4 Ways To Protect
Entertainers From IRS Meltdowns
By Ama Sarfo
Law360, New York (March 07, 2014, 6:06 PM ET) -- Rapper Lil Wayne has reportedly been slapped with a $12 million IRS tax lien, joining a long
list of entertainers like actors Lindsay Lohan and Wesley Snipes who've butted heads with the agency.
Entertainers and athletes often have erratic
pay schedules that complicate their IRS filings,
but with careful guidance they can avoid
missed taxes, experts
say.
Self-employed people like entertainers often run
into tax trouble because they receive money from several
different sources, and good advice is hard to come by, according
to tax attorney Cary Bryson of Bryson Law Firm LLC. And those
issues are intensified when large sums of money — and fame — are involved, experts
say.
"A lot of athletes and entertainers are so proficient at the area of their choosing that they
don't necessarily have a good handle on business, and they trust a lot of business
issues to individuals who
aren't looking out for their best interests," said Bradley Dorin, a tax
attorney with Selig & Associates Inc. "They often sign things they don't even read. You see that in other walks of life as well,
but when it happens with celebrities, it's a news curiosity."
Here are tips experts say are indispensable when helping entertainers and athletes secure their taxes properly.
Create a Corporation
People who hit monetary windfalls — like lottery
winners or inheritance recipients — often squander their funds because
they're unfamiliar with handling large lump sums of money and overestimate the money's staying
power. Then, when it's time to pay taxes, they receive a rude awakening. Entertainers and athletes
are no different, experts say.
"Often, there's no real preparation prior to
the monetary event," said Timothy Speiss, partner-in-charge of EisnerAmper's personal
wealth advisers group
and vice president of EisnerAmper Wealth Planning LLC. "And then, there's a
lot of people the athlete or entertainer has to manage and pay. In the case of athletes, whose average playing
career lasts three to six years, they also have to think about their
lives after sports. Those are factors that make entertainers and athletes more
different to serve than a CEO who has probably been on a trajectory to make a
substantial income for a lot longer, and has learned a lot of things along the way."
Tax attorneys can prevent clients'
fortunes from imploding
— and keep enough money to
pay tax bills — by setting up corporations or limited liability companies that
pay their clients wages, which
are taxed every
paycheck, experts say.
"My suggestion is that such clients establish
themselves as an LLC, and then within the
LLC, they create a corporation so that there
are two parts
to the LLC — themselves, and the corporation," said Howard Krant, a certified
public accountant who handles entertainment
and sports clients
for advisory firm Adeptus Partners
LLC. "If there's
only one person in an LLC, then it's considered to be a disregarded LLC."
Krant says entertainers and athletes should
replicate that structure for all of their business needs.
"They should copyright songs under a different corporation for liability purposes. They should create separate touring companies to accumulate
income and expenses for particular tours," he said. "They should do
this from a liability perspective and a tax perspective."
Some people say this kind of structure is
inefficient because clients then have to pay withholding taxes, but Bryson says those payments are well worth it when avoiding IRS audits.
"I'm more interested in getting the income taxes paid," he
said.
Meet Quarterly — at the Least
Experts resoundingly say that tax attorneys and
other members of an entertainer's financial team should establish formal quarterly meetings
at the very least to discuss old business, new business and
recurring issues.
"If you aren't
talking to your clients but for every
six months, you should be fired," Speiss said. "A lot can happen in
six months. This is a very interactive process, and with some clients, we talk to them several
times a week.
You need to be very close to your client
— they live in a very fast-paced world. If you don't talk to them, you could miss something."
Such meetings should
be attended by tax attorneys, financial advisers and all essential stakeholders in the client's
career, experts say.
And those meetings
are the time to shine a bright light on investments and activities that typically land entertainers and other
high-net-worth individuals in tax trouble, like sophisticated investments that
aren't right for a particular client or management issues within a client's corporation or foundation, Speiss
said.
Investment and foundation management issues are particularly important for entertainers and athletes, who are particularly susceptible to scams.
Just a few months ago, the U.S. Department of
Justice said a Chicago attorney who allegedly
helped professional athletes
and wealthy attorneys fraudulently claim $16 million
in tax credits cannot represent or advise clients on tax matters
or prepare tax returns
for individuals outside
his family.
Some of those
individuals included NFL
football heavyweights like
ex-Ravens star Ray Lewis and former Tennessee Titans
defensive end Jevon Kearse, according to court documents.
Seek Trustworthy Financial Advisers
Tax attorneys who have been entrusted to help find a financial adviser
for a famous client
should obtain at least three
references for each individual under
consideration and ask for
the adviser's client service plan,
Speiss said.
Attorneys should also inquire about more complex
fact patterns the adviser has seen, he added.
This is on top of routine inquiries attorneys should make into the adviser's billing
practices and protocols, educational credentials and licensing history, experts said.
And attorneys should also look for advisers
who are inquisitive and willing
to look beyond the numbers, said Angie Bryson,
also of the Bryson Law Firm.
"The biggest complaint that some clients
have is that their advisers
aren't proactive," she said.
"Many self-employed individuals inherently
have tax issues because they get a lot of money from different sources,
and they just get bad advice," Cary Bryson said.
"So many people are trying to take advantage
of them."
Settle Administratively
Celebrity tax woes make the news when attorneys let
the matters get out of hand, meaning the impetus
is upon tax attorneys to keep their clients' cases out of the public domain, Dorin said.
That's why attorneys need to be proactive in
dealing with state and federal revenue agencies to settle any problems
administratively, before a prosecution comes about.
"There are more entertainers in trouble than you'd think,
but the best attorneys strive
to keep those matters
quiet, and that's why you don't know about them," Dorin said.
"One thing my practice does is to vigorously
represent in person. We don't fax things, write in and allow things to lapse
and proceed to tax court," Dorin added. "We're at the IRS and state
revenue offices on a daily basis. We make sure that we're there to immediately deal with revenue
officers and make sure that our clients'
issues don't become a
matter of public record."
--Editing by Jeremy
Barker and Katherine Rautenberg.
