The Tax Season Hangover: Record Retention, Penalties, and Planning

Announcer:
Hello everyone. Welcome to the Millionaire Dentist Podcast, brought to you by Four Quadrants Advisory. On this podcast, we break down the world of dentistry finances and business practices to help you become the millionaire dentist you deserve to be. Please be advised we do speak with an honest tongue and may not be safe for work.

Jarrod Bridgeman:
Hello and welcome to the Millionaire Dentist. I am your host, Jarrod Bridgeman. Casey Hiers is out. He is traveling, and he is glad-handing and talking to dentists and owners and doing his whole shebang. So instead, I brought somebody even smarter, which is exciting. It's Brodie Hough. He's a CPA here at the firm. Brody, welcome.

Brodie Hough:
Thank you. Thank you. And I would attest to being the much smarter aspect of that, too. So I appreciate you having me on again.

Jarrod Bridgeman:
Is this your first time going solo with me?

Brodie Hough:
I think this is the first solo ride. So first one-on-one right here.

Jarrod Bridgeman:
Just how much I trust you.

Brodie Hough:
I appreciate that.

Jarrod Bridgeman:
Do not screw this up.

Brodie Hough:
I'll try not to.

Jarrod Bridgeman:
Well, we brought you in because you are a tax guy. You love taxes.

Brodie Hough:
I do.

Jarrod Bridgeman:
Talk about them all the time. And as you know, and I hope a lot of our listeners know, last month was tax time.

Brodie Hough:
It was indeed. Hopefully, you know that.

Jarrod Bridgeman:
Right. Pretty busy season. Now I wanted to bring you in to kind of talk about some next steps or wrap up of what owners can do. So, Brodie, where would you like to start with this conversation, and where can I help lead you?

Brodie Hough:
I'd say let's start with just looking at if you are filed and what needs to be done after that. What's some of the key points to hit on with that?

Jarrod Bridgeman:
Because I know I don't do as much. I don't own a business, so I just kind of sign some stuff, and I take a nap and hope they get accepted.

Brodie Hough:
Oh yeah, right. Which is the typical thing. But I mean, there is even some, with looking at the business side and looking at the personal side, there's a couple things worth pointing out that are worth mentioning and making sure everyone's on the same page on, that you're retaining and keeping records of the right documentations for so long, making sure you're covering that aspect if the IRS ever did come knocking on your door one day and just items like that that are just best practices for post-tax season overall.

Jarrod Bridgeman:
Yeah. I wanted to ask you, actually, let's go ahead and go through a couple of the key and main things that should be kept on file or in your filing cabinet.

Brodie Hough:
Yeah. For retention purposes, this is something that a lot of people ask about, actually, because it's out there. People know they need to keep records on all their tax documents and all that. And they just don't know how long do I keep it? I still need to have my 2015 tax return on record and all that. And so just to kind of get that out there overall, and what is good practice overall with that is ultimately for business taxes, you usually want to hold back a little bit more if you do own a business in any sort of way, which a lot of the people we work with obviously, and you listening probably do own your practice in that sense. So keeping those for probably around seven years is really good.

Technically, the statute of limitation for that is three years, but just on the safe side, keeping seven years' worth of business because there's a lot more that goes into the business. Your financials go into the business, and then they'll obviously flows through more than likely to your personal return. So there's just more at stake on the business side of things. So it's good to keep those a little beyond the statute of limitation of the three years.

Jarrod Bridgeman:
So about seven years would be fine.

Brodie Hough:
Yeah. Seven years is probably a good number ultimately.

Jarrod Bridgeman:
So if you're dealing with somebody and they like, "Oh, I have to dig through. I've got stuff from 2012, 2002."

Brodie Hough:
Right. And that's a little too far. It's never bad to have those, but I mean, the likelihood of that ever coming up is very, very, very, very small. At that point, so the IRS guidelines, are three years for statute of limitations if it's just they want to do a random audit on you.

Jarrod Bridgeman:
Okay.

Brodie Hough:
There's no like, we think you committed fraud or something, or understated your income. There's nothing along those lines. It's just like, here's a random audit. They have three years to do that from either the due date or when you filed, whichever is the later date. And then they have a six-year window if you substantially undersold what you have as income. So, if you technically, the percentage is 25% to get into the numbers. If you undersold your income by 25% or more, they have 6 years to audit you and get that back. And then fraud is open forever. So if you are committing fraud on your tax return, you are liable for that for the rest of your life if the IRS finds you for that. So I don't recommend that.

Jarrod Bridgeman:
And there's a good chance that the paperwork you may or may not have probably isn't worth its salt anyway if you're committing fraud.

Brodie Hough:
Yeah. If you're committing fraud, there's probably either a paper trail or there's no paper trail, which IRS will come at you for if there is no paper trail to support anything that you're expensing or blah, blah, blah beyond that.

Jarrod Bridgeman:
If you're, let's say you're cleaning out some stuff from seven plus years, would potentially digitizing any of that make any sense, or is that kind of just a ...

Brodie Hough:
I mean, honestly, no, not really. As long as you're not committing fraud, you don't really need to have that stuff beyond seven years. I mean, that's just with the tax returns. There's other stuff within the business that you need to keep long-term.

Jarrod Bridgeman:
Oh, okay.

Brodie Hough:
Operating agreements, the basic stuff like that, any policies you have.

Jarrod Bridgeman:
It's like an operating agreement you want to keep for as long as the ...

Brodie Hough:
Correct.

Jarrod Bridgeman:
It's in practice, right?

Brodie Hough:
Correct. Yeah. I mean, any insurance policies that you have on yourself or through the practice or anything on that, audit reports, depreciation schedules, I can go on and go on. But besides the point, just that kind of long-term stuff that really deals with the beginning of the business, you obviously need to keep forever. But in terms of tax returns, it's really up to seven years. I would even argue seven's probably on the high end, but just to be on the safe side, I always say seven years.

Jarrod Bridgeman:
Especially with you said the potential like six-year limit on the other one. So it's like seven years, why not?

Brodie Hough:
Yeah, correct.

Jarrod Bridgeman:
That makes sense. So we kind of talked about the business and what to keep with the tax and return and stuff there. What about on the personal side?

Brodie Hough:
Yeah, the personal side's actually not as intense as the business side of things, which makes sense. There's not as much going into the personal return as the business-

Jarrod Bridgeman:
It's not as intricate.

Brodie Hough:
Correct. It's a lot easier to follow. You're getting a lot of the forms sent to you that the RS has record of, like your W2s, your 1099s that you're receiving. I have interest, dividend income, and all that jazz on it, IRS has record of that. They're getting that. Once that's filed with whoever your investment company is, they get a copy of that, too. So, really, what we say is at least three years to cover that window; I've already kind of hit on the statute of limitation. Five years isn't a bad idea just to be safe, but three years is on. Again, if you're not committing fraud or anything, you should be perfectly fine with that aspect of just keeping those records, too.

Jarrod Bridgeman:
And with that, and that would be the same as any of your dependents or anything else you might have on the personal side?

Brodie Hough:
Correct. Yes. Yep. Yeah. If you have any kids who do have returns, it's the same thing for them, three to five years. I err on the side of caution and go five years. But again, ultimately, the three years is kind of that key.

Jarrod Bridgeman:
Gotcha. Besides this, retention and making sure you're keeping things organized in a place where you know where it is, that's helpful. Is there anything else that should be done post-tax time that you think that there's listeners out there may be forgetting?

Brodie Hough:
100%. Yeah. I think a lot of this focuses on the more the business side of things overall, that I guess business side that connects to the personal side ultimately. But it's a lot of just being organized for this next year coming up, especially if you owed a lot of money or even got refunded a lot of money. Something didn't go according to plan with whatever the plan was for this last year. Whether if you were way underpaid in taxes, that means CPA didn't really set you up in the right position to end the year.

Jarrod Bridgeman:
Probably not doing quarterly estimates and things.

Brodie Hough:
Correct. Yeah. And that's what I'm alluding to is let's get a good picture of the year so far and see if we can start to predict this out a little bit better. Let's make sure you're penalty safe going into next year and we-

Jarrod Bridgeman:
It's not too late to adjust. If you've had any hiccups or frustrations from just filing for last year, I mean, it's just the beginning of May now.

Brodie Hough:
Oh yeah. No, we have plenty of time to catch up. I think if you're talking about it now for 2026 taxes, you're on the front end, you're doing better than a lot of people do. I mean, this is something that we do in-house continuously with every quarterly estimate. We are looking at your updated total income picture to make sure we are covering your taxes, and we want to keep you penalty-free. That's kind of the first big with the estimated tax penalty and all that jazz. But other than that, just organizing yourself, looking at cash flow, because especially if you just had a big tax payment or a big refund, where's the best place to use that at? The refund aspect is to put it back in the practice, use it at home, depending on your situation within the practice or business, that's a very good thing to talk to your financial planner with or CPA with to figure out where best to use that cash flow.

Jarrod Bridgeman:
What if you can't get your CPA and your CFP to talk, get them in the same room?

Brodie Hough:
Well, that's a very common issue. If that's an issue, you should come talk to Four Quadrants and go find Casey-

Jarrod Bridgeman:
That's right.

Brodie Hough:
... wherever he's at and-

Jarrod Bridgeman:
That's right.

Brodie Hough:
... talk to us because that's not a problem here.

Jarrod Bridgeman:
What if I just had a really cool sales guy come in and I wanted to do some new machinery? He's like, "This will be great. It'll magically fix teeth forever."

Brodie Hough:
The typical salesperson.

Jarrod Bridgeman:
Yeah.

Brodie Hough:
Yeah. "Hey, this is a great tax deduction."No, that's a very common thing that people like to hit on and like, "Oh yeah, I just spent 100K to save on taxes." That's great, but that's 100K in cash flow you just lost.

Jarrod Bridgeman:
You and I may have talked about this before, at least mentioned it, but growing up, being in high school, maybe early in college, and stuff, when you got a tax refund, you were excited. It was like a bonus because one, I didn't get it, and two, I was not making a ton of money to begin with. And I think that mindset carries-

Brodie Hough:
Oh, 100%.

Jarrod Bridgeman:
... to a lot of people throughout adulthood.

Brodie Hough:
I mean, everyone likes to get a refund. I even like to get a refund-

Jarrod Bridgeman:
For sure.

Brodie Hough:
... still, I mean, it's better to see that auto debit coming into my bank account than seeing-

Jarrod Bridgeman:
The opposite.

Brodie Hough:
Yeah. I seen that withdrawal have to come out when it's time to file, but there's a balance there. You don't want to give the IRS too much because that money you're giving them is technically interest-free. You're getting nothing on that money. Well, that money could be earning stuff in the market, investing, you're just sitting in the bank account and earning some interest. I know the interest isn't a lot, but that's better than-

Jarrod Bridgeman:
Better nothing.

Brodie Hough:
... yeah, than it being nothing, exactly. So it's to optimize that. Ultimate goal is to have a little bit of a refund or a little bit of a tax load. If you're right around net zero, you're doing great, you're right on the money for that year, and that's a major accomplishment.

Jarrod Bridgeman:
If you're looking at, let's say, a million dollar in collections practice, what would be what you consider close to net zero? Is there a range of being like, if it was between this and this?

Brodie Hough:
Materiality aspects?

Jarrod Bridgeman:
Yeah.

Brodie Hough:
Yeah. I would say honestly, within a couple thousand, you're really doing really good. Even 5,000 isn't terrible. If you're anywhere, probably for a million-dollar practice, under 5K indifference, you're doing pretty good. Obviously, you'd rather be on the refund position, but even if you owed a little bit, that's not terrible, and you maximize the value of that cash.

Jarrod Bridgeman:
But if every year you're seeing more than 10, you're seeing 15, you're seeing 20, there's-

Brodie Hough:
Poor planning.

Jarrod Bridgeman:
Poor planning there.

Brodie Hough:
Yeah. Poor planning overall between your financial planning and the CPA, which it's a commonality. The CPAs usually just try to make sure you're penalty safe, which there's nothing wrong with that. And they just split that over four quarterly payments, equal payments throughout the year, which is great for cash flow. You know what's coming up then if you do pay those, but it can leave you vulnerable. If you had a great year and the business boomed that last year, oh, you're going to owe potentially six digits if you improve by that much.

Jarrod Bridgeman:
Or if all of a sudden we have another COVID-type situation where things are shutting down, and all of a sudden you're not making anything for a quarter.

Brodie Hough:
You just put all that money in, interest free the IRS, then who wants to give the government free money? That doesn't make sense. So yeah.

Jarrod Bridgeman:
So let's say there's people listening to this and they're like, "Well, I haven't really filed yet."

Brodie Hough:
Yeah.

Jarrod Bridgeman:
"I may have put in an extension or-"

Brodie Hough:
It's very possible.

Jarrod Bridgeman:
Yeah. And so walk me through that, and what are some target upcoming dates with people who've extended?

Brodie Hough:
Yeah. So if you have extended on the business side first, you have till September 15th to get that filed overall. And then, for personal wise, you have until October 15th to get that filed. So those are the ending dates. But to keep in mind, yes, you have till then to file; penalties are still in play here. There's three different types of penalties overall that the IRS hits on a lot. One is failure to file penalty, so that's when you miss the deadline, and you don't extend, or if you do extend and you still miss the extended deadline, that's when that penalty comes into play. So you're safe from that penalty as long as you get hit this September 15th or October 15th deadline. The other two penalties you can have incurring if you have a balance owed as of April 15th for personal returns and March 15th, that was the original due date for business returns. So that's something to keep in mind-

Jarrod Bridgeman:
So if you do owe, it's going to just kind of keep adding up.

Brodie Hough:
Yeah. Yeah, absolutely. So there's the failure to pipe-

Jarrod Bridgeman:
But if the government owes you money, they don't add in more as it goes on?

Brodie Hough:
No. Why would they do that, Jarrod? That's too much sense. I mean, that's the government-

Jarrod Bridgeman:
That's the interest right there.

Brodie Hough:
... giving out free money. When have you heard of that one?

Jarrod Bridgeman:
Oh, not on my bracket.

Brodie Hough:
That's fair. That's very fair on that side. But yeah, these other two penalties, not to get in too much nitty-gritty with the numbers, but ultimately if you owe a balance due, they're going to start calculating out as of 4/15, and every month you go beyond, it's going to keep getting higher and higher. So it can potentially, I mean, even just off, let's say you owe $5,000, I mean, that can result in about probably a good another two to three grand in penalties if you wait till October 15th.

Jarrod Bridgeman:
Oh, wow.

Brodie Hough:
Yeah. So it's not something to just laugh at and go, "Oh yeah, I'll pay. It's only a hundred bucks or something." No, it can add up pretty quick.

Jarrod Bridgeman:
Is there an ending to that? If you're negligent for X amount of time, it moves to another field, or how does that-

Brodie Hough:
So ultimately, between all these penalties, it's not super straightforward, but basically, you get close to about 25% being the cap of penalties of whatever that balance is owed. So if you had a great year and you have a very big balance owed, that's still no joke to mess with. I mean, and no matter what, that's something to be careful with. So you do have to watch that. And I guess that's capped at 25% for each of the penalties. So I guess it technically takes 75% to cap.

Jarrod Bridgeman:
So does any of this involve after a while, and you're not doing it, you'll get a note from the Sheriff's department on your door?

Brodie Hough:
Not from the sheriff, but IRS. Yeah. Overall, yes, you will get notices of ... They'll eventually, they'll start with like, if you haven't filed yet officially, they'll go like, "We haven't received your 2025 tax return." That will take a little bit. You probably won't get something like that until like next year. But if you're getting that notice, you're in trouble. It's been a while, your past due date, you're like, there's going to be some issues with that, and some penalties to pay with that. Overall, though, it's-

Jarrod Bridgeman:
Are we talking like Wesley Snipes level?

Brodie Hough:
Yes.

Jarrod Bridgeman:
Yeah. Okay.

Brodie Hough:
Yeah. You can avoid this by paying with your extension. So we're kind of obviously past the time when we did extend, but if you did need to extend and you had a tax owed projected, you could have paid always some of that off to help offset some of those penalties. And that's very beneficial if you do that if you are expecting a tax owed for that. So that's something to offset that, and it's just not like, "I'm screwed."

Jarrod Bridgeman:
And does that show the government, too, you're like, "I'm trying"?

Brodie Hough:
Yes. 100%. Yeah.

Jarrod Bridgeman:
Yeah.

Brodie Hough:
And then there is a one-time, you can ask for one-time forgiveness too. So if you're in a good standing as a taxpayer and it just didn't fall, you didn't have the cash flow at that point, you can ask for one time, and it's usually almost a guarantee you're going to get that one-time forgiveness. Now, after that, you're kind of on the hook if it happens again. But that is one thing, too, that the IRS is actually pretty forgiving with, is if you've done this one time, okay, we'll forgive you for that penalty. We'll write it off.

Jarrod Bridgeman:
"You've been pretty on the ball this whole time, right now."

Brodie Hough:
Right. Yeah. "Now if you do it again, we're coming for you," kind of thing.

Jarrod Bridgeman:
Brodie, thank you so much for stopping by. Any final thoughts you want to make sure our listeners are really, really tuned into?

Brodie Hough:
I say, I mean, it's really just planning. I mean, it's being constant communication with your CPA and financial planner, however that looks like for you, just be in constant communication with them, with the planning, because this can affect you financially very much so.

Jarrod Bridgeman:
And as you said, with some of these penalties, they really can jack up your-

Brodie Hough:
Yeah, they can add up quick. I mean, you can all of a sudden have a third of a higher tax owed just because you waited, and a lot of people think, "Oh, if I wait to file the return, I have less of an audit risk." That's not a thing.

Jarrod Bridgeman:
Or "They'll forget about me."

Brodie Hough:
Yeah, that's a complete fallacy that's made up by lazy CPAs that want to have the extra five months to be able to get all these tax returns done.

Jarrod Bridgeman:
Right, right. At the cost of their client.

Brodie Hough:
Correct.

Jarrod Bridgeman:
Wow.

Brodie Hough:
Yeah.

Jarrod Bridgeman:
Well, thank you so much for stopping by. Folks, if you want to learn more about taxes and financial planning and cash flow and all that stuff, don't forget we're doing events all over the country. We're going to be coming up into Orlando. We're going to be here in our hometown of Carmel, Indiana. We're looking at Amherst and Rochester, New York, which is exciting. We're going to be in Columbus and Cincinnati.

We're going to be all over the place, really just hoping to teach dentists and practice owners out there who may not have learned this in school of at least some ways to start doing it, or you can find out that, "Hey, I've been a dentist for 40 years and wow, I didn't do any of that."

Brodie Hough:
Very cool. Yeah.

Jarrod Bridgeman:
Thank you so much. Oh, we go to fourquadrantsadvisory.com/events. That's the place you want to go, and you can sign up and come see us.

Brodie Hough:
Awesome. Thanks, Jarrod, again.

Jarrod Bridgeman:
Thank you.

Announcer:
That's all the time we have today. Thank you to our guests for their insight and for sharing some really great information. And thank you to you, the listener, for tuning in. The Millionaire Dentist Podcast is brought to you by Four Quadrants Advisory. To see if they might be a good fit for you and your practice, go on over to fourquadrantsadvisory.com and see why, year after year, they retain over 95% of their clients. Thank you again for joining us and we'll see you next time.