IRS Officials Claim Cuts Will Widen Tax Gap by $500 Billion

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Blake Oliver: [00:00:04] 17% of millennials are considering not filing taxes this year because they think there's less chance of being audited due to the IRS job cuts.

David Leary: [00:00:11] 17% coming to you weekly from the OnPay Recording Studio.

Blake Oliver: [00:00:21] Hello, and welcome back to the Accounting Podcast, the number one podcast for accountants in the world, your weekly source for news and analysis in the profession. I'm Blake Oliver.

David Leary: [00:00:31] And I'm David Leary, and I'm waiting for the audience to show up. I really want my coffee emojis here, but nobody's here yet. It just takes a couple.

Blake Oliver: [00:00:40] I'm working on my second cup. We've got a lot to talk about this week, David. Some stuff we didn't get to last week we're going to cover. You mentioned a $1 billion budget hole in Los Angeles. I used to live there before I moved to Phoenix, so I'm eager to hear about that. Doesn't surprise me. Um, here is something that, uh, we also talked about last week didn't get to Douglas Edelman, one of the biggest tax fraudsters in history. He was a defense contractor. He went on the run from the IRS. He got arrested in Ibiza and put in a Ibiza jail. Guy's worth hundreds of millions of dollars and he was doing these crazy, obviously illegal tax evasion schemes, just hiding hundreds of millions of dollars in income from the IRS. Why was he doing it? We may never know. Uh, tether is still working on an audit. I think this is, like, ten years later. Still haven't gotten an audit. We'll get an update on that. Oh, I also want to talk about this Tesla Financial Times retraction, the Financial Times, which is a very, very excellent respected, uh, site news site, had to retract some accounting analysis they did of Tesla. Very embarrassing. But I think it also says something about the complexity of generally accepted accounting principles that one of the top magazines, newspapers in the profession, in the financial world couldn't get it right. And, uh, yeah. So those are my top stories. Anything I missed there, David?

David Leary: [00:02:02] Um, the IRS is projecting a $500 billion loss. We have to talk about that. And I also have some information about direct file. Most Americans are interested in using it, but the learnings from this survey are can be applied to your tax firm. And then I got a cool TikTok video. We'll play, uh, of a TikTok influencer about taxes and tax returns. Well, or online taxes. Turbotax versus another product.

Blake Oliver: [00:02:27] Let's also thank our sponsors of this episode who we have. The sponsors.

David Leary: [00:02:33] Uh bluevine. And Rite Works are our sponsors this episode.

Blake Oliver: [00:02:36] Stay tuned for messages from Bluevine and Rite Works and support us by supporting them. Visit the links in the sponsored messages when we share those. And we also got a plug our own event. Here we are hosting a screening of The Accountant two, the sequel to The Accountant, the Ben Affleck movie featuring an accountant who, uh, I mean, I don't know. No spoilers. Right? But he's skilled.

David Leary: [00:03:04] He's skilled.

Blake Oliver: [00:03:05] He's very skilled. Not just with numbers, but also with, uh, with with what do they call them? Freedom seeds, I think, is what, uh, J.D. Vance calls.

David Leary: [00:03:15] Is that a word for bullets?

Blake Oliver: [00:03:16] He he he tweeted, and he used freedom seeds for bullets. Uh, that that's the best euphemism I've ever heard.

David Leary: [00:03:25] So if a fist bump emoji and a flag and a fire emoji.

Blake Oliver: [00:03:29] If you want to join me and David in real life to see The Accountant two on the day it comes out, uh, in April after tax day, download the earmark app or go to earmark app in your web browser, and you'll find the registration page for the accountant to on the app in the events section. And I'll show you right here where you can see it. So here is the earmark app.

David Leary: [00:03:58] It won't just be Blake and me. It's going to be 60 of our friends, but not just 60. We're now going to get a bigger theater, and we're going to open up to about 110, 120 people. So it should be a lot of fun.

Blake Oliver: [00:04:07] Yeah, we we had to get a bigger theater. We originally planned for 60. And now we're going to go up to like 120 if we can get everyone there. Uh, so you go to the earmark app. Earmark app. And you see at the event section here we've got the watch party for the accountant two. Click on that. You can see that it's on April 25th in Tempe, Arizona here in the Phoenix area in the afternoon 2 to 5. I think the this might be wrong David, because it's actually going to start at like three isn't it. We might we might have to update every click through.

David Leary: [00:04:38] This is this is actually a bug on our website. And I noted it yesterday that our date time, the way we display it for our events is goofy. And we have to fix that. That's a bug, but okay. Yeah.

Blake Oliver: [00:04:49] So anyway, that's how you can join us. I also want to plug an interview I did. This might be the most high profile guest I've had yet on my earmarked podcast, my solo project. I interviewed Christina Ho, an independent board member at the Public Company Accounting Oversight Board, and we talked for a whole hour, and she answered some of these burning questions that I have had about the PCAOB, their role, and in particular, this number called the deficiency rate, the audit deficiency rate, which the Pcob has called out as completely unacceptable. Chair Erica Williams has been just going after the big audit firms in particular, for having these awful deficiency rates. I think the most recent one was like 46%. So half of audits. The Pcob is saying that half of audits are so deficient that the auditors should not have issued their opinion. And Christina Ho, as an independent board member, is the one board member who has dissented from the pcob ever in the history of the pcob. And she says, she told me that she doesn't think that number accurately represents the quality of audits being done. And she explains the difference between that number, the 46% number, and the smaller number of inspected audits that actually require financial statement restatements. And that's only 5%. And she considers that a much better measure of audit quality, because it doesn't really matter if the audit opinion had issues, if the actual financial statements still stand. Right. That's a much smaller problem than if you have to restate your financials. So the question is like do you have other problems. And then are the audit problems so significant that you had to restate your financials. So look for that interview coming out on the earmark podcast very soon. It might be.

David Leary: [00:06:43] It's out now. I just put the link in the chat. So anybody that looks in the chat comments, you should be able to see the link there.

Blake Oliver: [00:06:49] And if you're listening on your podcast player and you can't see it and you're not in the chat. Go to podcast. Com or just search earmarked podcast in your podcast player of choice and you'll see that interview. And uh, welcome to our live stream viewers. Hello. Hey, MJ. Hey, Heather Smith David RJ Big Four transparency is here. Boring accountant is here with four coffee emojis this morning. Gators got two. Big Four transparency has one. Uh, Heather has five koalas. Welcome, Heather from Down Under. Heather says I'm in Brisbane with one coffee tree with hundreds of coffee beans, but I have never brewed them. Well, maybe we could make a special accounting podcast brew someday. You could collect all the coffee beans and ship them here, and I'll have somebody roast them.

David Leary: [00:07:43] Yeah, it'll have to be a collaboration, because I don't think I've ever roasted coffee beans before. I don't know, it feels like that. Just like barbecue would be years of trial and errors before. And then I learn so many coffee beans before you get good at it.

Blake Oliver: [00:07:57] All right, so I think we should probably talk first about these IRS cuts and the projected loss in tax revenue, because I'm a bit skeptical, to be honest, of this number. Where did you see this, David?

David Leary: [00:08:11] So this was in the Washington Post and they spoke to this is how most reporting is unnamed officials top at the Treasury and IRS. But they're predicting that there's going to be a 10% drop. So it'll amount to about $500 billion in taxes collected this year versus last year. And they're tying it directly to taxpayer behavior. So indirectly, it's because of the cuts, right? Because if there's less enforcement happening, taxpayer behavior is going to be more lax. Right. And who wants to if you feel like you don't have to comply because the IRS is being dismantled, you're going to comply less so.

Blake Oliver: [00:08:51] So that's the argument is that that's the argument. If you cut IRS enforcement, fewer people will comply and they won't pay their taxes. They'll they'll say, oh, I'm more I'm less likely to get audited. So I'm going to either not file my taxes or I'm not going to pay my taxes, or maybe I'm going to cheat a bit more. And so unnamed IRS officials are saying are projecting a 10% decline in tax revenues as a result of the IRS cuts. See I don't well, there's there's a few things that are suspicious about this that they're unnamed, that this appeared in the Washington Post. And I don't see any justification for that number. Like, why would we expect a 10% decline in compliance because of these cuts? Necessarily. I'm not saying it won't happen and that there won't be an increase in, say, tax evasion. But like, what's the evidence for it?

David Leary: [00:09:45] Well, I have evidence Possibly. So if you think about this is where if you think about the right and the arguments versus the liberal arguments, the right got very upset that the liberal cities, let's say San Francisco, etc., were cutting police budgets, cutting police. And what happened? We've all seen these videos on all the socials. People are running into targets and Best Buy's just taking shopping carts of goods and running out the store. No police presence. Nobody's getting arrested. Nobody's being prosecuted. Right? Right, right. If we riot. So the right gets upset. We want to enforce those crimes, but we don't want to enforce tax paying crimes and tax avoidance and filing tax crimes. You can't have it both ways. Do we? Do we? Are we a lawful society or not? If you want like these are tax laws, you have to follow them and they have to be enforced by somebody. Like we've already seen what happens when you cut the enforcement away. You get lawlessness and that's what's going to happen.

Blake Oliver: [00:10:43] Okay, I see your point there, David. That's fair. But enforcement is already extremely, extremely low. The audit rate at the IRS is less than 1%, and it varies depending on your income level. If you're an individual earning between 100 and $200,000 a year, the audit rate is 0.1% around that. If you make a little more, if you make 1 million to 5 million, it's 0.5%. You know, it varies, but it's anywhere from 0.1% up to 2.9% for those making over $10 million. So my question is based on that, given that the audit rate is so low, is cutting the audit rate like a little bit more going to make that much of a difference? It's a tiny percentage already. And I think.

David Leary: [00:11:34] That was the logic used with not going after people that do $1,000 crime. Well, it's so low. What difference is it going to make if we don't prosecute or arrest those people. It's that's the exact same logic with crime. And so they.

Blake Oliver: [00:11:50] Know.

David Leary: [00:11:50] That's a little bit less and it goes up.

Blake Oliver: [00:11:52] That's different because like in San Francisco, the city doesn't prosecute any crimes. They went to zero. When it comes to, I don't know, theft below a certain dollar amount, which is quite a lot. And that's why you have people just going into stores and taking whatever they want and leaving. But we're not talking about no enforcement. We're talking about maybe just a little less enforcement, a little less auditors going after people. And as I mentioned on the show before, in the last episode, voluntary compliance is actually very high in the United States. 85% of taxes are paid voluntarily. And the IRS doesn't have to go after anybody to get to it. And IRS enforcement efforts. For all the money we spend on IRS audits, it only adds 2% to that number. So we go from 85% to 87%. And I also want to talk about the cost of that compliance, because I feel like that is not factored in to all of these discussions that IRS audits cost people a lot of money. They cost businesses a lot of money to respond to them, to deal with them a lot of hassle. I mean, people really stress about this stuff, too. And that's not anywhere in the numbers. So I just like to to point out the audit rate's already really low. And so I do not buy this argument from unnamed IRS people that cuts at the IRS are going to really drop compliance by 10%. That seems unreasonable to me.

David Leary: [00:13:21] Does 1% seem reasonable? Does 2% seem reasonable?

Blake Oliver: [00:13:24] Yeah, maybe. Like maybe a small amount. Perhaps. Yeah.

David Leary: [00:13:27] So? So 2% is what.

Blake Oliver: [00:13:30] $100 billion, $100 billion.

David Leary: [00:13:33] Guess what's on the DOJ's website. Estimated savings. Right now their total is $130 billion. Like, maybe they should invest time more into increasing the revenue and less cost cutting. I mean, we could do that in our business. We could try to cut every little SaaS app we do and monitor how much people spend on a meal on their expense card. We can micromanage and have a big party, but look at all the money we saved. But it's probably better to focus on our revenue for our company, right?

Blake Oliver: [00:13:59] Yeah, and I agree. Like, if I were a Doge, I would not be going after the revenue generating department of the government. If you're trying to solve truly solve the deficit problem. At the same time, I think that if you made proper investments into IRS technology, which the IRS has failed to do for 30, 40 years, and I believe that they totally could do, and I do not believe the argument that they don't have the resources. It's really just a misallocation of resources there. And a problem with the people leading the IRS. If they actually invested in the technology, you could do more audits and you could do automated types of audits without needing all these people. Like you could increase compliance from 85% to 90% without more people with a lot fewer people because of how ancient these systems are. They're literally doing these audits by hand. They're extracting information from a database that you have to get to through a green screen computer system, where you print everything to PDF, and then you do the audit. So the the IRS is really successful at compliance when it's stuff like W-2s where all this information is reported electronically to the IRS, and they can simply automate the issuing of notices and the adjustment to returns based on the reported information. So like that's what I would be focusing on if I were running the IRS and designing a system that doesn't need to have complex audits.

David Leary: [00:15:28] But let's take away the audit part. Like okay, yes, we're going to audit and that'll help grab some of that revenue. Right. But just about you said 85% of Americans. Is that the stat file. They were a good society. 85% of us are going to pay our taxes and file our taxes.

Blake Oliver: [00:15:44] That's not 85% of taxpayers. It's actually 85% of total taxes due.

David Leary: [00:15:49] Total taxes due.

Blake Oliver: [00:15:50] So it's probably far more than 85% of taxpayers, because most of the tax that's evaded is at the higher income level and the corporate level.

David Leary: [00:15:58] But if all you do is a psychological war, right? And you get people to believe the IRS is going to enforce more, maybe that 85% moves to an 88 or an 89. They don't even have to go do the enforcement. Right.

Blake Oliver: [00:16:10] It's like it's like, uh, when, when when Trump says, we're going to build the wall and you're not going to have jobs. If you come here and we're going to kick you out of the country. It deters illegal immigration. So that's the deterrent effect is more important is what you're saying.

David Leary: [00:16:25] And I think what's happening the other way is we're seeing the IRS get dismantled. And I'm sure I would safely say 10% of all taxpayers are like, well, why pay my taxes? They're going to be gone. I do think there's a mindset out there with probably 10% of voters, 10% of taxpayers, that thinks the IRS won't exist soon.

Blake Oliver: [00:16:44] Well, and here's.

David Leary: [00:16:45] Something.

Blake Oliver: [00:16:45] Disturbing. Here's a disturbing stat to back up what you're saying, David.

David Leary: [00:16:49] Great.

Blake Oliver: [00:16:50] 17% of millennials, that's me, my generation. People like I'm an elder millennial. Me and younger. Right? 17% of millennials are considering not filing taxes this year because they think there's less chance of being audited due to the IRS job cuts. 17%. That's from an Intuit Credit Karma survey of over 1000 Americans that was done in March. Now that is insane. And I posted that on Twitter. And the tax pros just went nuts with this because this is actually one of those things that doesn't work, that the IRS knows how much money you made. The vast majority of those 17% of millennials are earning W-2 income and getting 1099. And if you don't file, the IRS will just automatically Matically assess you and the penalties and the interest will come out. And it doesn't require any human intervention by the IRS. And that's why it works so well. That's why compliance with W-2 income and 1099 income is so high because you can't hide it. They know about it. Right? So and the worst thing about this is if you don't file, then it doesn't start the statute of limitations. So the IRS can go back like forever on that I think because correct me if I'm wrong chat, but it's pretty far, you know, it doesn't start that whatever it is, three years that they've got seven years.

Blake Oliver: [00:18:09] I forget what the number is, but you got a file. So I mean yeah, it's the issue is like compliance at the upper end where there's lots of gray areas like we saw with Doctor Oz and his limited partner exemption. You can play games to avoid taxes. And it's really hard for the IRS to fight that because it's such a legal gray area. And so the the idea has been let's, let's get more and more people to audit that and that works. The studies do show that there's a study that that I saw recently from late last year, published early this year, that shows that on the top 10% of income earners, top 10%, a dollar put into IRS enforcement comes out to $12 in taxes back in the end, due to both the collections and the additional compliance at that income level, because people are afraid of getting audited. So like the ROI is there if you want to do it.

David Leary: [00:19:12] And it's big, we're talking what was it 1.5 trillion was collected last year. So this is real. Oh or sorry 5.1 trillion was collected. So a 1% move, even if it's just a psychological driven.

Blake Oliver: [00:19:27] $500 billion.

David Leary: [00:19:28] Is massive massive, massive. Yeah. Yeah that'd be $50 billion because 10% is the 500 billion. So it'd be a 5050 billion. Yeah, yeah.

Blake Oliver: [00:19:36] And you were saying so. So yeah, it's a lot. It's a lot of money. Okay. So let's talk about is there anything else from tax that we need to follow up on.

David Leary: [00:19:44] I have.

Blake Oliver: [00:19:44] Some.

David Leary: [00:19:44] Tax. But before we jump into that so I have a survey about IRS direct direct file. But we should do the first ad. Okay.

Blake Oliver: [00:19:52] I'll, uh I'll do this one. David.

David Leary: [00:19:53] Okay.

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David Leary: [00:20:56] Sorry.

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David Leary: [00:21:33] Now we can jump into this survey about direct file.

Blake Oliver: [00:21:36] Okay. You're gonna do direct file. Go for it.

David Leary: [00:21:39] So most Americans are interested in using direct file. So this was a survey from December 2024. Data from the Urban Institute's Well-Being and Basic Needs survey, uh, acronyms. And they were examining the interest in direct file and they surveyed 2024 taxpayers. Right. So it just wasn't just random people. It's actually people who filed and paid taxes. And it didn't really matter regardless of family income, race, ethnicity, age, education level, 60% or more, actually 67% or more in any of these categories were interested in using direct file. Now the question is why? I'm going to flip to a share. So. And here's the reasons why I'm sharing this. The top two reasons. So these are people that are interested or for people that are not interested in using direct file. Here's the reasons why. Um or sorry or interested in using direct file. The reasons are ease of use and cost. But the people that don't want to use it, they're not interested. They value accuracy, reduced chance of being audited. They want to maximize or minimize their taxes owed, maximize their tax refund. They want customer service. These are all things that you as your firm need to compete on, right? So again I'm going to make this argument.

David Leary: [00:23:13] You should have your pricing page on your firm. Have a free column and list direct file. Here's the services you get with direct file. Here's what you get with a TurboTax and then what services you. Because I'm all the people that are not interested in using direct file in theory, should be customers of our listeners, right? If you have a tax firm, these were your customers. The people that don't have don't care about the cost and they don't really care about ease of use. Even though I'm finding it difficult to work with accounting firms sometimes. So you want to focus your messaging around how you're going to help maximize the refunds, minimize their taxes, minimize their chance of being audited, because that's what the people that have no interest in direct file are valuing. You want to you want to focus on those two things on your website. Um it's interesting. Customer service is not very high like only 6% of the non they're not interested in customer service right.

Blake Oliver: [00:24:12] So this is among so so both tax filers interested in using direct file and not.

David Leary: [00:24:17] Not.

Blake Oliver: [00:24:18] Customer service is only like 3% of tax filers care about that.

David Leary: [00:24:24] In direct. When you use direct file and the ones that don't want to use direct file are no interest in it, only 6%. So it's.

Blake Oliver: [00:24:30] Accuracy. Yeah, accuracy is the most important thing.

David Leary: [00:24:34] And ease.

Blake Oliver: [00:24:34] Of use. So so this is what to focus on right. Ease of use cost accuracy though accuracy is the biggest one.

David Leary: [00:24:45] As far as for a different for people that don't want to use direct file.

Blake Oliver: [00:24:49] Right. And that's who you want to attract as clients. As customers. Right. So accuracy is the thing to focus on from a marketing standpoint. Then ease of use, then cost, then ability to maximize your tax return. Yeah. All right.

David Leary: [00:25:03] And that's ties like this ties to a TikToker video I'm going to press play on.

Speaker3: [00:25:09] There's such a big difference between TurboTax and this website that ChatGPT told me to use as an alternative. It's called Freetaxusa. I filed my taxes with TurboTax last year, but I didn't have a business, so I thought it would just be easier to use it again this year. It wasn't connecting to my QuickBooks, which was the whole reason why I got QuickBooks, was to stay on top of my expenses so that then it easily transferred to TurboTax, but it just wasn't connecting. So I submitted a ticket. I was going back and forth with the representatives. I think I spoke with like four of them because I kept getting an error. They were supposed to submit an internal ticket. It they apparently didn't because when I followed up with them, it didn't exist, although I spent hours working on it with them. And then finally, when I thought I was getting somewhere, and the rep that I was speaking to, uh, two nights ago was actually, like, concerned about everything that was going on with with what I was experiencing. She got her manager on the chat and I was gonna screen share. And then the call dropped, and then I literally was like, I, I can't, I cannot logically give them my money. So I went on to this website, freetaxusa, and I just need to show you guys this. I need to show you the difference. Tell me why TurboTax is telling me I have a federal tax De of $198 in California tax De of 2839. And then this other website is telling me I actually have a federal refund of over close to $1,400. And California do of a little over 2000. So I just, I, I don't understand what is going on. Turbotax don't use TurboTax. It sucks. Also, I almost paid $273 for TurboTax, and this website is free for federal filing, but $15 for state. That is a huge difference. I'm just about to submit my.

Blake Oliver: [00:26:59] Okay, wait, so summarize the difference for me.

David Leary: [00:27:02] So the difference is a the price to use TurboTax. It's like almost paid $200 or something. And this other software for filing the feds was free. And the other difference is how come TurboTax is I owe 250 $300, but the the other program says I'm getting a refund of $2,300. And this is kind of the same values, right? Here's one of these people. Like she might be interested in direct file because she wants it free right. And she cares about her refund. Right. So she she cares about that. But the so just digging into this a little bit. This is free tax USA is actually tax hawk which I think maybe you've seen before or know about. It's actually tax hawk. My guess actually after watching this video a couple of times now, I think it's a viral marketing campaign by Tax Hawk actually. But the lesson here is she said that she went to ChatGPT and it recommended her or turned her on to this other tax website. So my I have a couple questions. How come it didn't recommend a local tax preparer? It didn't recommend any of our listeners or maybe an E. And that makes me think like, are the decks now stacked? Blake, against tax preparers and accountants in the world of AI? If you're trying to reach clients now. Like it depends.

Blake Oliver: [00:28:19] What the AI was trained on.

David Leary: [00:28:21] Yeah. Obviously this the I pushed her to that. It's it's just going to be even more difficult for you to get clients right. I think is in the future with chat unless you can somehow get chat to recommend you. Right. Yeah. Over and over again.

Blake Oliver: [00:28:40] So like that's that's the opportunity is that taxpayers are going to have questions about specific areas that are relevant to them. And if you are the expert online and you've done a bunch of videos that are on YouTube and AI is pulling from those transcripts, and you're out there speaking and you're out there, you know, showcasing your expertise, then hopefully, hopefully the way it works is that you get cited and then that's the person that they want to do their taxes, or the AI will just steal your content and represent it as its own.

David Leary: [00:29:15] In this very hot video, it had 134,000 likes, 4200 comments, But but I'm sure tho TurboTax says the refunds this much, or you owe this much $200 or whatever it was. The Tax Hawk software says she's getting a refund of two grand or something. I bet if you take it to three different tax preparers, we'd also get three other different numbers. How how how does that get explained to anybody? Did you ever did you I don't know you really do tax. But how do you explain that to a client. Why this tax offer gave one number. This tax software gave a different number. I did your taxes and came up with a third number. How do you how do you explain that to a client. And maybe people in the, the, the chat could explain that to me because my suspicion is if I give my tax return to five different preparers, I'm going to get five different numbers, which is exactly what she did side by side in that screenshot.

Blake Oliver: [00:30:04] But so I don't know the answer to that, but I do have something else related to TurboTax, not TurboTax direct file. The idea that the IRS should provide tax filing service. It is very popular. 91% of Americans believe that tax filing should be free. That's according to a WalletHub survey of 200 taxpayers. The vast majority, 91%, think that filing taxes should be free. So eliminating direct file would not be popular. Also, 66% believe their tax rate is too high. Only 31% believe their tax rate is just right. And only 3% think their tax rate is too low. 70% of Americans are more concerned about inflation than taxes. And 77% believe the rich don't pay their fair share in taxes. Here's something scary more than 25% of Americans know someone who has cheated on their taxes. Nearly 1 in 3 would prefer jury duty over doing their taxes. I would not be in that group. I would rather do my taxes than have jury duty. But maybe that's because I know how to do my taxes.

David Leary: [00:31:18] That's that's where this is getting tied back to. It's comparing versus jury duty. It's sad.

Blake Oliver: [00:31:24] I also want to call out the National Association of Tax Professionals. They are not doing tax pros a favor. They are telling people not to file an extension this year. The director of tax content and government relations at Natpe, Tom Osborne, was quoted in a MarketWatch article saying if you're ready to file, this is probably a good year to file and to not file an extension. And that is awful for the work compression that happens with tax pros. I don't understand why they would be telling people this. I mean, the all the tax professionals that I know that are building practices where they don't have to work 70 or 80 hours in tax season, are figuring out how to extend as many of their tax clients as possible so they can spread the work out throughout the year. Up until September October. And so this does not do a favor to tax professionals. I do not know why they are doing this. And they got the IRS.

David Leary: [00:32:27] You'd want the IRS to have a nice steady stream of returns coming in that they can work on all year instead of the big wave. Yeah, that doesn't it seems like poor advice, I agree.

Blake Oliver: [00:32:40] Okay, so let's go to the budget hole in LA. David, are you ready to share that what is going on in LA? Why what's what's the billion dollars issue here.

David Leary: [00:32:50] So Los Angeles is facing a projected deficit of nearly $1 billion in the next fiscal year. Some of it's the wildflowers, some are wild wildfires. Sorry about that. And then in general, they've already were having a deep decline in revenue. Anyways. People like you Blake who left LA right after Covid. So in general they've had a decrease in revenue overall. The warnings. Now they're saying this is a council meeting. Two weeks ago, they said they have the possibility of thousands of layoffs and extremely difficult cost cutting positions because the shortfall is about 13% of the adopted budget. So they're a council member asked for some historical comparison so they could. How bad is this going to be? And the answer was 2009, which is basically right after the 2008 financial crisis. And on a related note, Chicago, they just passed their new budget and it had $1 billion deficit. And San Francisco is projecting a budget shortfall of about 876 million. So almost a billion. Is this the next bailout, like the feds are going to have to come in and bail out cities that are all having these billion dollar deficits in their budgets?

Blake Oliver: [00:33:59] It's not going to happen under the Trump administration, that's for sure.

David Leary: [00:34:02] Maybe not.

Blake Oliver: [00:34:02] What what is causing this? Are they just spending out of control? What is the cause of these budget deficits in L.A.? Like, why can't they balance their budget?

David Leary: [00:34:13] Its revenue is dropping. So for LA specifically, they had the cost related to the wildfire wildfires. I don't know. Stop saying flowers wildfires. And the revenue is expected to drop 315 million below projections. So they if you have people moving and you're not collecting revenue, things are going to obviously go down.

Blake Oliver: [00:34:32] Stoic bookkeeper says we also have the Olympics and FIFA World Cup coming up. That's a lot of expense, right? Yeah. Yep. That could be it. Uh, I mean, you know. Yeah. You know, it's funny, like. Well, I was just going to say, like, my personal experience, this is just anecdotal, but my personal experience living in the city of Los Angeles, which I did, I lived on I lived in Encino and Sherman Oaks in the Valley. That was that was where I lived for, I don't know, ten years. My experience was as a taxpayer. I don't get that much for my money compared to moving here to Scottsdale, Arizona, where in the Phoenix area I get a lot more for a lot less. My property taxes are half what they were in LA and the city is run so much more smoothly. We have we have police we that that actually enforce the law. We have we don't have a lot of homeless people standing around on the streets. We actually have places that they can go like we house them. Um, you know, there's a lot of services. We have excellent, uh, facilities for athletics and swimming and it's it's wonderful. So I, you know, it's it's not like I'm, I don't think it's because they don't have enough money. I think, like, it's a lot it's like a lot of this federal government stuff where it's just being spent poorly.

David Leary: [00:35:51] And the article did kind of imply or tie to some of these pressures are also from the federal cuts and how Donald Trump has threatened the cities that don't comply with his immigration policies. Um, they'll cut back on some of the staffing and freezing spending. So that is a little bit of it as well. The federal funds are not getting to these cities the way they possibly used to get there. And and once you get money coming to you, you spend it. And you're used to it. So you want to still be there. But my.

Blake Oliver: [00:36:20] Question on that is like.

David Leary: [00:36:21] Why won't get a bailout in the current administration? Nobody's going to get a bailout.

Blake Oliver: [00:36:24] What business does the federal government have funding all these programs in these major cities? There's a reason we have a Federalist style of government, right? The the states are supposed to handle this stuff, and the federal government handles interstate commerce and defense and all the stuff that the states can't do on their own. And I think that's the issue I have with all the the spending that's been going on at the federal level for so long, is that it seems like the federal government is just, like completely overstepped its role. It's not the role of the federal government to like, um, you know, fund homeless shelters in Los Angeles. That's for the residents to do. The city of Los Angeles, the state of California. That's just one example, and I don't know how much of that goes on. But, you know, there's a lot of it, I think. Um. One thing I want to bring up, too is like like the, the waste that occurs at the federal level. So. I saw this crazy story about, like, duplicate payments. In Medicaid. So Medicaid is one of the largest expenses. It's one of the, the the the biggest ways the federal government spends money is providing medical insurance to people. That's what it is. It's like, you know, federal insurance, right?

David Leary: [00:37:52] Unlike Social Security, that's not like its own fund, where Social Security is its own thing. It pays for its own expenses. It's its own fund.

Blake Oliver: [00:38:00] Well, we have Medicare taxes, right? Yeah. I don't know exactly how it works. I thought Medicare taxes went to go into Medicaid or something like that, right?

David Leary: [00:38:09] Maybe it is a separate fund that I know about Social Security. I don't know about that.

Blake Oliver: [00:38:12] I haven't dug into exactly how it's funded. But what I have seen is this story in the Wall Street Journal. So the Wall Street Journal got access to Medicaid data through like a research program where they could get anonymized Medicaid data on all the payments going out. And so they analyzed 2019 to 2021, three year period. They found that private insurers collected at least $4.3 billion over those three years for patients who were enrolled in Medicaid in multiple states. So duplicate payments, they got double paid by $4.3 billion over three years.

David Leary: [00:38:54] On who got the actual double paid? The insurance company, the insurance companies or the doctors?

Blake Oliver: [00:38:58] The insurance companies? It's just profit to the insurance companies. 660,000 patients per year were double enrolled, with some individuals signed up in five or more states simultaneously. And the way this happens is somebody moves from one state to another, they're enrolled in Medicaid in Florida, and then they move to Georgia, and they enroll there, and they're enrolled in both places. And an insurer in Florida is getting paid for a bunch of months in Florida when that patient was not receiving any services in Florida. Centene.

David Leary: [00:39:29] Now, is this fraud or would this be in the we just have crappy bookkeeping and crappy IT infrastructure?

Blake Oliver: [00:39:37] I mean, I probably a gray area sort of thing, right? Who's responsible for fixing this? The insurance companies.

David Leary: [00:39:43] Are not going to.

Blake Oliver: [00:39:44] Medicaid.

David Leary: [00:39:44] Raise the flag, say, hey, look at this. You're not going to do.

Blake Oliver: [00:39:47] Anything.

David Leary: [00:39:48] About it.

Blake Oliver: [00:39:48] Do you think Centene is going to raise their hand and say, hey, guys, we got $620 million in duplicative payments per year? It was, uh, yeah, it's just it's it's in that three year period. El Avance Health collected 346 million in duplicative payments UnitedHealth Group 298 million. Aetna 400 143 million. It's a lot of money. The states don't have a mechanism to automatically detect when Medicaid recipients move to another state, and the federal government actually rejected a recommendation in 2022 from the inspector general to use national data to detect double enrollees. They decided not to do it. They just said, we're going to we're going to keep making the double payments. And the insurers say, oh, it's the state's responsibility to verify eligibility and disenroll patients when needed. Well, of course they're going to say that, right. So this is just one example of the waste that occurs when you have people who are bureaucrats at the federal level. I mean, it happens at all levels, right? But at the federal level, it's bureaucrats who are playing with other people's money. They do not have a they do not have an incentive to reduce this waste and abuse. And across the entire federal government. It is estimated that improper payments are 5% of our budget. So, David, just let's say we have.

David Leary: [00:41:15] Sloppy bookkeeping essentially is 5% of our budget.

Blake Oliver: [00:41:18] Payments that should not have been.

David Leary: [00:41:19] Issued paying.

Blake Oliver: [00:41:20] Double payments, payments that should not have been made. So you know how much money that is. If we have, say, 5 trillion in tax revenue and we spend it all. Actually, it's more than that because we have a deficit, right. But let's just say it's 5 trillion. So we said that 1% is 50 billion. So 5% would be $250 billion.

David Leary: [00:41:41] That's the right math.

Blake Oliver: [00:41:41] Hundreds of billions of dollars that are just completely wrong. And that's just what we know about. So that's why I'm sympathetic to these efforts to reduce fraud, waste and abuse. And it frustrates me that the memes that we see seem to like reduce and simplify all this down to we either fund science research or we don't. We either fund medical insurance for people who can't afford it or we don't. And it's not that simple.

David Leary: [00:42:13] Yeah, we can still I mean, the healthcare space is not great anyways. It's not a great experience getting health insurance and a great experience. We'd like to insure more Americans, etc. but if you have this waste happening that doesn't let you actually provide those services the way you, the Congress intends them to be.

Blake Oliver: [00:42:33] I don't know if this is true because Elon Musk makes a lot of false statements, but this one I think might be true. He was on Joe Rogan's podcast, and I listened to about half of it, and he said that the Treasury system to make payments like that, that system that issues the the checks, it is not a requirement to put a memo for the payment so you can make a payment in the treasury system. You can cut a check without saying what it was for.

David Leary: [00:43:08] Imagine, of course people don't do that, right?

Blake Oliver: [00:43:10] They don't do it. And so they're going through this list of payments and there's all these payments and there's no reconciliation as to what the payment was for. Like, how can that be? The only way that could be is if you had people running the system who just didn't care. Because every business in the world that cares about controlling spend requires at least a memo field to say what the payment was for.

David Leary: [00:43:43] Yeah, I'm trying to think about how what the mindset is the frontline employee that's recording that transaction. The the government bookkeeper is going to put that transaction.

Blake Oliver: [00:43:55] They don't know.

David Leary: [00:43:56] Right? Right.

Blake Oliver: [00:43:57] It's whoever authorized it. You can authorize a payment in Treasury system without without a memo.

David Leary: [00:44:04] Even QuickBooks forces you to pick a category like you have to. You can't just get the little recording beep for entering transactions. You have to put a category.

Blake Oliver: [00:44:16] So noodle on that David a little bit. And I want to talk about what are we going to next. Oh there's so much and not a lot of time. But you know what we should do is we should thank our next sponsor.

David Leary: [00:44:30] I'm going to do the other ad okay.

Blake Oliver: [00:44:32] And then I'll figure out what we're going to talk about next. And I'm going to check in on the chat.

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Blake Oliver: [00:45:54] Thank you Rootworks. I want to do some follow up. It's been a while since we talked about crypto on the show, and when we do, it's often about tether, the world's largest stablecoin. They issue Usdc, and tether has never undergone a formal audit. A what we would call a real audit, a full audit, a legit.

David Leary: [00:46:18] Just those agitation type stuff before, right?

Blake Oliver: [00:46:20] They've done attestations of their reserves, which is like a agreed upon procedures engagement, where some auditor looks at their reserves and then says this is how much they've got, but we don't really even know to what extent that was verified. Did they just look at a screen? Did they just take a PDF? How did they do it? It's not.

David Leary: [00:46:42] And then the crypto company takes that logo of the accounting firm and puts it on their website and implies to the common person that's going there that, look, we're we're all verified. We got an accounting firm logo on our website. They looked at our books.

Blake Oliver: [00:46:55] They were actually representing it as if they had an audit when it wasn't. And you know, it doesn't include liabilities either. So quick refresher. What is tether in a stablecoin? Basically, when you buy us, tether takes your money and then supposedly they say they invest it in mostly government bonds like US treasuries and other safe investments that are cash equivalents. And that way, if you ever want to get your dollars back, you can sell your tether back to tether and they'll give you dollars. And it's a stablecoin because supposedly every tether coin, every USDt is backed 1 to 1 by US dollars. Although we know that's not true because tether also makes loans. And as soon as you start making loans in tether, you're no longer 1 to 1 backed. But we'll set that aside for now. So tether has a market cap of $140 billion. It's basically a bank. It operates like a bank, but it doesn't get audited. And they have been promising for years since their inception that they would undergo a complete audit. That's since 2015. So it's basically been ten years now that tether has been promising that they're going to get an audit and they haven't done it. And tether CEO Paolo Ardoino announced again that his company is engaging with a Big Four accounting firm to conduct a full audit of its reserves. It's a top priority for them, but for some reason, for ten years they haven't been able to do it. And this is just a giant red flag to me. I really wonder, is tether actually backed 1 to 1 or is it a scam? I think an audit would help to settle that question, but we really don't know. It's nuts to me that the entire crypto world is built on this stablecoin, which is used along with Usdc to transact, to provide liquidity into the market, but we don't really know if it's backed 1 to 1. There's there's no proof of it.

David Leary: [00:48:55] And so I'm not going to buy tether because I think it's going to go to the moon. I'm going to buy tether because I need to put my funds into this digital format, because I need to transfer it overseas or move money some other way. And I'm using it as a it's like going to the pizza place and cashing in your $20 bill and getting video game tokens and using. So I'm getting I'm getting an exchange and I can use those in theory, but I'm not buying video game tokens because I think it's going to go up. But then what tether's going to let me do if at the end of the day I still have ten tokens left in my pocket, I can get cash back for those.

Blake Oliver: [00:49:28] Supposedly, although the terms of service of tether say they are not required to exchange your tether for US dollars. That's insane to me. Like they could just choose to, like, shut down and take everyone's money if they wanted to according to their terms of service.

David Leary: [00:49:44] Um, and it's not clear if the amount of tokens they spit out of the machine matches the cash they have stacked in the machine.

Blake Oliver: [00:49:50] It's not proven.

David Leary: [00:49:51] That's the big.

Blake Oliver: [00:49:51] Issue. It's not audited. Yes, exactly. Well put. Tether is also the largest holder of US Treasury bills. They claim that anyway, they've purchased 33.1 billion of Treasury bills. That was just in 2024. So it's the the seventh largest buyer of US government debt. And I think it's the it might be the largest single holder. I'm not sure I thought I saw that somewhere. But anyway they buy a lot of US treasuries according to what they say. So you know, think about this. The crypto world is really just completely, um, a wild west. The bank of crypto is not audited. And when will it be? I don't know, is it a fraud? We don't know. Okay. Moving on. Uh, the Financial Times got deeply embarrassed. I would be embarrassed if I were the Financial Times, they reported on March 19th that Tesla had $1.4 billion in unexplained financial discrepancies. They compared Tesla's reported capital expenditures of 6.3 billion in the second half of 2024, with the increase in property, plant and equipment value, which was only 4.9 billion. And then they suggested that the difference of 1.4 billion indicated potentially shady accounting practices. This got picked up all over because everyone loves to hate on Tesla right now because of Elon Musk, right? I mean, Tesla's.

David Leary: [00:51:27] In the article implied the original article basically implied, um, because it got picked up in a lot of media places that the concern is they were intentionally categorizing expenses in a misleading way to make its profits look better.

Blake Oliver: [00:51:39] Yes.

David Leary: [00:51:40] And that's the concern. Or that they don't have good internal or weak internal controls.

Blake Oliver: [00:51:45] And when they actually dug into it. When people said, no, that's not the situation. The Financial Times posted a retraction, and apparently 689 million of the gap is explained by Tesla paying down liabilities for assets already purchased. Another 270 million is accounted for by disposal of depreciated assets, and the remaining 463 million difference can be attributed to foreign exchange movements, non-material write offs or equipment sales, although it is not clear in the financial statements exactly how this happened. Because this is something about GAAP, it's not really clear when.

David Leary: [00:52:25] They blame that specifically in the when and then there. There are bad retraction of the article if you want to call it. Oh our bad. They blamed it on their own misunderstanding on the arcane complexities of cash flow accounting. Um, and because it uses an indirect method that's supposedly tricky.

Blake Oliver: [00:52:45] Yeah. And the indirect statement of cash flows is not easy. Probably the hardest thing that you learn in accounting is how to create one and understand one.

David Leary: [00:52:55] And then the other quote they had in there, they quote unquote. At a certain point, it's necessary to trust the auditor's judgment. Really? Wow. They actually they actually said we should trust the audited financials, which now, finally, for the first time in the show's history, we have proof that people actually value the audited financials. It's printed in media. Somebody said you should value the audited financials. Well.

Blake Oliver: [00:53:22] But I don't think we should have to. And I think this actually points to an issue with GAAP. I've said for years that gap is too complex. If an organization like the Financial Times cannot understand Tesla's financial statements, that means GAAP is too complex or there's not enough transparency. And this is part of the issue with like the way that assets are valued on balance sheets at historical cost. And then all these adjustments happen. It's it's it would actually be not difficult for Tesla to manipulate earnings by manipulating the adjustments to the value of their property, plant and equipment on their balance sheet. And it happens all the time. I actually did an interview with Thomas selling that's also going to appear on the podcast. We just did it this week and he talks about that. He's got a whole explanation for why historical cost is rife with abuse and is not actually, like, ideal for how we value assets. And it led to this issue here. Um. Where do we go next?

David Leary: [00:54:31] Well, it's interesting about this is I agree with you. The Financial Times has, I would say, very reputable reporters. They put teams of people, they do the work. Their numbers are usually good. Their stories are really good, really good. But if you start thinking about all financial articles, we see about all these companies and accusations that are thrown around it, you start questioning which ones are accurate or not accurate.

Blake Oliver: [00:54:55] At this point, I wonder if they ran the story actually here in the chat says if they knew this, they just ran the story due to pressure. I wonder if they ran the story quickly, because Tesla is such a hot topic right now and that they didn't fact check it. I mean, but again, it takes such deep expertise in accounting standards to understand what is happening on the balance sheet and to explain the differences, that it's hard to do this. And to me, that is a failure of GAAP. If GAAP is so complex that financial reporters that journalists who are experts in the space can't figure it out, what hope do average people have? And what hope do those investment analysts who are like 22 years old, working at banks, have to figure this stuff out? I don't think.

David Leary: [00:55:41] We can have headlines out there about how companies, public companies are missing 1.4 billion. Billion dollars. You can't have news reports like that.

Blake Oliver: [00:55:52] We don't want.

David Leary: [00:55:53] That because the. Nobody understands the balance sheet statement of cash flows and the profit and loss because of all the standards.

Blake Oliver: [00:55:59] Yep. Um, David, I want to highlight one more thing, and then I'm afraid I actually have to jump. I've got to go to a meeting. Ah, man, we didn't get to it again. Douglas Edelman, the biggest tax fraudster ever. I got to go.

David Leary: [00:56:13] To it right now. Just go to it.

Blake Oliver: [00:56:14] Just go. No, I don't have time. I don't have time. It's too good a story. Um, I just want to highlight Big Four transparency released their annual accounting firm rankings. This is a site Big Four transparency. Com that sources data from people actually working at these firms. Users submitted and they rank the firms and the lowest ranked firms. This is this is this is not great for private equity. The lowest the three firms with the lowest overall job satisfaction are all PE backed or public firms.

David Leary: [00:56:46] I could see that. I think that's organizational change, right? A new CEO comes in. The employees get disgruntled anytime there's change. It's there's a book, right, that came out in the late 80s or the 90s who moved my cheese. And when people are kind of set in their ways and your firm's working the way it is, and then you have new management come in, you're going to be upset. It's just natural. So it makes sense that the worst rated firms are ones that recently were P backed. Now, five years from now, if that's still the case, yes, this is an issue.

Blake Oliver: [00:57:18] But you're.

David Leary: [00:57:19] Saying it's.

Blake Oliver: [00:57:20] It's the disruption of the change that's causing low satisfaction.

David Leary: [00:57:24] Yes.

Blake Oliver: [00:57:24] Which makes sense because Citrin Cooperman had the lowest self-reported hours but also had the lowest job satisfaction rating. So isn't that strange? The hours were the lowest, but the job satisfaction was also the lowest. That fits with what you're saying.

David Leary: [00:57:40] It's probably the change. And I think the way you'd want, you'd have to find a firm that the way you'd have to slice this data. Like people that have been piggybacked for ten years, five years, two years, six months. And see what the satisfaction scores with that because I don't think it's all P backed. I think it's probably recent P backed. It's probably the real dissatisfaction.

Blake Oliver: [00:58:02] David great chatting with you.

David Leary: [00:58:04] You can't have you can't have numbers like that. It's not good.

Blake Oliver: [00:58:07] Thanks to everyone who joined us live. Um, David, thanks for chatting with me again this week. As always, if you want to get free continuing professional education credit for listening to this episode and all our episodes, uh, at least all the, uh, the weekly, the regular ones we do not the bonus ones go to earmarked app, create a free account, earn one free CPE a week, and subscribe for just $150 a year to support us. See you around here next week. Bye everyone.

David Leary: [00:58:33] Bye, everyone.

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IRS Officials Claim Cuts Will Widen Tax Gap by $500 Billion
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