Hello loyal readers! The glitz! The glamour! The Bling! Celebrity scandals are always a hot topic, be it romance, divorce and even tax evasion. Recently Mr. Robert De Niro had a tax issue and the gossip columns went nuts. De Niro was able to smooth things over as an innocent mistake, but incredulous fans were incredulous. How is it that these celebrities and athletes, make so much money and are forever in the news for not paying their taxes? The truth is if you delve into the life of a successful celebrity you will see the reason is not just criminal or stupidity (though those can be true), and us regular folk can even learn something from these mistakes.
As this topic can be lengthy I have decided to split my posts into "Episodes" so that someone actually reads it. So let's peek behind the curtain shall we?
Let's begin with Episode 4 just like Star Wars did:
4. Big Bad Advisors:
In general celebrities are artistic beings. This means that they hate their dealing with their finances so they prefer for other people to handle these tedious details. Those blessed with success can go from being in mounds of credit card debt to having millions in their bank accounts over-night. These two ingredients create a need (rightly so) to put their money in the trust of another. Leaving aside the "buddy" money manager who is trusted with finances for no reason (which is a terrible idea BTW), celebrities are TOLD who to trust. Between an agent, manager and publicist the celebrity mentality is to add another to the list without much verification, because their agent told them to. The issue is that one shady broker, ignorant accountant or thieving advisor can bring the whole house down quickly. So while a celebrity may believe that their "advisor" is "taking care" of their tax issues, they are woefully unaware of what is going on and therein lies the danger. The IRS does not consider "my accountant said so" a viable excuse for not paying your taxes. Though every celebrity from Nicolas Cage to Wesley Snipes has attempted this excuse, it simply does not work for tax issues. We are all grown-ups in the eyes of the IRS and it is our responsibility to know what is going on in our financial lives. Us regular people are just as culpable in this mistake as we routinely follow the advice of someone we perceive as competent without question. The IRS holds us all to the same standard. Know what is going on in your financial life, ask questions often, and double check the work of others.
5. Every day is awesome! Like winning the lottery:
Movie stars, athletes and stadium packing musicians can take home a large payday in an instant. Oftentimes one or two big checks per year is what an average successful star can legitimately bring home. Now a multimillion dollar payday on a Tuesday may sound pretty amazing, but remember they must then manage that money wisely all year long, without knowing necessarily when the next payday will be. The rest of us normally get paid in regular cycles, our taxes are withheld, so budgeting and tax separations are built into the process of payment. Not so for celebs who can make a million dollars, and blow it on a weekend in Vegas. For those judging the spending habits, remember that celebs are regular people who win the lottery, and considering that the majority of lottery winners go broke in a few years, it is completely normal for the spending habits to be extreme. When you overspend without knowledge of the next payday, taxes are the last thing on your mind.
6. Records are for Losers
As previously mentioned, most celebrities do not have their taxes withheld, they are self-employed which means they do not receive a Form W-2. As such they can't complain about their FICA reductions like the rest of us. As any self-employed person can tell you, the key to paying your taxes is in the deductions, and as any tax planner can tell you the key to deductions is having the proof to back it up. When a regular person is deducting expenses they are the regular normal expenses nearly every business utilizes to survive. Not so for celebs, their business expenses are varied, wild , unconventional and center around the vague "Meals and Entertainment." Additionally they are all mixed up without much record keeping or schedule cross reference. A hotel stay or airfare in the course of networking for a gig can be deductible, and maybe even drinks for such a prospect. However the round of drinks that was bought for their 50 favorite friends in the back room at NYC's priciest club is not. These expenses get all mixed together on one credit card, without any idea of who spent for what. Deductions for "meals and entertainment" are limited to 50% of total expenses, and the IRS loves to pounce on those going over the limit. Proving that you have stayed in line with the cap is paramount when utilizing the "entertainment" deductions. However as a celebrity proving these deductions can become nearly impossible, and provides the IRS license to disallow these expenses across the board.
To be continued...Dum Dum Dummmm...
Benjamin Goldburd is an Associate at Goldburd McCone LLP a boutique tax law firm in New York City.
For more information on these and other tax issues feel free to contact our offices at 212-302-9400, or on the web at www.goldburdmccone.com