Predictions from the Godfather of Tax Resolution - Robert McKenzie

01/09/20 • 60 min

The godfather of tax resolution is the featured guest of the podcast today. Robert McKenzie is the guy that leading attorneys and CPAs turn to when they have criminal tax defense cases they need help with. Robert has a unique perspective into the IRS since he worked as a collections officer and literally wrote the book when it comes to representation before the IRS.

[4:15] Robert started his career as a revenue officer of the IRS. While working at the IRS, Robert completed his law school education and immediately went into his own practice doing tax resolution which he’s been practicing for the past 40 years.

[6:00] While at the IRS in 1976, Robert was incentivized to seize 30+ businesses and homes because that was how success was measured by the IRS before reforms were passed. Since 1998, the number of seizures has drastically decreased.

[9:15] In the last 8 years, the IRS has had its budget and headcount decimated, particularly in the enforcement area. This has lead to fewer enforcement actions and less revenue officers in total.

[13:00] This is a little counterproductive in terms of government revenue because a skilled revenue officer generates $11 in revenue for every $1 spent. Right now it’s a good time to be a tax cheat in this country because the odds of being caught have never been lower.

[13:50] The IRS received a 2.6% increase in budget in 2019 which means they can now bring on some new people. The new commissioner, Charles Rettig, is one of the first tax lawyers to get the job.

[17:35] Levies were up 8% in 2018, the first increase in over a decade. Robert believes that this indicates a trend of increased enforcement in the near future. The IRS is taking revenue officers from underutilized states and placing them in other areas that are lacking staffing to help go after higher dollar actions.

[21:00] The reality is the IRS has a lot of cases in queue that are just waiting to be assigned to someone in the field and they are not having liens filed. The more they can have people to receive cases out of the queue, the more liens we’re going to see.

[24:30] Sometimes it can be hard to change someone’s attitude if the IRS hasn’t started looking at their case. If you want to be delinquent in this country, you would want to live in a big city where the staff to enforce is at the lowest point. In Dallas, the IRS wasn’t going after anyone that owed less than a million dollars.

[27:50] There was a study released earlier in 2019 that shows about 83% of Americans comply with their taxes, but we are auditing 0.58% of all tax returns filed. They estimate that the government is losing over $300 billion in revenue from people not properly reporting their income.

[30:40] Over 43% of all the 1040 audits in 2019 were done on low dollar amounts returns. These were automated audits because auditing a high net worth individual requires a person to handle the task. Overall, 97% of people who are making over a million dollars a year will never see the IRS.

[33:40] Who cut the IRS budgets? Politicians. Who donates the most to politicians? Rich people. Who has the most to benefit by an IRS that’s not properly funded? Rich people. They cheat more and have more money they could be forced to pay if they were ever audited.

[34:10] The IRS has been engaging in a series of summons with the clearing houses that deal with cryptocurrencies and have been looking more closely at people making those transactions. For some people, that could mean potential criminal prosecution if the numbers are large enough.

[37:30] The statute defining an employee at the federal level has been established since the 1970’s. Congress is not likely to pass legislation dealing with the gig economy similar to the one recently passed in California, since industries have varying definitions as to who qualifies as an employee.

[41:45] Customer service from the IRS has improved in recent years. Their answer rate is only around 70% and even when they do connect with someone, the IRS only answers around 70% of those questions correctly. The FAIR Act is an effort to improve the IRS’s customer service but we’ll see how it goes.

[45:00] Now is a good time to get into the tax resolution business. There is going to be more audits and collections in the coming years which means more potential customers for your business. You will require proper training and an understanding of how to market your business if you want it to last.

[50:45] The IRS has said that they are coming after syndicated conservation easements. Conservation easements have become a scheme that some people have used as an abusive tax shelter and the IRS has made it known that they are going after those people.

[52:35] Captive insurance companies are another target of the IRS, particularly where something is insured against a risk that will never happen.

[53:30] Employme...

[9:15] In the last 8 years, the IRS has had its budget and headcount decimated, particularly in the enforcement area. This has lead to fewer enforcement actions and less revenue officers in total.

[13:50] The IRS received a 2.6% increase in budget in 2019 which means they can now bring on some new people. The new commissioner, Charles Rettig, is one of the first tax lawyers to get the job.

[52:35] Captive insurance companies are another target of the IRS, particularly where something is insured against a risk that will never happen.

[53:30] Employme...

Previous Episode

Tax Season Found Money with Jeffrey Schneider

Jeffrey Schneider has a tax and accounting service, but he also has a separate company that helps taxpayers with tax resolution and solving their IRS problems.

[3:40] When Michael presented the Audit Protection Plan, the first thing that Jeffrey thought was “free money.”

[4:30] Michael originally got into the tax audit protection business when he was running his tax resolution business. He was running a separate business of his own selling audit protection plans that generated over $9 million in revenue over three years. It was an opt-in plan at first.

[5:30] In an opt-in plan, you have to choose to take the option to join the program. With an opt-out plan, you are telling the client they are enrolled and they have to choose to opt out. The way that Jeffrey structures his audit protection is opt-out.

[6:45] Since implementing the plan in 2017, Jeffrey offers the plan to every single client but his practice is a bit atypical. About 80% of the people that turned it down were over the age of 75. He still has a very high acceptance rate for his clients and the program has generated over five figures every single year so far. The retention for the program has been over 96%.

[9:40] Jeffrey made more money this tax season than in the past because of two factors. The first is that he has raised his fees across the board and the second is that many of his clients are self employed in some form and those clients are automatically enrolled in the Gold plan.

[10:50] The Audit Protection Plan covers three major things: responding to notices after you file the return, audit representation in the event of a full-blown audit, and tax identity theft. It’s also customizable and has three tiers of membership.

[13:40] When Jeffrey sends out the engagement letter, he includes a nicely designed brochure that explains the plan and conveys its benefits. He positions it as a cheap insurance plan. The brochure is also present in his waiting room and conference room so new clients always see it. Since it’s automatically included on the invoice, he has had an average 90% acceptance rate.

[15:50] The Audit Protection Plan system includes all the documents you need to implement the plan in your tax resolution business.

[17:25] You’re charging them on the invoice but it’s not mandatory. If they opt out, the charge is removed. People make mistakes, and the plan is an easy way for your clients to protect themselves from small but costly errors. The plan is also easily adjusted to whatever your existing fees are. The more you charge for your services, the more you can charge for the Audit Protection Plan.

[22:45] For the first two years, Jeffrey kept the plan priced at exactly what Michael recommended, but he raised his prices until people complained. The value of the plan still far exceeds the expense for the client.

[24:00] You make so much more money by having the plan in place than not having the plan and then charging people separately. Before the plan, Jeffrey would often work for free providing similar services but he tracked his accounts very carefully. The costs involved in handling the services were not even close to the amount of revenue generated by offering the protection plan.

[27:15] You are not splitting the proceeds of the plan with anyone, unlike many out of the box tax software programs.

[28:05] Jeffrey is going to make about $12,000 net revenue off the 110 tax returns he will do this year. Imagine how much you could make if you had a business that processed 200 or 300 tax returns.

[30:30] Jeffrey’s Gold plan includes a couple of extra features beyond what Michael recommends, including additional schedules and expedited response times.

[31:30] The people who don’t want the plan are required to sign a client disclosure form that explains they will pay the hourly rate for any work done outside the scope of the return. Jeffrey is getting paid 100% of the time whenever he does any work outside the preparation of a return. He also includes that in his engagement letter.

[33:45] If there is any place where it is particularly hard to sell the protection plan, Florida would be it. Jeffrey has found tremendous success with the Audit Protection Plan, even so. It’s a simple program that’s easy to implement and very effective, even in a difficult market.

[38:50] Jeffrey is probably in one of the toughest markets in terms of professional fees. If he can implement this system, then you can too. You’re clients want you to protect them. Notices and identity theft are the main selling points for Jeffrey’s business.

Mentioned in this episode: SFS Tax Problem Solutions Free Online Master Class

Next Episode

Best Practice IRS Tax Lien Marketing with Christine Lacina of TaxLienLists.net

Christine and Michael go back all the way to 1998, when Michael was buying huge numbers of names from TaxLienLists.net. Christine started out in 1996 while working for a trucking company, where a friend shared the latest technological advance with her later known as the World Wide Web. One of the family members came up with the idea of collecting government records online, and this developed into a business selling that information to CPA’s, enrolled agents, and tax attorneys. In February, Christine will have been with the company for 21 years.

[7:00] Tax collection enforcement tends to swing back and forth like a pendulum, and it appears that we’re in another swing towards more enforcement with the IRS receiving an additional $200+ million in funding.

[8:40] In the late 90’s, the enforcement agents were a little overzealous. In many ways the IRS was ruining the lives of regular people because they got behind on their taxes. It was around that time that the IRS had to change their image and try to be a bit less intimidating. This change was groundbreaking for tax resolution businesses and that’s when Christine’s company really started to take off.

[12:40] Levies and liens are the two main drivers of clients to tax resolution businesses, so an increase in those means a lot of additional business for us. The IRS benefits immensely from tax resolution companies because they help collect on their behalf, which is one of the reasons that it’s such a good business to be in.

[16:00] There was a major decrease in lien filings starting in 2009, but even with that happening, Christine was still seeing plenty of successful tax resolution companies taking off.

[17:45] Federal tax liens for 2019 will likely be around half a million, similar to the last two years. Christine’s company has been able to combine the list of federal tax liens with the individual state’s tax liens, which has enabled tax resolution companies to market directly to those people. Marketing to state tax liens is a great way to get to the clients’ federal problem and get ahead of the competition. Marketing is about numbers: when the number of federal tax liens is low, go after the list of state tax liens too.

[20:00] A lien is public record, which is why federal tax liens can be compiled into a list, unlike levies which are not. There is no set standard for individual local courthouses where liens are filed. What this means is that Christine’s company has to be very flexible when collecting records.

[24:10] As a list broker, Christine collects the same information that the IRS has on file. Name, mailing address, the type of lien, and the dollar amount of the lien that was filed against them for that year. They always remind their clients that the information on the lists are just the tip of the iceberg and most people with a current lien against them owe more.

[27:30] The information Christine collects is really geared towards direct marketing, but there are companies that also use email to reach out to prospects. One thing to keep in mind is that you should expect to mail multiple times to get the best results from your marketing. If you do the mailing right with an accurate and fresh list, and a good mail piece, you should be able to get a 0.5% to 1% response rate.

[32:10] Part of the service includes a personalized letter containing the prospect’s information, as well as brochures, business cards, and other marketing pieces that you can add to the package. Christine breaks down the math on purchasing a list with 1000 names on it, where with a good closer most tax resolution companies should be able to close 50% of the people who call in to their business. The typical ROI for this kind of marketing is anywhere from 400% to 2000%.

[36:00] TaxLienLists.net services less than 55 customers nationwide and they have limited the number of clients for years, but now, with the increase in the number of tax liens, the doors are open.

[37:30] Follow-up mailings can improve those numbers even further and potentially bump the response rate up to 1% to 2%, but you have to keep in mind that no marketing list is perfect. There will always be a part of the list that’s too old or inaccurate. Part of the strategy is to record the undelivered mail as it comes back and to remove those addresses from follow-up mailings.

[43:45] Christine’s company tracks the results of their best customers over the years and what they’ve found is that follow up mailings produce paying customers. When the customer calls you, they are ready to do business. When you start follow-up mailings, a lot of the competition drops off because they only mail once.

[45:00] Sometimes a mailing can generate no calls initially, but 9 months down the road the prospects start reaching out. Follow-up mailings are seeds that you have to plant and harvest later. Always include a business card or brochure in ev...