5 Tips for Musicians to Avoid IRS Interference
It's a fact of life that bears repeating: The IRS does not screw around, no matter who you are.
Legendary musician Chuck Berry, who recently passed on (R.I.P.), received a reminder of this universal truth the hard way nearly 40 years ago. Only three days after playing a gig on the White House lawn for President Jimmy Carter, the rock and roll pioneer pleaded guilty to tax evasion in 1979 for willfully falsifying income information on a tax return.
Because Berry notoriously insisted on being paid in cash and didn't bother to keep strict records, he was pretty much screwed as soon as the IRS took an interest in him. By taking a plea deal, he only spent four months in jail, but even after he was released he still had to perform 1,000 hours of community service. That's a hell of a lot of benefit concerts.
Chuck is hardly the only rock-star to regret crossing the taxman. In 1990, Willie Nelson famously owed the IRS $16.7 million, and the agency eventually confiscated and auctioned off his assets. Marc Anthony owed millions in back taxes after he failed to file a single return between 2000-04, and news recently surfaced that R. Kelly owes the IRS nearly $5 million in unpaid taxes. Not exactly chump change.
These are just a few of the most famous examples in a pattern of problems that musicians experience in dealing with (or avoiding) tax collectors. What is it that makes them so vulnerable to IRS issues--and how can musicians who aren't nearly so famous avoid the same pitfalls?
Music stars aren't exactly tax experts. In fact, our very own filing routine typically involves a great deal of weeping and prayer. Knowing what we know, we've put together a list of five common-sense tips for musicians on how to avoid the IRS' wrath.
Following these simple guidelines might just help keep you out of Chuck's old jail cell come tax time.
1. Always, ALWAYS file a tax return.
It seems so simple, doesn't it? And yet, failure to promptly file a tax return each and every year is at the root of countless musicians' tax troubles. Some wealthy performers (like Marc Anthony) wrongly assume that their accountants will simply "take care" of filing their tax returns. The truth is, only you are responsible for making sure your return is filed promptly and accurately.
We get it: Pro musicians don't exactly lead the most stable lives, and if you're living gig to gig, the temptation to skip filing returns at all can be high. That's a mistake that can cost you dearly, however. If you get busted, IRS penalties can equal nearly 50 percent of the original tax burden. Then they apply monthly interest on both the unpaid tax and the penalty.
That adds up quickly to a spiraling, Tony Soprano-style debt that you definitely do not want.
2. When the IRS sends you a bill, for God's sake pay it.
If there's one thing the IRS hates, it's a deadbeat. If you know you owe money to the feds, do everything in your power to pay up. The taxman doesn't forget, he doesn't forgive and he never gives up. If the IRS believes a musician is dodging his or her obligation, it can file a lien at the county courthouse -- usually after a few warning letters have failed to get the money.
What's a lien, you ask? Basically, it's the government's legal claim against your property when you neglect or fail to pay a tax debt. That means they can seize your house, your car, your gear, your bank accounts and pretty much anything else you've got the keys to in order to recoup what you owe.
Typically, the IRS prefers cash and will only seize your stuff as a last resort. That doesn't mean they're shy about it, though -- No less a beloved figure than Willie Nelson lost damn near everything he owned to the IRS in 1991.
3. Save your money.
News flash: It's pretty difficult to pay a tax debt when you don't have any money. Musicians are rarely on a fixed income; they have good years and bad years. Too many entertainers find themselves in tax trouble because they spend as if their peak earnings will last indefinitely.
Problem is, nobody stays on top forever. If the gigs dry up and you haven't saved your pennies, you could find yourself unable to pay last year's taxes. If that happens, don't expect a single drop of pity from the IRS.
Say your new album bombs, or a tour gets canceled due to a bandmate's illness. If you haven't set your tax money aside, you could be screwed in a hurry. The IRS generally likes to settle a tax debt with a payment plan based on an entertainer's current assets and earnings, which beats having your assets seized.
Naturally, you'll be expected to sell your own property in order to make those payments, however.
4. Keep records of everything.
Musicians can deduct a host of business expenses on their Schedule Cs, but you'll need proof to avoid owing back taxes if you get audited. That's why it's a good idea to keep a journal of all your income, expenses and travels.
It doesn't have to be complicated, just a simple record of what you do each day and how much it cost or paid. That includes little things like driving to a gig, photocopying fliers and buying drumsticks. This is especially crucial while you're on tour, when even meals are a business expense.
If you're one of those musicians who isn't stoned all day, every day, you can go ahead and enter all this data into Quicken or some other spreadsheet for easy manipulation. But at the very least, write down a record of every music-related activity you undertake and save all of your receipts. It could save you a lot of money at tax time.
5. Hire a professional, ya goofball.
Let's face it: Taxes are hard, and mistakes can cost you dearly. That's why it is never NOT a good idea to hire an experienced tax professional to help you maximize your deductions while keeping you out of trouble. Don't wait until the weekend before your return is due, either--do a little research, ask around and find yourself a tax pro with experience working with performers who comes recommended by your peers.
The stress-free sense of security you'll feel when filing your taxes with professional help is worth the cost. It's certainly a hell of a lot cheaper than potentially paying back taxes and penalties with interest.
Just because you write somebody a check and turn over your financial records is no excuse to "turn your pretty head and walk away", though. It's important to follow up and make sure that your tax advisor is doing his job. If someone else is filing your tax return for you, it's still your job to make sure he or she actually does it.