I Guess You Don’t Get to be The Most Successful R&B Artist of the Past 25 Years by Paying Your Taxes

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photo via guardian.co.uk

Most celebrity tax debt stories are pretty boring.  They’re boring because we have no details.  Usually we are limited to the information in the notice of federal tax lien (FTL), which includes little more than the years and the dollar amounts that are owed.  It’s not until after the tax debt is made public that juicier details begin to emerge.  Sometimes in the aftermath the celebrity taxpayer makes comments publicly about the tax debt, and we learn something about why/how the celebrity got into trouble.

Of course, most of the time if there is any public comment, it is something that has been carefully written by the star’s attorney; something like what R. Kelly’s spokesperson said:

R. Kelly is in the process of working everything out with the government and is confident that all his obligations will be satisfied.

Most of the time we are left to read between the lines and make our own (unreasonable) assumptions.  One of the assumptions I have made on ocassion is that the reason why celebrities incur big tax debts is they are on a downward spiral in popularity, marketability, . . . star power.  They have a hard time accepting this and modifying their lifestyle accordingly.

Oh, did I mention that R. Kelly owes about $4.8 million in back taxes?  It’s true; except my theory falls apart in this case because R. Kelly seems to be doing fine career-wise.  It’s impossible to tell for sure how he is doing financially, but his star power seems to be intact and he is keeping busy.  Maybe the “most successful R&B artist of the last 25 years” just has other priorities besides the IRS.

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Idaho Legislator Owes $500k to IRS

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photo via boiseweekly.com

Here’s one that TMZ missed.  Not enough star power.

Idaho legislator Phil Hart is not giving politicians a very good name.  He is a tax protestor (one of those eccentric believers in unfettered freedom to do what they please which often includes taking the position that the federal income tax is unconstitutional).  Many tax protestors believe that payment of income tax is optional, and Phil Hart has definitely exercised the option to NOT pay.  Now his federal and state tax debt stretches back to the mid 1990s.

Hart’s tax problems have been public for some time now, but new details emerged when he filed bankruptcy last month.  The bankruptcy filings reveal that his total debt is over $600,000 and over $500,000 of that represents money owed for delinquent federal income taxes.

We also learn that (according to Mr. Hart) 100% of his income was subject to wage garnishment during the past seven years.  I wonder if this is accurate because the IRS isn’t supposed to take 100% of w-2 income.  Maybe the feds were taking their share, then the state was taking the rest.

And finally, we see that Rep. Hart was basically hiding assets to steer clear of the IRS.  He put his property into a sham trust to try to keep it out of the hands of the government.  But the Dept of Justice sees right through this; the IRS will undoubtedly get at least some of what is owed from the sale of this property.  See full story here.

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IRS Debt Collection Practices Deemed "Fair"

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image via taxprof.typepad.com

The latest audit conducted by the Treasury Inspector General for Tax Administration (aka TIGTA, aka “Big Brother”) looked for instances of harassment, oppression, and abuse in the tax debt collection practices of the IRS.  But I don’t think they looked hard enough.

According to the audit report:

 [T]here were no cases involving Fair Tax Collection Practices (FTCP) violations for which an IRS employee received administrative disciplinary action in FY 2011, and no taxpayers received civil damages for an FTCP violation.

Ok fine, but what does that really say about IRS debt collection practices?  The conclusion that was drawn in the report (and the same conclusion that has been drawn year after year in this annual report) is that “taxpayers have reasonable assurance that communications with the IRS in connection with the collection of unpaid taxes generally did not violate the FTCP statute.”

So, let me get this straight.  Because no IRS employee was disciplined for harrassing taxpayers and because no taxpayers prevailed in a civil suit under the FTCP statute, then we are to assume that everything is on the up and up?  This is pure ridiculousness!  From my point of view (my point of view being a tax attorney who has clients come to me on a regular basis complaining about how they were treated by IRS personnel), all this statement means is that IRS management is either too conservative with their discipline, or they are actually going out of their way to protect employees who cross the line.  And as for the finding that no taxpayers have received civil damages for a FTCP violation in 2011, well . . . geez, could it be that it is practically impossible to prevail in a civil suit when the claim is that an IRS employee abused his authority and chewed you out?

This report is a slap in the face for those who have been treated unfairly by IRS employees.

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Will North Dakota be the First to Eliminate Property Tax?

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Voters in North Dakota will decide tomorrow whether or not to abolish property taxes in their state.  If the ballot measure is approved, North Dakota would be the only state in the nation to extend full and complete tax relief to property owners.

Many of those who support the ballot measure view property tax as a type of encumbrance on their property that limits ownership rights.  They believe if you’ve paid in full, then you own the property, and there should be nothing in the present or the future that would threaten that ownership — not even failure to pay a tax associated with that property.  Furthermore, North Dakota is one of the few states not feeling the effects of the recession, and proponents feel confident that the state will not miss the $812 million in property tax revenue.

But the opposition has been well-funded and the measure is not expected to pass.  The arguments against the ban on the state’s property tax really come down to fear of change.  How would the state make up for the lost revenue?  What effect would this have on myriad other state laws and regulations that reference the hunred-year-old property tax law?  It is irresponsible; somewhat akin to quitting your well-paying job as soon as you get ahead a little.  But maybe voter trepidation will save North Dakota from falling into debt like so many other states.

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Dolce & Gabbana Face Tax Evasion Charges

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image via bombod.com

Italian fashion designers Domenico Dolce and Stefano Gabbana allegedly owe in the neighborhood of 1 billion euros in back taxes (that’s equal to $1.25 billion this side of the pond), and of course they deny it.  I’m sure they’re innocent, since Italians are so good about paying their taxes.  FYI, the only nation with more tax evaders than Italy is Greece.  Here is Gabbana’s well-reasoned tweet from earlier today:

Everyone knows that we haven’t done anything.

With 140 available characters that’s all he could say for himself!?  I wonder if Dolce is any brighter than Gabanna.  The Italian tax authorities have beeen investigating the two since 2007.  A lower court acquitted them, but the government appealed, so their quest for tax relief continues.

Based on the designs pictured in this post, Italy should consider taxing D&G at an even higher rate.  Maybe if they taxed these designs like cigarettes it would discourage anybody from wearing them.

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"The Misprosecution of Lauryn Hill"

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photo via escobar300.wordpress.com

Taxpayers often call us in a panic because they have received a threatening letter from the IRS and they are one step away from a wage garnishment or a bank levy.  Our clients come from a variety of experiences and backgrounds, but they all have one thing in common: they owe the IRS and can’t pay what they owe.  And many, if not most of our clients, also have missing tax returns.

What are the typical repercussions for failing to file a tax return?  The IRS will send notices asking the taxpayer to file, maybe assign a Revenue Officer to secure the return, possibly file a Substitute for Return, assess a failure to file penalty, etc.  As for criminal prosecution, I’d say it is pretty uncommon.  In fact, failing to file on its own is not criminal; there must be some additional affirmative act to elevate the misconduct to a felony.

I was surprised to hear about Lauryn Hill’s tax troubles today.  She has been charged with failing to file her 2005, 2006, and 2007 tax returns. None of the reports say what the “extra something” was in Hill’s case. My best guess for now is that she simply fits the profile of people they like to prosecute as a public spectacle (i.e., a downward trending musician with an extra large tax bill) and the IRS isn’t about to let her get away with it.

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Clinton & Obama Clash on Tax Cuts for Wealthy

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image via jayperoni.com

Bill Clinton disagrees with Obama about what should be done about the tax cuts that are set to expire in January 2013. Obama’s position is that they should be renewed for people earning below $250,000.  The former president believes we should extend tax relief across the board for all Americans (at least for now) regardless of income levels:

What I think we need to do is to find some way to avoid the fiscal cliff, to avoid doing anything that would contract the economy now, and then deal with what’s necessary in the long-term debt-reduction plan as soon as they can, which presumably will be after the election.

~ Bill Clinton on CNBC’s “Closing Bell with Maria Bartiromo”

It’s hard to imagine there’s another potential “cliff” in our future, but I certainly would not doubt it.  Letting the tax cuts expire completely would be akin to running along the edge of the cliff blindfolded.

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An Academic View of Tax Fraud

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A new book by Duke University professor, Dan Ariely, may shed some light on why so many people looking for tax relief tend to cheat on their income taxes.

The book is called The (Honest) Truth About Dishonesty: How We Lie To Everyone — Especially Ourselves. I should point out that, as far as I can tell from the 8 minute NPR piece that I heard yesterday, this book has nothing to do with taxes. But some of the conclusions drawn from one of his cheating experiments really seems applicable to tax cheats (including those looking for a way to overcome their tax debt and those simply looking for a windfall).

The experiment went something like this: people were given a number of simple math problems and were told that they would be awarded a dollar for each correct answer. At the conclusion of the quiz,and after the correct answers were given, the participants were instructed to go to the back of the room and shred their answer sheets. What they didn’t know is the shredder was rigged so that it only shredded the sides of the paper (so the experimenters could go back and check their honesty). Ariely found that many people were ok with fudging their scores to earn a couple extra bucks.

Then the experiment was altered slightly and the participants, instead of being paid directly for their correct answers, were given tokens which they cashed in for money nearby (1 token = $1). Ariely found that adding this extra step of separation increased the dishonesty of the participants.

The moment something is one step removed from money … people can cheat more and [still] feel good about themselves. It basically relieves people from the moral shackles.

~ Dan Ariely, Duke University

Then one additional variable was added to the experiment. One of the math quiz administrators was pretending to be distracted by a cell phone call in the middle of his instructions. As you might have guessed, Ariely found that this resulted in even more drastic cheating. Apparently, if people can come up with a good reason for cheating (i.e., like somebody was being rude by talking on their phone at an inappropriate time) then it’s that much easier to cheat.

Too many taxpayers fudge their numbers to get a bigger refund. Maybe people feel ok about doing this because the process seems so far removed from the government’s money. AND maybe they feel it is justified because they have been mistreated by The System at one time or another.

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Cleveland Lady Returns $400k IRS Refund Check

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The IRS recently issued a $400,000 refund check to a little old lady in Cleveland who was supposed to get only $700 back.  Some IRS employee somewhere is getting chewed out and/or fired over this, right?  Actually, probably not.

Everything at the IRS is automated.  It wouldn’t surprise me to learn that this was the result of a computer glitch or identity theft of some kind.  When the computers read the returns and the computers write the checks, it’s hard to place the blame on any one individual.

To avoid any potential tax problems, the taxpayer’s moral compass lead her directly to her local IRS office to return the check, and I can only imagine the fiasco that ensued.  The sources that reported this story say she was required to confirm her identity before the IRS would accept the check or even talk with her about it.  But once she turned it over, I bet it got passed around that office like a hot potato.  I’m sure the managers spent the better half of their work day trying to figure out what to do with it.  And I’m sure all the other employees wasted the rest of their day making jokes or talking about how they might have spent it.

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