They’ve just done it again! The IRS has targeted the entertainment industry for tax audits. If you’re an actor, director, producer, entertainer, composer, writer, film star, rock star, producer, recording artist, musician, publisher, manager or in any other way related to the music entertainment, film or related industry, you can or probably should suspect that you will be a target for the IRS examination of your tax returns.
This October, the IRS has released its Entertainment Audit Technique Guide as guidance to assist IRS auditors in the audit of individuals and businesses involved the entertainment industry. The audit technique guides were developed as part of a Market Segment Specialization Program to target certain industries in which the IRS will generally apply additional scrutiny or consideration in enforcing compliance with tax reporting.
On the income side, the IRS will review residuals, royalties, licensing fees, fringe benefits, advances and more to ensure that all applicable revenues are fully reported. On the expense side, the IRS will scrutinize your record keeping, reporting compliance, the failure to capitalize, depreciate and amortize expenses, employment taxes, home office deductions and more to ensure that deductions actually exist, are not “personal” in nature and are fully supported in accordance with the strict reporting requirements of travel, meals and entertainment deductions required by law.
Remember that an audit of this year’s targeted tax industries may not hit you until around two years from now unless your returns are specifically targeted for other reasons. That does not mean you have nothing to worry about for two years. What that means is that THIS year’s return may not be audited for another two years, but by that time its highly likely that your audit will include this year’s returns, next year’s returns and possibly the year after that — all at one time and all with the same audit issues. So the time to get your affairs in order is NOW so you don’t get killed on your tax audit later.
Many of the tax strategies previously overlooked are being specifically targeted as “suspect” from the write-off of entertainment expenses, equipment leasing contracts, reimbursements, fringe benefits, income characterization, home office deductions and more. On the up side, we can make certain affirmative elections to allow you to take expenses, or a portion thereof, currently, rather than capitalize and amortize up front costs over a much longer period of time that would otherwise be required by law.
Whatever the case may be, the key in successful tax negotiations lies in the planning – the early identification of tax issues, strategies and the implementation of those strategies early in the game to help achieve the most optimal success.