AI-Generated IRS Audits, Yikes! with Diane Kennedy

In this Episode

• [03:23]Diane advises on the importance of responding to AI audit notices promptly to avoid penalties and levies on bank accounts.
• [08:37]Diane emphasizes the importance of good record-keeping and proper reporting to avoid AI audits.
• [16:20]Diane describes an AI-enabled CPA firm that uses AI for tasks like writing emails and generating blog content.
• [22:28]Diane shares tips for verifying the authenticity of IRS communications and the importance of cybersecurity for tax professionals.
• [35:38]Diane discusses the tax benefits of owning real estate and running businesses overseas, including home office deductions.
• [42:26]Stephan and Diane explore the potential of universal basic income (UBI) as a solution to job displacement due to AI.
• [44:35]Diane introduces the concept of medical migration, where people move to countries with cheaper healthcare to avoid high premiums.

Jump to Links and Resources

Diane, it’s so great to have you back on the show. It’s been like seven years.

It’s been a long time. In the tax world, that’s like a hundred years because it’s like every day seems like something’s changing.

That’s like dog years, but in tax years. What exactly is the most important thing that our listener or viewer needs to know that this is a thing now? Because if they aren’t aware of it, they’re going to end up in a really bad place, maybe getting audited, maybe getting some bad penalties, or just ending up in a really uncomfortable position. What’s that kind of elephant in the room that we need to talk about?

What we’re seeing is that the way audits are being done here, primarily with the IRS, although we’re also seeing some states doing it now, is that they’re using AI tools, and it’s taking this kind of human element of, “Well, this makes sense, or this doesn’t make sense.” It’s all about our things lining up. 

Implementation and proper reporting have never been more important. It almost becomes more important than the strategy because you could come up with a great strategy, but if you’re not precisely checking the right boxes, you’ve got an audit, and AI audits are brutal. You don’t want one.

Let’s talk about this. What are AI audits? What’s involved? How do you get help if you are getting audited through the AI in the IRS?

The AI audit itself is trying to match up record-keeping.

A couple of things happened. When the government shutdown happened, basically, human beings were gone, but the computers kept working. There are timelines—people might have been in the middle of audits, or they had 60 days to comply with something, but there was no way to do it because there was nobody there to answer the phone when they called. That created a large backlog and many problems that people are still dealing with. I think they’re going to be dealing with this issue for at least a year to come.

But the AI audit itself is what they’re trying to do, which is match up record-keeping. If you get a 1099, for example, saying that you’ve got interest income and you don’t report it, it’s going to get flagged, and it’s going to get flagged really quickly. The letters that have come out, the initial ones, gave you 10 days to respond. It was 10 days from when it was mailed, which means you might really only have five days left, depending on how the mail service runs.

If you don’t, it escalates really rapidly into full-blown audits. That’s one of the keys to an AI audit: it’s always based on something that’s been reported, and they’re wondering why you didn’t show it on your tax return. Then they give you a very short window, typically, to respond. The response can be as simple as, “I forgot, here’s what it should be,” or “This is the reason it wasn’t done,” and you give a good explanation of that.

You do need to respond. You can’t just ignore this, because the next step is levying bank accounts. In the past, we always had 90-day, 60-day, and 30-day letters before they took money from your bank account. But now we’re seeing that that’s even happening more quickly. They aren’t giving you all of those notices ahead of time. You wake up one morning and your bank account’s empty. That’s not fun either.

This makes it even more difficult if you’re living overseas and you’re getting your IRS mail to a PO box type situation, such as me. I live overseas. I’m in Tel Aviv. The Florida address is a private mailbox, and I don’t check that except when I’m flying into the States, which might be a few times a year. That puts me at risk.

A couple of things are maybe having somebody else get your mail, or there are services that will scan the mail that comes in, and then you can look and see what you’ve got online. I had a client whose father was diagnosed. He was terminal. He had one thing he wanted to do, which was a month-long vacation. She spent that with him, came home, and her bank account was just about to get levied because she’d missed one of those notices while she was gone. It is something we need to be careful of.

One of the things that we’re seeing for 2025, the tax year, we’re recording this in November 2025. For the tax year, the 1040 shows details at a level we’ve never seen before. For example, if you have minor children, and they have interest or dividend income, that’s called unearned income. Typically, if it’s over a certain level, it’s reported on the parents’ tax return, which is called the kiddie tax we just added. Now you have to show all these details about the child. What they’re doing is they know that there’s going to be a 1099 coming to the child, and they want to tag you into that whole audit loop. 

If there’s a problem, the parent is the one getting the audit notice and not just the minor child. It’s just fact gathering. What used to be half of a page is now a full page on the 1040, just with all of the additional questions. The detail is that they receive forms, the bank gives them a 1099, and then they see a social security number, and they want to match it to a return to see where that gets reported or not. If not, then you get that AI letter. That’s the concern that we’re looking at right now for clients and are concerned about as we move into this tax year, through the whole year.

This is only going to get worse or more extensive as AI advances and the government gets more infiltrated by AI systems. We’re going to see that this is just the tip of the iceberg. This is going to really get very serious very quickly.

The other challenge that I see is that AI doesn’t always make the right decisions. There could be a reason why it didn’t get reported. Maybe somebody has a 1099, and it’s so low that they’re below the threshold of even needing to report income, so they didn’t file a tax return. Suddenly, they’re getting a notice, “We’re going to take your money. We’re going to do all of these things.” It’s not applicable in that particular case. AI works great. I love AI when it’s controlled. But sometimes, I call it a passive-aggressive virtual assistant. You need to pay attention to what’s happening with it.

What are some of the things that you would recommend our listener do to reduce their tax liability legally and ethically? What would they do to decrease the likelihood of getting an AI audit, a regular audit, or having any kind of problems with the state governments as well? What are some of your top tips for that?

In general, we’re kind of on that AI theory, or bend here, just if you’ve got an investment anywhere, make sure you’ve got the K-1s, make sure you’ve got the 1099s that you’ve received and that those are getting reported. As a note here, if you receive a 1099 and it’s incorrect, try to get it corrected. The reality is that if you can’t sometimes, it’s very difficult to get a bank to reissue, or maybe you sold something that shouldn’t have been reported on a 1099-K. You shouldn’t have gotten this report because it was a personal item, wasn’t business-related, or involved any money transfers, and it’s wrong. But if they won’t correct it, report it anyway and then make a line item underneath it to subtract it out and explain, “This was issued in error, and I tried to get it changed.” Tell the circumstance, but make sure it’s on the top line because otherwise it’s going to trigger the program to give you a note. That’s just kind of survival tips. 

AI works great. I love AI when it’s controlled.

But how do you pay less in taxes? The best way still is by having a business and or investing in real estate. If you’ve got a business, look for all of those legitimate deductions at this moment. AI isn’t checking that at all. They’re just looking at the top line. They’re just looking at income. 

So, you’ve got expenses, now, at some point, there could be audits, and you’re going to need to prove what those numbers are. But if that happens, just make sure you’ve got the receipts and good record-keeping. I think that’s going to be moving forward into probably the next decade. The best way to save on taxes is to have good record-keeping. Interestingly enough, just recently, Intuit paid $100 million to OpenAI to have ChatGPT now working with QuickBooks. We’re going to see a lot more tools that help people do better bookkeeping. The better your bookkeeping, without a doubt, the more deductions you’re gonna have. 

The people that I see who don’t keep good records are the ones who miss out on their deductions. It’s kind of a sad thing to see that if you’re waiting till March to pull all your records together, you’ve missed out on opportunities where you could have maybe made some extra money, reduced some costs, or done some planning, as well as you’ve probably forgotten some things. That means you’re gonna pay more taxes.

What are some of the ways to more effortlessly maintain records of receipts and things like that? I’ve got big piles of credit card receipts. They’re just everywhere. I just don’t have a great system for that. I’ve never had my bookkeeper ask me for the credit card receipts because she already has access to the credit card statements. When I get email receipts, I just forward them to her, or my assistant does. That far has been a workable system, but that might have to change now.

The easiest way is to have a separate bank account, so you report business income separately from your personal income. Then your bookkeeper probably does this, your bookkeeper is reconciling that bank account. With that, there are a lot of ways you can memorize transactions so that they know that when you make this payment, it’s always for office supplies or for your monthly cable bill or your ISP or whatever.

If you’ve got an investment anywhere, make sure you’ve got the K-1s and the 1099s you’ve received, and that they’re being reported.

Now the same thing was true with the credit card. I recommend you have a credit card just for your business. Even if you don’t have the name of the business on the credit card, just make sure it’s a separate one. Like you always use your Visa for business and your Mastercard for personal. Just keep it separate. 

You mentioned that if your bookkeeper has access to those credit cards, most likely they can tell who the vendor is in most cases and what the expense is going to be. The fact that you’ve put it on a business card says this is a business expense, unless you say otherwise, and somehow you left the house, and you only have one credit card or something. 

But the better you can do at separating those things, the easier your record-keeping is going to be. One of the problems you can run into is if you commingle, a couple of things are that if you like, let’s say you’ve set up an LLC and you’re doing it for asset protection to protect your personal assets from your business, but then you commingle everything you’ve just blown through that veil of protection you can get because you haven’t properly followed what we call corporate formalities. But not only that, if you were audited and you say, “That expense is over here on this credit card.“

Now they have to go look at everything that you’ve done on this other credit card. It just opens up all these other aspects in your life that you might not want the IRS looking at. Why make your audit bigger? Try to keep it in a little box where you’ve got good records of that. 

In general, though, if there is a question, why is this particular meal going to be a deduction, keep notes on that. One thing we did see in the one big beautiful bill, which is the new tax bill, which has now been renamed the Working Families Tax Cut. 

The easiest way is to have a separate bank account, so you report business income separately from your personal income.

They did make it a little easier on some of the definitions of what’s deductible for a business, which is great for us because we don’t have to worry quite so much about all the details. However, you still need to show whether you had a meal with someone and who that person was; you don’t necessarily need to show every minute of what you talked about, but “This was a client, this was a prospect, this was a vendor, this was my advisor,” who it was that you met with, that’s enough usually with a meal as a deduction, for example.

One thing I heard at a conference was that the meal is 100% deductible unless you put it in the room. If you’re staying at a hotel and it’s included in the room charge, or you’ve billed it to the room, then you only get 50%. Is that true?

It used to be. Unfortunately, that has been reduced now to just 50%. The only time you can get the 100% deduction is if it’s like an office party, or it’s included in something. For example, if you put on an event and meals are included as part of that event, then you get a 100% deduction for those. But otherwise, we’re pretty much stuck with the 50% deduction now. What happened during the COVID years is that they increased that to 100% in most cases, and then that gradually over time expired. We’re now in that period where it’s expired.

The big hot thing right now for 2025 is bonus depreciation. That if you buy something, a piece of equipment, it’s a hundred percent deductible. For my clients who are in real estate, that’s a really big thing because they can go through and look at the property they just bought and divide out personal property items, which could be floor coverings, and the garbage disposal in the washroom, a whole bunch of things like that, and get a hundred percent deduction on those things. 

Bonus depreciation is a big deal right now, as it went back to a hundred percent effective January 20th, 2025. One of the keys for this year, 2025, is going to be whether something was purchased and put in service before or after the cut-off date of January 20th, 2025. But a 100% deduction is great. If you’re thinking about buying a computer or something before you’re in, and you’re going to buy it anyway, 100% deductible.

So that’s not going to apply in the tax year of 2026?

The better your bookkeeping, without a doubt, the more deductions you’re going to have.

It could be. If you buy it in 2026, then we’ve got that 100% deduction. The reason that’s important is that it kept ratcheting down, and it was down to just 40% as a deduction for depreciation. Now we’ve got 100%, and it’s permanent. It’s not going to expire, and it’s not going to change. It’s 100%.

That’s great. What are some of the more friendly tax benefits and opportunities that our listeners may not know about?

Think the biggest thing is, first of all, take a look at everything you’re spending money on personally and ask yourself, ‘What would it take to make this a business deduction?’ The fact is that your business having podcasts is very different than my business as a CPA. I can’t tell you exactly what’s going to be deductible for you. You might have a whole range of different things, and that’s kind of the beauty of it. One of my favorite prompts to ask AI is to describe your business and what ten weird but legal deductions I might be able to take.

I did that with a whole range of my clients a couple of weeks ago, and we got some great answers. The fact is, maybe they don’t apply to everybody, but it’s an idea to think outside of the box. What are things that might be deductible that you hadn’t thought of before? 

I think a couple of things, though, that people often miss. One is something called the Augusta Rule. You might’ve seen this on TikTok tax. A lot of people are talking about that. If you own your home, you can rent it out for up to 14 days a year and not have to pay tax, or not even report the income that you make from renting it out for 14 days. The hack on that is that your business rents it from you for 14 days and pays a fair market value for whatever the rent would be for renting a home. Most of my clients, when they start doing market research, come in at about $750 to $1,000 for a whole house rental. 

Say you want to do it for a video production of video or you’re doing it for meetings, or you have to come up with a purpose why you’re going to rent this. But it’s a deduction for the business, and it’s absolutely perfectly tax-free to the individual. That’s a great one. Another one is that, if you have any kind of business structure, like you’ve set up an LLC or an S corporation, in most cases, depending on the state, you are required to hold at least an annual meeting.

This is required in every state; corporations are required to have annual meetings. Now doesn’t have to be just once a year; it can be every quarter. The cost of those meetings is completely deductible. You could travel somewhere and have a meeting, and it’s okay if you’re a solopreneur and the meeting is just you, but you keep minutes, and there you ratify all the decisions you made. You took on this client, you changed banks, you got a new credit card, you bought some new equipment, whatever the big things that you did in the business, just ratify those in your minutes, and you now have a write-off on that whole trip that you took. That can be a great benefit. If you’ve got family members working in that business as well, they can come along as advisors or sit in on the meeting, and their costs are included.

Is this something that is maybe a little gray hat, where if an auditor looks at that like, “Well, that was mostly a vacation, and you did this little loophole thing, and we’re going to charge you penalties and interest for at least half of the trip, which was really a vacation.”  What’s the likelihood of that happening?

Thanks to our new tax bill, we now have rules: if 50% or more is business, then all travel is included, and the room costs are probably included. Let me give you an example. Let’s say you fly to New York City and you have a business day on Friday and a business day on Monday. Saturday and Sunday are included because the assumption is, I mean, unless you live in New Jersey, that it’s going to cost you more to go back home on the weekends. So, you might as well stay, and you have a business meeting or some business purpose in New York City on Monday. 

Our big hot thing right now for 2025 is bonus depreciation. That if you buy something, a piece of equipment, it’s a hundred percent deductible.

You can bracket time like that and have it be deductible. Now, just using New York City as an example, if you also go to a Broadway play, unless your business has something to do with Broadway plays, you probably aren’t going to be able to deduct those tickets. But the hotel costs, the travel there and back, meals, most likely, most of that will be deductible.

What if you take a client out to a Broadway musical? Is that going to be deductible?

Great question. We actually have a very specific case on that. In this particular case, it was sporting events. If you just go to the sporting event or to the play, it’s not deductible. However, if you have a meeting before or after that that is related to client work or becoming a prospect, or it’s a vendor, anything like that, if we can tie that in, then it is deductible. “Hey, I got a box office at this sporting event, but let’s meet ahead of time and talk about this new product we have, then it’s a deduction.”

Many little details. It’s pretty clear that you need to have a really savvy tax consultant advising you to make sure you’re drawing within the lines.

On my website, we do weekly tax updates that are free. I think sometimes it’s on the taxpayer to come up with these, because as a tax preparer who also has tax season, I don’t always have time to go through everything that might be deductible. Now, if we can meet ahead of time, that’s great. But sometimes you’re meeting in March, and the tax returns are due in three weeks, and we don’t have a lot of time to go through all of the nuances with that. I think with taxpayers, the more you know, the more you can save.

Let’s talk about AI in a very different sort of way. Let’s say you get a really convincing letter, voicemail, or email from what seems to be the IRS. These scam outreaches can look very convincing and sound very convincing because of AI facilitating this process and fixing all the typos and the grammar errors, and making it look super legit and convincing. What’s your experience with helping clients out of situations where they got scammed? Because it was supposedly the IRS, but it wasn’t.

Typically, the problem I’ve seen clients have is that they get their identity stolen. It’s often click here and enter your social security number and all this data, and then we’ll tell you what the problem is. First of all, you’re never going to get an email from the IRS. They don’t email. Now it’s possible you could get a phone call, but I recommend to my clients that they just hang up and then call again. Get the details of whoever is talking to you. They’ll give you their name and ID number if you ask, then call the regular IRS number, 800-829-1040. 

Just look it up on IRS.gov and call them; give them that ID number and that information, and you’ll find out if it’s accurate. You can also go to the IRS.gov site, and they’ll give you a list of current scams that be careful of. Just as a little tip, we get people, I’m a CPA and any of the tax professionals, we get ridiculously good-looking things that are trying to get into our system because they know if they can hack into us, they don’t get just our information, they’re going to get hundreds of clients’ information. 

There’s now a whole cybersecurity around tax professionals, so we have to protect our data really closely for that reason. I am so aware of those. I got one that I got this morning that looked like it came from my tax software company. I was like, “That doesn’t really look right.” I called them, and it wasn’t from them. But even if I hadn’t called them, I would have probably gone to their site and not clicked to theoretically go to it. I would have just gone to their site to see if there was a message for me. You’ve got to be careful.

You really do. This is a thing, too, that I never really thought about me that there would be fake charities out there. I’m pretty careful about emails from the IRS, banks, or whatever. I’m skeptical. But a charity that isn’t actually real, that didn’t really occur to me.

Take a look at everything you’re spending money on personally and ask yourself, ‘What would it take to make this a business deduction?’

It seems so sad because it’s often in the wake of some kind of tragedy, a major flood or hurricane, and “Hey, donate here.” There are ways, and I don’t remember the link off the top of my head, but there is a list of legitimate charities. 

Charity Navigator.

Even the little ones are listed there. I really recommend just checking it out and making sure it’s legit.

There’s something the IRS publishes called the Dirty Dozen—the biggest tax scam of the year, and what to be mindful of and keep your guard up against it.

For the first time ever, the Dirty Dozen now includes don’t watch social media for your tax tips, which I found hilarious because TikTok tax is like the bane of my existence. They have a little kernel of truth, but then they’ve tried to put it into a little tiny sound bite. Well, it’s kind of true, but mostly not. People can get in trouble with that.

What’s an example of bad advice from those TikToks?

Our big issue is Wyoming LLCs. That said, Wyoming LLCs are fantastic. I don’t know, have you heard all of this about what Wyoming LLCs can purportedly do? It’s an LLC formed in the state of Wyoming, which has great law, and Wyoming doesn’t have a state income tax. If you live in Wyoming, if your business is in Wyoming, you’re not gonna pay state income tax. However, you can’t live in California and set up a Wyoming LLC and not pay California tax.

That’s one that’s really big: Wyoming LLC is going to do everything in the world for you. It doesn’t; it works in specific ways. If your circumstances are right, it works perfectly, but just be careful. There really isn’t one strategy that’s going to work for everybody. 

Another one I’m seeing is that people are saying to buy their house, and instead of keeping it as a primary residence, put it in a corporation. The corporation can take deductions for it, which is fine. That is almost always legitimate as long as you’re paying a fair market value rent for it. But what you give up with that is when it sells, you don’t get a capital gains exclusion as you do with the home that you own as your primary residence. Maybe it works. Maybe you’re never going to sell, and you’re fine not having that capital gains exclusion as long as you get the deductions. A lot of people don’t realize the rest of it because you can’t put it all in that 60-second TikTok item that you talk about.

Let’s talk more about this corporate veil and the piercing of it, and how that happens, so we don’t end up getting in trouble there or opening ourselves up to getting our life savings accessible to someone suing us.

There are a couple of reasons why you want to have an LLC or a corporation for your business. There are tax savings, and then there is asset protection. I actually would probably reverse those, as asset protection is the most important. Once you have a business, if something goes wrong or even if it doesn’t go wrong and you’re somebody who’s trying to have a bad day, and they’re trying to sue you, you want to be able to stop it from getting into your personal assets or even carrying over into other businesses. That’s why we set these up.

Probably the number one issue that I see with people is that they co-mingle their funds. We need to keep our business income and expenses separate from our personal income and expenses. That’s where we have a separate bank account and a separate credit card, and we report those separately. That’s a big step forward. 

Another one, and this actually was a story, a client of mine has a large company and brought on an attorney to work just for that company as counsel for them. In one of my first meetings with him, he was telling a story about the client company he had just been in, and they were able to pierce the corporate veil because they found an email—they were the plaintiff’s attorney. They were trying to sue and trying to break through this corporation. 

They found an email where someone didn’t identify themselves as an officer of the company. It looked like he was personally acting alone. Since it was corporate business, they were able to use that to create the carpet veil. If there’s money on the line and somebody’s suing you, they’re going to look at everything. Make sure that you identify yourself as an LLC, and that you’re the manager of the LLC. If it’s a corporation, you’re the president or the CEO, or you’re showing some kind of title so that you are not just acting personally, but you’re acting on behalf of the company. That’s for any kind of advertising that’s in your email. That’s when you sign a contract. Just always hold out that you’re doing those things.

In general, you just want to make sure that it looks like you’re operating like a business. Don’t forget that annual meeting. It sounds like it’s kind of silly, especially if you’re a solopreneur and the only person, but every state in the US, no matter where you formed it, requires an annual meeting. Some states also require the LLC. We just recommend that all our clients, just have an annual meeting, no matter what kind of business structure you’ve got. It’s a write-off. Why wouldn’t you?

This is a selfish question, but is a Florida LLC required to do an annual meeting?

They aren’t required, but I would do it again for the same reason. Florida hasn’t had a lot of audits in general. There are some states that seem to attract IRS attention. Florida hasn’t been that. But I’ve seen a lot of people who are moving offshore are using Florida addresses. Since that is something that the IRS has been looking at, I have a feeling we’re going to see an uptick in Florida. I would just make sure everything’s clean.

There are a couple of reasons why you want to have an LLC or a corporation for your business. There are tax savings, and then there is asset protection.

Let’s change topics and go into AI for not just tax savings, but also business growth and all sorts of things that you’re seeing for your clients and for your firm. How are you using AI? How are your clients using AI in novel ways that aren’t just like, “Write me a business plan,” on ChatGPT? It’s more like a really clever way to get generative AI to produce something of value, reduce costs, or reduce tax burden or liability.

I personally use ChatGPT a lot. I also use Claude and Gemini a bit. Gemini to me works great if you’re trying to write a little program. But with ChatGPT, for me in my business, often, these are the things that we have going on. Where do you see additional income sources? Or where are areas that I should be concerned about cost-cutting? I do onboarding through ChatGPT when you bring on a new client. Something that went from 5 hours is now 15 minutes. It is just amazing. There are a lot of bookkeeping functions that you can use.

What I’m seeing with my clients who use it a lot, they are using it to think and to research. One client is launching a new business, and he was using Gemini for it. He’s using that to look at doing research on where the holes might be in the market, where there’s a lot of demand, just in general in this new business, where are the opportunities? With Gemini, you can ask it to show its work. He’s fascinated with that. He’s seeing what the things are that are important in determining where you got to that point? 

Another client of mine is interestingly enough seeing AI make inroads into her business. She’s looking at, “Okay, what are the talents that I, as a human being, need to focus on more and stop trying to compete with AI that other people are using?” She’s changing her business. She’s using Claude. She has long conversations because it’s going to be a big change in her business and what she’s creating, her marketplace, and trying to differentiate herself from AI. 

I think that we are all using different forms of it in different ways to help us be more active in our business.  I was concerned, and I still see this a lot, that AI will do away with all accountants. I don’t believe that at all. I do believe that probably a lot of the more basic functions, like reconciliations and coding, bookkeeping, can be handled by AI. But any of the strategic decision-making that is still needed by human beings. I’m looking for how I can be smarter with it? At the same time, I don’t want to be doing something that I know AI is going to replace me.

What does an AI-enabled CPA firm look like?

Personally, I have a tab open with it where I was talking about it. I do get letters written and emails written for me through ChatGPT. Additionally, this is the focus I want to take with the website and new branding. Tell me what colors, fonts, all of those things that we should be thinking about that match with the mood we’re trying to create in this new site, give me some ideas of what pricing would be and what kind of competition is out there. 

In my world right now, I’m actually working as an expert CPA for a larger firm, not a tax firm, but it’s a business; they provide business services. They’re having AI-generated blogs that sometimes are wrong. 

What’s become a really interesting part of this for me is I’m looking at blogs that tax changes rapidly, and often we’re seeing that AI doesn’t keep up with that. You have to be really careful with your prompts. More than anything, I think for me, everybody in my firm knows what the prompts are. We tell it, need to look at which is very specific, before we ask any tax questions. These instructions include: “Please look at these recent bills and IRS instructions.”

It’s a fast-moving world, isn’t it?

Just a story here. Right now in my world, there are headhunters out there looking for experienced tax managers at a higher level who all they do is review AI-generated tax returns. A colleague of mine took one of those jobs, $250,000 a year, and he quit after two weeks because he said it’s hopeless. “I can’t do this.” That’s kind of like, “I think I’m set in my field for a while because AI is struggling.” 

With tax returns, there’s often a bit of art to how you do them. It’s not a gray area. It doesn’t mean you’re going to get audited, but you just need to be careful how you position things and where you report them and how.

Let’s talk about some of the significant changes that have happened since we did our first interview in 2019. What are some of the things that people need to do differently, plan differently, that we haven’t already talked about? 

Back in 2019, it was a very different sort of world. You were talking about different strategies, and I remember a book you’d read called Taxmageddon 2018: How to Brace for the Trump Tax Plan. I guess that’s old news now.

I’ll keep calling it the one big, beautiful bill, because not everybody knows the new name. But what we got with that is it made a lot of the things with that Tax Cuts and Jobs Act of 2017, effective January 1st, 2018. What it did with that is it made those permanent.  Before that, they were phasing out, and so there was a lot of uncertainty. We now have certainty, unless Congress changes it, which takes a process. But that means that we can act a little more confidently, and in some ways, it’s made things easier for business owners. For example, a cell phone was considered a listed property. We used to have to actually track how many personal minutes versus business minutes.

I don’t know how many people actually did that, but that’s what we were supposed to do, and only the business portion would be deductible. Now the rule is that as long as it’s required for business, maybe you’re using it to make your phone calls, you don’t have a landline, or you have some kind of business that requires you to be on call, so you have to have it, even if you’re not using it that often, it’s just that you need a cell phone because you’re a plumber, and somebody might call you out on a job. 

Reconciliations, coding, and bookkeeping can be handled by AI. But any strategic decision-making is still needed by human beings.

If that’s the case, it’s 100% deductible, even if you’re using it personally for more than 50%. As long as you’re required to have it for your business, it’s a deduction. That makes it a lot easier to track. The same is true with your computer and all the incidentals that go with it. As long as it resides, most of the time, in a business location, which can be your home office, it’s a complete write-off. You don’t have to say part of it’s personal, part of it’s business.

What we’ve seen is that things have gotten a little easier for business owners. Now that said, I think it’s gotten harder for people who are W-2 wage earners. That’s why I keep saying start a business, because that’s where the deductions are. There’s not a lot you can do anymore if you’re a W-2 wage earner and you don’t have some other way, a side business, some real estate investments, something that allows you some write-offs. Otherwise, you’re going to pay the highest taxes there are.

What if our listener is a wage earner at somebody else’s business? What’s a legitimate way they could set up a side hustle that really doesn’t take a lot of their time because they’re busy working full-time for some corporate entity that they’re not a shareholder in?

I would say anything that they’re interested in, that they’re good at, that’s a little different question than what I’m getting recently, is like Gen Xs who are in their 50s, they’re too young to retire, they’re not financially set, and yet they’re too old to go find another job. Suddenly, they get laid off. They need to immediately start making some money. My advice would be different for them than for the person who’s just looking for, “I need to do something different.” Maybe start with your interest? 

A client of mine who really liked to sail had a sailboat. His friends always asked him, “Which thing do I need? What’s the best brand for this?” He wrote a blog about that, took a lot of pictures, and included things like, “This is a better widget than this one because of these things.” Now, as a result, whatever that widget is, that became a deduction for him. He then was able to write off a hobby, basically, but he was doing it in a way that was clearly monetized. He set up his blog, and he had a link to it. If anybody bought or clicked on the link, he could make some money. It’s monetized, and therefore it’s a deduction.

We see a lot of YouTube guys doing that these days. I got to say, YouTube is a difficult way to make money unless you have something on the back end. But it might be an easier way to monetize if you’re trying to find some way to kind of get your foot in the door, try some things out. Who knows? Like this guy, you might end up with a sailing business. He did. He ended up with a sailing business. He did charters. Let people rent his boat; he was doing things that actually grew into a real business.

That’s cool. In that scenario, where you said a Gen X person in their fifties gets laid off, they’re having a hard time getting a new job. They have to pivot quickly. What would you recommend to that person? How do they start getting some income quickly?

In most cases, they probably won’t be able to replace the income they had before, at least initially. But to look at it this way, the money they bring in buys them time, as opposed to building up wealth to retire on, which just means they don’t have to start drawing on their retirement funds. With that idea, most likely it’s going to be something service-related and something that they can do in real time. 

It’s not going to be an online project because those typically take time, they take lists, you gotta build a funnel. Not that you can’t do that, but for most of them, they have a more immediate need. Look at where there is a need that they know how to fill. Depending on what they were doing before, maybe it’s helping write resumes or helping with search or prompt engineering. They’re really good at AI, and they help other people do that.

I have a friend who was in marketing for a business, and she started a business by checking other marketing companies for big companies. They come in, and they hire some marketing companies and say, “We’re going to increase all your sales, and you just need to pay us a couple of hundred thousand dollars.” She comes in and looks at the actual results. She analyzes it as a third party. Completely came up with this business herself when she reached a point where “I just lost my job,” but she knew marketing, and she knew these programs because she used to sell them, because she used to be in that spot.

What is it you do, and where do you see an immediate need that can get you a paycheck in the next month? By paycheck, I don’t mean W-2 income. The advantage with that is that just in general, if you make $50,000 as an employee, you’re going to pay X. If you make $50,000 as a business owner, you’re going to pay usually $10,000 less in taxes. You get a raise right away when you switch from that W-2 income into business income because of all the write-offs you’re gonna pick up.

With tax returns, there’s often a bit of art to how you do them. It’s not a gray area. It doesn’t mean you’re going to get audited, but you just need to be careful how you position things and where you report them and how.

Because the cell phone is now a business expense, and all these other things that you’re just paying personally.

All the tech, your home office, your car for business use, meals, trips, and whatever you’re doing that we can tie back into the business. Those are all deductions now.

A percentage of your house can be business-related because you have one or two rooms dedicated to your business.

That’s true even if you’re renting. If you’ve got a rental house and you’ve got one bedroom that you’ve turned into an office, and it’s 20% of your house, then 20% of that home rent is a business deduction.

That’s great. What do you think about a universal basic income? I know it’s not here yet, but in this AI era we’re entering, supposedly, all these people are going to be out of jobs because AI will do it better than most of us. UBI is going to be the way people will eat, I guess. I don’t know. It seems kind of sketchy right now, but we’ll see how it unfolds. I’m curious what your take is on that.

I just remember Andrew Yang. He had that whole campaign that the robots are coming, and then instead, we got COVID. It was 2020, whichever election. It was my first time running into UBI by somebody I would consider a capitalist, primarily. His argument made a lot of sense that there needs to be something that keeps the economy running. The US economy has a lot of things going on that are changing GDP, unemployment, and inflation numbers, and there are lots of things moving. 

I don’t know if UBI solves any of those right now, but in the long picture, I think there might need to be a way to keep the economy going. I personally would love it if people who are working, who find their jobs gone because of AI, get some kind of training so they can do something that makes them money that they can feel good about and that makes them still productive. That’s my fantasy world. I don’t know if that’s gonna happen.

One thing that I’m sure our listeners are seeing, I’m seeing it, is that things cost more because of inflation, and it’s not just a small amount. It’s like, stuff you get at the grocery store is double what it was a few years ago. It’s crazy. What’s your take on this? How do you protect against the money printing and all the inflation that’s happening and the eroding of our wealth that is sitting in our bank accounts?

It’s interesting, kind of the new term in my world, the tax planning and strategy world, is medical migration. Are you familiar with that term? What’s happening is lot of us, beginning November 1st, people started finding out how much their medical insurance is going to cost. 2026 is just a shock for a lot of people. Forget 10 or 20% increases; people are seeing their premiums double and more, and they simply can’t afford it.

What happens is people drop their insurance, and it just becomes a snowball effect, because if people are dropping their insurance, especially if they’re healthy and don’t need it, that changes the demographics of these groups. That means the only people getting insurance are the ones who are going to use it a lot, which means the premiums go up even more. Medical migration is the term for people who are moving outside of the US to countries where medical insurance and medical healthcare are cheaper. 

In my world, I’m seeing that people who are generally speaking middle to high middle-income earners are still making money, and they’re doing it online, and they can move. They’re moving to countries where it’s cheaper. A client of mine went to Portugal, and the stories he tells, he has three kids, and he went from paying, I don’t know, $1,500 a month or something for his insurance. Now he said, “Well, somebody had an emergency, and the doctor came to their house, and it was less than $20 US to get them.” The kid had to be stitched up. I don’t know, it was bleeding or something. The doctor came to their house and handled that for just a small amount of money. They also have insurance, and it’s much, much cheaper. 

Medical migration is kind of the buzz thing that’s happening in my industry, with people who have income sources that allow them to move to another country. They’re looking at a whole range. Portugal seems popular, as do Spain, Thailand, and Mexico, where medical insurance is very cheap or medical health care is.

Do you have any plans to move overseas?

Medical migration refers to people moving outside the US to countries where medical insurance and healthcare are cheaper.

Well, actually, I’m talking to you right now from our Baja California, Mexico ranch. I am in Las Vegas, and then we also have a small family ranch, which is along the Pacific, on the Pacific side of Baja California. You can’t see it, but if I open that curtain over there, I see the ocean. My husband, who is very into sustainable energy, collects rainwater, and we recycle rainwater. We have fruit trees. My hobby is beekeeping, and we have bees. We have our little farm here. We also have the city in Vegas. That’s where my office is in Las Vegas, too. Although most of my work now is just online, it doesn’t matter.

Wow, that’s cool. Are you able to claim part of your home overseas as a write-off or not?

It’s interesting that when you own real estate, and we do, rental properties, that you get very similar write-offs if the rentals are in another country. Depreciation laws are a little different, but even if we sell this, we still get that capital gains exclusion if you’ve got the gain. For American taxpayers living in other countries, many tax benefits remain the same. But I can take a home office deduction here and deduct all of those costs.

That’s great. How did you get into beekeeping?

Isn’t that funny? I’m actually third generation. My grandpa and my dad both had bees. I kind of grew up with that. Never had them before, but now that we were here in this property. We don’t have a lot of neighbors around us. Nobody’s going to get upset if I put some hives here. Our son has learned it. My 13-year-old granddaughter also goes out and helps with the bees. Everybody’s got bee suits, so we’re all fine.

Bee suits, that’s awesome. Why did I not ask you that I should have?

Now you know about beekeeping more than you ever wanted to know.

I think it’s great. I think it’s such a wonderful hobby that makes the world a better place. I can’t encourage that enough. Hobbies that are doing damage in the world. I’m a vegetarian.

Me too.

I’m not going to go on about hunting or anything because. Some of our listeners probably are hunters, whatever it is that is not great for the environment or just neutral for the environment, here you’re doing something that’s a hobby that makes the world a better place. That’s cool.

I could go on and on about bees because it’s interesting that they are such a community, and once they know who you are, that hive knows you for the rest of their lives. The next generation they teach who you are. There’s a cohesiveness with that, and it’s kind of a community, if you will. 

I think maybe that’s a psychological advantage in today’s world, where we see so much distance and separation that whatever it is, if we can include a community together with humans as well as animals and insects, then I think it makes our lives happier.

Was there anything that I should have asked you, but I didn’t?

Just a comment, if people want to find me, I’m at ustaxaid.com, and you can sign up for free for the tax updates on a weekly basis. Just go to my site and take a look.

Why is it called USTaxAid?

Just in general, I have a number of clients who are very wealthy, and I see what happens with them. They get people like me, as soon as a new tax bill comes out, and we tear it apart, and we find out all the legal loopholes, the ways they can make money. It’s absolutely true when people say, “That’s a bill for billionaires and billionaires love it.” But the thing is, the same things are there for anyone who does the same things. Have a business.

To get the things you can, set up the right entities, run them correctly. Anybody can get those same write-offs. That’s what USTaxAid is all about: taking the same things I talk about with my really wealthy clients and distilling them down so everybody can use them. Anybody who wants to make that change, they’re all available for them.

That’s awesome. Thank you so much, Diane. That was a lot of great advice and suggestions. We have to disclaim this. It’s not tax or legal advice. You have to consult your tax professional, etc. It was a great idea for our listener to reduce their tax liability and improve their chances of being squeaky clean when it comes to AI audits and regular audits, too. Thank you for that.

Thank you.

All right, and thank you, listener. Now take this information and do something with it, and share it so that others can benefit as well. We’ll catch you in the next episode. I’m your host, Stephan Spencer, signing off.

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