A federal tax lien is almost always a sign of financial problems, says Cincinnati tax lawyer Howard Levy, who publishes the IRS and the Law blog. People who live chaotic lives or are under financial stress often skip tax payments or don't file returns at all, he says. That is a big mistake: IRS penalties can equal nearly 50% of the original tax burden. Then the IRS applies interest monthly on both the unpaid tax and the penalty.
Multiple tax liens generally indicate a person has failed to file tax returns in multiple years -- a lien per year, Levy says. Many entertainers fit that bill.
The lien is a snapshot of what the IRS says it is owed in taxes, penalties and interest at the time the lien is prepared. The public amount doesn't change until the entire tax bill is paid, so it doesn't reflect payments to reduce what's owed or how the obligation grows as penalties and interest accumulate. "People usually owe more than the amount in the lien," Levy says.
Records don't show when taxpayers are working with the IRS or have reached a deal to settle the debt.
The IRS is sometimes wrong or overstates what is owed, Levy says. If you don't file a return, for example, the IRS will estimate what you owe in a formula that can be unrealistic. The IRS filed a $261.4 million tax lien in January against New Orleans rapper Juvenile (Terius Gray).
In rare instances, wealthy people may not know what they owe the IRS, Levy says.
But mostly, entertainers get in tax trouble because they expect peak earnings to last indefinitely, says Dennis McGoldrick, a veteran bankruptcy lawyer in Torrance, Calif. "Their income revs up, and their spending revs up. These people don't save any money. They get a big house. Then work dries up, and they can't pay their taxes. It's a fairly common occurrence."
Coming down hard
An entertainer may see income drop unexpectedly from $10 million a year to $1 million after a canceled TV show, a movie that bombs or a concert tour cut short by a bandmate's illness. Mortgage payments and investing in the next project may take priority over paying the estimated quarterly income taxes the IRS wants.
The IRS generally will settle the tax debt with a five-year payment plan based on an entertainer's current assets and earnings, McGoldrick says. But that can force performers to face harsh realities about their careers and lifestyles.
For example, the IRS expects tax debtors to sell their homes -- often mansions -- to convert the home equity into cash and redirect the mortgage payment to the government. "It's hard to explain why you're paying $50,000 a month on a mortgage rather than giving that money to the IRS," Levy says.
Comedian Sinbad (David Adkins), who had HBO specials and his own TV show in the early 1990s, tried to save a house he had bought when he hit it big. He even transferred the title of the $2 million hilltop house to his brother to protect it from the IRS, court documents show. The government challenged him in court and won. Sinbad owed more than $8 million in taxes and penalties.
In a bankruptcy filing, Sinbad estimated his current earning power had fallen to about $100,000 a year. He didn't even have money to convert his HBO specials to digital to make them sellable, the filing said.
Sinbad declined comment. But he did turn his tax troubles into a new reality show -- Sinbad: It's Just Family -- on the WE TV network. The first episode: Sinbad moves back in with his ex-wife.
A sudden rescue from the IRS' grasp is always possible in show business, courtesy of an unexpected hit song or movie.
Actor Robert Downey Jr. fell more than $2 million behind on state and federal income taxes while in jail and on drugs, tax liens show. After getting clean, the star of Iron Man and other blockbusters paid off the debts.
Actor Terry Crews stars in the TBS comedy Are We There Yet? He is also featured in The Family Crews, a reality show on BET that follows his family and wife, former gospel singer Rebecca Crews. The IRS filed a $521,581 tax lien against the couple's property in November.
"We have experienced tremendous success in the entertainment industry and are blessed to do what we love," Terry Crews says. "But sometimes business is good and sometimes it's not. It's in these various periods of making either a little or a lot, depending on the job, location and opportunity, that this tax liability developed."
He says he and his wife have been working closely with the IRS and have paid off the majority of what they owe. The IRS released a separate $205,913 lien against the couple in 2010.
The IRS filed a $492,583 tax lien in December against a hot couple -- R&B artist Robin Thicke and his actress wife, Paula Patton (Mission: Impossible -- Ghost Protocol). "When they were made aware of it, they immediately paid it," says their publicist, Amanda Silverman. The IRS, however, hasn't released the lien, a process that can take 30 days.
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