What do Chris Tucker and Willie Nelson have in common? The comedian and the singer have both had run-ins with the IRS.
From Willie Nelson to Wesley Snipes, celebrities have a long history of tax trouble. In just the past year, comedian Chris Tucker, supermodel Gisele Bündchen, the lead singer of Creed, and at least one of the Real Housewives have had reported run-ins with the IRS. What's going on?
Singers, actors, and professional athletes get ensnared in complicated money situations that confuse even advisers with CPAs and law degrees. Here's why:
Just as Uber drivers can deduct the cost of gas from their taxes, celebrities can deduct their necessary expenses. But there's a fine line between show-business expenses and the perks of a celebrity lifestyle. Hiring a stylist or personal assistant might be deductible—as long as her pay is well-documented—but an expensive car or a poolside massage probably isn't.
FICKLE INCOME
Dave Lopez, a Philadelphia-based CPA financial planner, works with hip-hop artists for whom it's crucial to network with other producers and musicians around the country. That can mean a hotel or airfare is deductible, but not drinking in the back of the city's priciest club. Anyway, it can be impossible to get entertainers to keep track of their expenses. “Everybody's doing everything in cash,” Mr. Lopez says. “The record-keeping is not that great.”
Stars' income can be as fickle as their fans
The IRS charges a penalty if taxpayers don't pay enough in estimated taxes throughout the year. But many entertainers have no way to estimate how much they'll make by Dec. 31. In the film business, “you can have one job a year. You can have four jobs a year. You can have three years without a job,” says CPA financial planner Mitchell Freedman.
And a lot of their income arrives in strange ways, which makes it tempting to cheat the IRS. Professional athletes get paid for autograph signings, reality TV stars for appearing at clubs. Those checks can't just be cashed; they must be reported on tax returns.
They're big in Japan, Milwaukee, and everywhere else
When you're an actor shooting on location or a tennis player going from tournament to tournament, you can end up owing taxes to dozens of jurisdictions. States, the IRS, and foreign countries all want a piece of you.
The complications multiply on concert tours, says Victor Wlodinguer of Citrin Cooperman. Backup musicians and roadies need the right W-2s and worker's compensation insurance for each jurisdiction. Managers must keep track of not just expenses and income but where they occur. States such as California and Massachusetts will otherwise demand concert promoters withhold a big chunk of revenue for taxes, Mr. Wlodinguer says. Foreign artists visiting the U.S. get the same treatment from the IRS.
SUDDEN WEALTH
Some stars are good with money. But it's hard to expect financial savvy from people known primarily for their jokes, their three-pointers, or their ability to cry on cue. “They're on set for 12 to 14 hours a day,” Jeff Fishman of Los Angeles-based JSF Financial says of his clients. “They don't have time to focus on the financial world.”
When they hit it big, many don't know what to do with all the money. So they start spending it, quickly. “There's a temptation to be the kid in the candy store,” Fishman says, even though much of that new money may belong to the IRS.
Making planning harder: Unless you're the next Betty White, the income won't last forever. “This year you're hot—you're at every awards show—and then we don't hear from you ever again,” Lopez says.
PARASITES
When you get famous enough, everyone knows you're rich. That brings out friends and family from deep in your past, begging for a loan, a job, or an investment in their soon-to-fail business. If you give your cousin money, you'll need to fill out a W-2, a 1099, or a gift tax return. He or she may be family, but the IRS demands the correct form.
