Stories of celebrities who fail to pay their taxes routinely make the news. Earlier this month, it was reported that R. Kelly owed back taxes to the tune of $5 million and that he hadn’t filed a tax return since 2005. The news came on the heels of reports that singer Lauryn Hill had failed to pay taxes on nearly $2 million she earned between 2005 and 2007. Every year there are at least 50 new celebrity tax problem stories (2009 Top 100 Celebrity Tax Problems, 2010 Top 100 Tax Celebrity Tax Problems, 2011 Top 50 Celebrity Tax Problems)
Despite the fact that celebrity tax scandals have become a familiar tale, they continue to fascinate the public. High-profile reports of multi-million dollar paychecks and contract signings leave many wondering the obvious: why don’t celebrities pay their taxes? While there’s no definitive answer, there are some possible explanations for why the rich and famous find themselves in tax trouble.
They Follow Bad Advice
Becoming a celebrity means that certain tasks, including management of their finances, are handed over to someone else. While the average person keeps track of their money by balancing their checkbook or logging on to online banking, it becomes much harder to do when you’re dealing with millions of dollars, multiple bank accounts and a substantial portfolio of investments. A celebrity may believe they’re choosing someone they can trust to take care of their finances but in reality, their financial advisor or accountant may be making poor decisions on their behalf, including not filing their taxes properly.
They Don’t Receive Regular Paychecks
Typically, employers issue paychecks to workers on a fixed schedule, with employees getting paid weekly, biweekly or monthly in most cases. Generally, state and federal taxes and Social Security withholdings have already been deducted from their check. Celebrities, on the other hand, don’t receive a steady paycheck. Instead, they may receive several large checks throughout the year and taxes are not automatically deducted. If they’ve hired a financial advisor or accountant, they may not even see the check or think about the potential tax implications. The money gets spent and when the IRS comes knocking, they find that nothing has been set aside to cover their tax liability.
They’re Subject to Closer Scrutiny by the IRS
When an actor or actress signs a high-profile movie deal or makes a big-ticket purchase, it’s bound to attract the media’s attention. The high-profile nature of being a celebrity makes it difficult to keep your income and assets a secret. Statistically, individuals who earn over a million dollars are more likely to become the subject of an IRS audit and in the case of celebrities, their increased visibility makes them a prime target. If the IRS suspects a celebrity of tax evasion or fraud, it’s almost a certainty that they will face a vigorous investigation. Celebrities who fail to pay their taxes risk not only a civil penalty but also imprisonment if the IRS chooses to pursue a criminal trial. These celebrities become examples to others who may think they can get out of paying taxes.
They Believe They’re Exempt
Finally, one possible explanation for why celebrities fail to pay their taxes is that they develop the misguided belief that the rules don’t apply to them. Becoming rich and famous is a life-altering experience and celebrities become accustomed to receiving special treatment in almost every situation. In some cases, they may believe that this special treatment should extend to the IRS. When they’re confronted with an outstanding tax bill, they may not appreciate the reality of the situation and expect the government to overlook their failure to meet their responsibilities.
There’s no excuse for failing to pay taxes but there are certain obstacles that can make meeting your financial obligations more difficult. In the case of celebrities, the challenges may be different from those faced by the ordinary taxpayer. Understanding the potential reasons why some celebrities don’t pay their taxes can be eye-opening for the Average Joe and for the celebrities themselves.