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This is The Anderson Files on PodClips.
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The Anderson Files is a look at commerce, investment, economics and retirement issues that affect each and every one of you.
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Your host is Mike Anderson, Executive vice president, retirement services, and partner of Finestone Partners.
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Finestone Partners is an independent firm with securities offered through Four Point Capital.
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And now your host, Mike Anderson. Taxes, the IRS, and the pandemic.
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What you should be concerned about now that July 15th tax filing deadline has passed. Here to talk with me is Ernest Howard CPA. Ernest has had his practice in Marina Del Rey since 1978.
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He offers a full range of accounting, tax, business consulting and bookkeeping services, as well as aggressive tax planning and tax audit defense.
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He is a key member and leader of the California Society of Certified Public Accountants, serving currently as chair of the Hollywood Beverly Hills chapter and has served on the State Board of Directors.
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He’s a frequent lecturer at UCLA and USC and guests on LA radio and television.
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Ernest.
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Good morning.
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Welcome. Good morning.
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So to get rolling.
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So, now that July 15th has passed.
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Everything is starting to come back online, collection and audit activity are now resuming, tax notices are going out, audits and collection activity are gearing up.
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Now, much of the activity is being conducted remotely by telephone fax, mail, fedex, et cetera.
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With with the state doing email.
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IRS still does not use email.
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Tax court trials are by Zoom-type technologies.
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There was a program, that we’ll discuss later, last week where they actually went through in depth of the procedures that the tax court will be using.
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Let’s see, IRS telephones are busy over the last week and a half.
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My anecdotal sample is that in calling on one call, I got what they call a courtesy disconnect, which is, I’m sorry, we’re too busy to answer your call at this time.
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Please call again another time.
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So that that’s still happening on occasion.
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Another time I had a 45 minute wait, which was within, they did say the wait will be between 30 and 60 minutes, and they were accurate there last year.
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A lot of these they were saying that and ending up two in three hours and then courtesy disconnecting.
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So the IRS has definitely gotten better that way.
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And then the third experience was, it was just a half an hour wait, but there, I wasn’t calling one of the more popular lines, I was calling IRS collections directly, and they’re a little bit less busy than, you know, the popular numbers.
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Now, IRS is hiring aggressively to staff up their new needs.
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They’ve indicated over the last, well, going all the way back to late last year, that they’ll be hiring hundreds of new special agents.
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These are the law enforcement people who investigate tax crimes.
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You know, they carry badges and guns and they’ll read you an equivalent of a Miranda warning, and all that, when appropriate.
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But they’re also hiring more auditors, more collection people, and a lot more telephone service people.
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So I’m hoping that they’ll get it geared up.
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Unfortunately, a lot of people have left the IRS because of all the negative publicity it’s gotten over the last several years.
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A lot of the very experienced people have opted to retire and they’re going to have to build back up their institutional memory base.
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But Commissioner Reddig is a brilliant guy and he takes good care of the IRS employees and, I think the prognosis is good as long as he’s in charge because he knows what he’s doing and he understands how to make it work for the fraud enforcement office.
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What would you say is the reason why, now, for beefing up that and creating that new office? Well, Commissioner Reddig, you know, the IRS commissioner, is a former criminal defense tax lawyer.
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In fact, he was the managing partner of what I consider to be the top criminal defense tax controversy law firm in the country.
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And, basically he’s aware that there needs to be more done in the area of catching the bad guys, and the Fraud Enforcement Office is to act kind of as a resource for the revenue agents who do the audits, and help them to analyze the possibility, the possible productivity, of fraud investigations.
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You know, where people, you know, there are two kinds of fraud.
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There’s civil fraud, where they hit you with massive penalties, 50% and, and more sometimes, and then there’s criminal fraud, which in many cases entails jail or prison time, or at least Club Fed, as they say.
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And the fraud enforcement office’s job is to analyze cases brought to them by the office auditors and the revenue agents, and you know, where there are misbehavior looking things going on, whether it warrants referral to the criminal investigation division or whether it warrants proposing civil fraud penalties, which would happen at the auditor level.
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This is an expansion. In the past,
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there was usually a fraud coordinator, say in the Los Angeles district or the New York district.
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So there weren’t a lot of people. By beefing it up with a formal group, or office, as they call it, they’re putting more manpower and training into it so that there’ll be more analytical ability available to help develop the cases better.
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Ernest,
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is this something that will come about in the balance of this year in 2020, or is it a combination of 2020 and 2021 that we should expect those? Well, it’ll take a little bit of time to get people up to speed, but I would expect you’ll see more immediately and a lot more over the next few years.
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Remember that when cases get to the criminal investigation group, they have an approximate 95% successful prosecution rate for the cases that they choose to prosecute.
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And right now on their hot list are people who aren’t reporting foreign bank accounts, and of course, income hidden in foreign bank accounts. They’re also looking at payroll tax non reporters, and/or non payers.
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You know, if you are sort of, you know, criminally avoiding either the reporting or the payment of payroll taxes, they’re gonna be after you, and they will be behind some of the investigations of the payroll protection plan loan and EIDL loan abuses.
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So they’ll, they’ll be out there. If, you know, any of you out there in the listening group have any thoughts that something doesn’t seem right, and you might possibly have stepped across the line, here now is the best time to make some corrections.
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And, if you think there’s any possibility of a criminal issue that you’re involved with, you want to get a competent criminal defense tax attorney.
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Not all tax attorneys do criminal defense work.
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You need someone who is very educated in the area of rules of evidence, and knows the procedures and ways of the IRS in dealing with such matters.
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There was a case I was involved in many years ago back in the eighties where a man used his corporation,
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he had a business, to put an addition on his home and he believed that it was going to be his office for the corporation and didn’t need to be reported as income to himself.
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But ultimately, the IRS proved that he should have been aware that this was, constructively, income to him.
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He had a transactional lawyer, not a criminal defense lawyer, who didn’t do a good job defending him.
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And ultimately, he ended up serving four years in Club Fed.
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And it’s been an interesting story. A few years later,
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I had a client who married the prosecutor on this case, and we were talking about the kinds of cases he’d run into and I started describing this one and he rattled off the taxpayer defendant’s name, and he said, oh yeah, we always believed there was a lot more there than we caught.
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So you can see how the mentality and things like this can work. For the individual tax filer,
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what is the probability percentage-wise of someone being audited? Well, you know, just if you look at all taxpayers, it’s less than a half percent.
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But the problem is, included in that population, are filers of E-Z forms, where all there is is a W-2, maybe a couple of dollars worth of interest income and no deductions.
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So there’s really nothing to audit.
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You know, just anecdotally from experience,
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it seems like, if you own a business, and they are mildly to moderately aggressive with your deductions, you know, putting all the usual things out there, you know, a small amount or small to moderate amount of entertainment and auto expense, and that sort of thing, that, you know, you should expect a fair chance of being selected for audit, you know, every 15 to 20 years.
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You know, and that varies from area to area.
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Los Angeles is sort of a hotbed.
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New York is sort of a hotbed.
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You know, if you’re in the middle of nowhere, you know, it may be a little bit tamer.
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I’m chatting with Ernest Howard CPA. I’m Mike Anderson and this is The Anderson Files with PodClips.io. Ernest, to continue, for high net worth individuals,
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the very wealthy.
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What should they be concerned about for the balance of this year and going into next year? Anything different? Well, actually, yes, the IRS has announced that they have a program to audit several hundred very high net worth individuals. At the program
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I was at last week, there was no clear indication that they said probably in excess of $50 million of net worth and, you know, so several hundred of people who, you know, have massive amounts of assets and massive amounts of income and, you know, basically a lot of people that are this rich, you know, have almost full time tax advisors.
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I know, you know, when it comes to corporations back in the years when I was with the big international accounting firms, all of the really big businesses had a full time office for IRS auditors, a full time office for state income tax auditors, a full time office for city auditors and county auditors.
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And, you know, it was just an ordinary part of the business to be auditing almost all the time ongoing, but this is new, and it’s focusing on the folks that both have the money to pay the tax and you know, have the money to defend themselves, so that the cases that come out of this will be very interesting. For the area of virtual crypto currencies and the reporting of gains
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Aad losses on buys and sells,
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is the IRS interested in this area? Is it gaining interest? This is definitely on their very high interest list.
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And, in fact, there is a question on every individual tax return, that’s, are, do you hold or do you own any virtual or cryptocurrencies? And these are mindlessly complicated, and it’s somethin. The IRS has defined cryptocurrencies or virtual currencies as property like stocks, and yet some of the reporting is diametrically different than like reporting for stock options or the things that are sort of equivalent, you know, with stock options, you don’t necessarily record income in every case or a stock split,
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let’s say you don’t record income, you just increase the number of shares and decrease your cost per share that you have to deduct against sale.
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But with cryptocurrencies, any of these things seem to report as income.
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The IRS has accessed the virtual currency exchanges.
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And as a result, you know, they’re gonna find a lot of the non reporters. And remember, if you hold a Cryptocurrency or one of these virtual currencies, when you buy something with it, it’s considered a sale and the proceeds of your sale are considered the value of the item you purchased.
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And you, if it gets up into the thousands of dollars, it definitely needs to be reported on schedule D as long or short term capital gains and you need to have tracked your weighted average basis per unit of the currency you’re dealing with,
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so you know how much cost to deduct against the scale to reach the net gain.
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Let’s see, virtual currencies can be so complex that there are, I forget the the actual name of these groups, but I I refer to them as transaction tabulation services that become available.
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Some of them are scams.
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So, be careful, choose very carefully, and do a little homework before you get with them.
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But what they’ve done is designed Excel spreadsheets where they can go to the exchanges and download all your transactions that fit into the proper slots and will calculate for you,
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what your basis is and and your gains or losses, so that you know what to report in dollars. As far as targeting certain individuals that buy and sell cryptocurrencies,
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is there a threshold that the IRS is looking at in terms of transaction, or pretty much anybody that engages will be looked at? Well, you know, if you hold any amount of virtual currency, you must check
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Yes on the question on your tax return, so that you are automatically part of a potential audit population.
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And then if, you know, at some point currently there’s an amount and it’s in the low thousands, not hundreds of dollars of transactions to where you absolutely are required to report these transactions.
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And, you know that will change and evolve over time.
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So I would check each year as you do your taxes and see if your volume of, of dollar volume of transactions meets with the current standards of needing to be reported.
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Make sure that you’re dealing with a competent tax preparer who understands how to handle the currency, these Cryptocurrency transactions.
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And you know, I would recommend finding one of these competent currency transaction tabulation services because it’s very time consuming and can burn up a lot of time of a preparer who just does it all by hand. In shifting gears a little bit, for California businesses employee and in and independent contractor cases and the application of AB-5,
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what’s the status within the state of California for contract workers now, in terms of reporting and how they can file? You know what, it’s dangerous in California and I’d say extremely dangerous to hire people as independent contractors.
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And there are multitudes of misinformation out there, you know, during 2019, in passing AB-5, California codified the California Supreme Court decision in Dynamex.
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And they adopted an ABC test to determine worker classification and the worker has to be free from the control and direction of the hiring entity.
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He must perform work that is outside the usual course of the hiring entity’s business.
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So if you are say an accountant and you hire accountants’
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they need to be your employees, even though accountants are specifically exempted since they are working within your ordinary course of business,
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they would need to be employees if, if they’re doing accounting or tax type work.
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And, they must also be customarily engaged in an independently established business or occupation where they have other clients.
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You can’t be their only client. And even if AB-5 exempts you, there’s a whole series of tests under the old rules that still apply that incorporate similar tests, must be free of control, providing services directly to the contracting business and not to their customers.
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The contract must be in writing.
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They have to have a business license,
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if the jurisdiction requires it, they must maintain a location that is separate from the business they’re contracting with and several other steps that, if people are interested, they should look into. The risks are huge and a lot of tax preparers believe, well, we’ll just deal with the employment development department and it’ll be, you know, just an audit, but that may be the last organization you deal with.
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It’s the labor department and the labor commission’s auditors that can be the leading edge on this and they have the ability to assess the $25,000 per penalty per check written to an independent contractor.
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And if an accountant or non attorney advisor recommends that someone treat someone as an independent contractor.
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They can be subject to this penalty just as well as the owner of the business
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can.
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Ernest, for AB-5 within the state,
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what groups are for AB-5 and which are against it? Well, the small businesses are against AB-5, and of course, you know, it runs, there, is a substantial risk that it will put Uber and Lyft out of business because it totally destroys their business model.
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It’s the labor unions that are very much for it, and groups that want to control business.
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You know, the, the taxing agencies are very much for it because it’s so much easier to collect tax when people are employees and the taxes withheld, than it is to go after a bunch of little independent self employed businesses that have the ability to deduct lots of expenses that are no longer deductible under the under the 2017 Tax Cuts and Jobs Act for federal purposes.
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There are substantial forces and of course, Uber and Lyft are raising millions of dollars to put on the November election some propositions to overturn AB-5.
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Now, if that happens, it may be just specifically to their business model.
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And, of course, there are other groups that are lobbying for themselves to be exempt and the hairdressers have managed to carve out some exemption for themselves to some extent.
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And a few other groups like that have had that ability.
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But, I know, I was at a meeting in January with some, some of our state legislators and, it was pretty clear that they were aware that something needs to be done, but the political forces that are pulling are so powerful.
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What can happen or will happen is not clear.
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Ernest, thanks so much for being with us this morning and to learn more and to inquire further
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what is the best way for folks to reach you by email, phone? Email is best.
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Yeah, and just go to my website, my initials efhcpa.com and all of my contact information is right there on the first page. We hope to have you back in the future and to learn more about what’s happening currently with the IRS and the Franchise Tax Board, and what individuals, companies need to be aware of, and focused on, regarding taxation and their responsibilities.
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Well, I recommend that we talk on October 20th, that will be the UCLA Tax Controversy Institute at the Beverly Hills Hotel, and there are always some very interesting developments that come out of that.
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And then on November 19th and 20th, California CPA Society is having their annual tax conference, and that is a very high level theoretical tax program that that will talk about these kinds of issues, and we will probably have some people coming out from Washington to talk about, you know, given whatever the election results end up with, what the prognosis is for some things that will be of interest to everyone.
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Ernest, thanks for sharing those events and dates.
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I’d like to thank our engineer Darryl Wayne, producer Mark Alynn.
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I’m Mike Anderson and this is The Anderson Files on PodClips.io.
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Keep calm and keep listening.
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You’ve been listening to The Anderson Files with Mike Anderson.
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Visit us at PodClips.io and check on the Financial box for more information on The Anderson Files.