Because this guy ran a business, and he didn't understand his cost of capital. He just knew how much money he had in the bank. He needs, like, a CFO level person to come in there and help him. And I'm like, I would agree. Like, you need to have your put the foundation that is having your bookkeeping records together. So you need bookkeeping if you're running a business. It's just, you need it, you know, I can't tell you how many investors don't want to spend the money on it. I think it's, you know, a frivolous, painful expense. It's the cost of doing business. Like, you have to ask yourself, are you a sophisticated investor? Are you a sophisticated business owner? Are you or are you an amateur? Right? And amateurs get cooked by the irs, as we're seeing here. Amateurs don't know how much money they're spending. You know, they're overpaying costs. They're not raising prices correctly. In some cases, like, I don't know how to say this. Like, I don't want to sound like this cpa, but it's like, grow up. As a business owner, grow up. You need bookkeeping. Whether you do it yourself, whether you have somebody, you hire somebody to do it within your business, or whether you outsource it to a company like us, you need someone to do it. All right? So if you don't have it, okay, Shameless plug. If you're an investor and you have a portfolio of six or more rental properties, and you don't have a bookkeeping system in place, you need to get one. All right? So go ahead, click the link to discovery call link in the show notes this episode, we'd love to talk to you about how we can help you set up your bookkeeping so you don't end up like this guy in this task for case, and you can actually make decisions that move your business forward. Sorry, Nate. Sorry.

[Nate (Co-host)]

No, Tom, I'm glad. I was like. I'm glad. It's like, I'm just gonna digest exactly what you said, because it's a great conversation. If you were doing Excel spreadsheets. I'm sorry. Probably not going to be enough. Could be. Probably not. If you're using QuickBooks. You got a way better shot, in my opinion, at winning an IRS audit than you do at not winning an IRS audit. Essentially what Tom said. Enough said there.

[Host 1 (Possibly Tom or Co-host)]

Right. Yeah. Okay, let's move into the depreciation issues here, as I'm sure that's. That's going to be tough.

[Nate (Co-host)]

Yeah, we talked about depreciation issues. Right. Tom. A second ago. So, like, gotta have documentation, gotta be able to support how you calculated your basis.

[Host 1 (Possibly Tom or Co-host)]

Right.

[Nate (Co-host)]

That's essentially what it comes down to at the end of the day. So we'll recap that. And then we already talked about the good old AI hallucination problem. So what do we get to here? Look, you got to hire competent people, and you got to hire people that are going to be in your corner, do due diligence, and actually look out for your best interests as a taxpayer. Right. Our goal is to see, is it not just to. We want to lower your tax liability as much possible as we legally can. But the key point is legally. So we are just trying to do everything we can to help you guys when, like, whether it's just through this podcast or through actually filing your tax return, we're trying to help you help do everything that you need to do so that you can save on taxes but also run a successful business at the same time. Yeah, yeah.

[Host 1 (Possibly Tom or Co-host)]

Nate, you know, I see the three major takeaways from this episode that you wrote down here. Bookkeeping is everything. Recordkeeping is everything. Rather, that's key. The IRS has more data than you think. They had the schedule 1099ks, the MISCs, again, they had all that information and this taxpayer still underreporting their income, probably because they didn't have good bookkeeping. But anyway, the IRS has more information and you do need to hire the competent professionals because at the end of the day, this is very specialized. Nate. Part of Nate's role here at home, CPA is to dig into task for cases just like this one and pull out what details are relevant for our clients so we can help them avoid some of the mistakes that other taxpayers are making. Task force, I think this one came out a week or two ago or something like that.

[Nate (Co-host)]

Last week, last Thursday, tomorrow last Thursday.

[Host 1 (Possibly Tom or Co-host)]

And we're sitting here covering it already. And then on top of that, AI. AI is just not there yet. I think one day it will. To be very clear, at one point, it will. At some point it's not that day is not today, and I don't know when it's going to be. So you have to watch out for that. You have to.

[Nate (Co-host)]

100%, Tom. I can agree more. Enough said.

[Host 1 (Possibly Tom or Co-host)]

All right, cool. So look, if you're undergoing an audit right now, or you ever go under an audit, please get yourself a competent professional to represent you. We do offer audit representation here at Whole cpa. We have won many audits on behalf of our clients, including many in the short term rental space, the rep space. You name it, we've seen it. Go ahead and request a consultation discovery. Call in the link to the show notes to this episode. Additionally, if you are in the game of real estate and you're you're ramping up, you're getting going, we highly recommend you also work with a specialist in this space. It's a lot more complicated than the turbo tax returns. It's a lot more complicated than the accountant down the block is probably going to be able to help you with. I mean, look, there's some good accountants out there, do not get me wrong, but that they're in the minority. They're in the minority. So also, we'd love to talk to you too as well. Link to the discovery calls in the Show Notes. We'll catch you there. And we'll catch you on next week's episode of the Tax Smart REI Podcast.

[Tom Wheelwright]

The Tax Smart Real Estate Investors Podcast is for general information purposes only and is not intended to provide and should not be relied upon for tax, legal or accounting advice. Information on the podcast may not constitute the most up to date legal or other information. No reader, user or listener of this podcast should act or refrain from acting on the basis of of the information on this podcast without first seeking legal and tax advice from counsel in the relevant jurisdiction. Use of an Access to this podcast or any of the links or resources contained or mentioned within the podcast show or Show Notes do not create a relationship between the reader, user or listener of the podcast and the host, contributors or guests. Any mention of third party vendors, products or services does not constitute an endorsement or recommendation. You should conduct your own due diligence before before engaging any vendor. For more information, reference the show notes or description of this episode.

[Show Outro/Producer]

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