Celebrity Tax Problems and One Likely Cause: Failure to Make Estimated Tax Deposits
Wesley Snipes, Nicholas Cage, Floyd Mayweather, Val Kilmer, and Marc Anthony: Besides being multimillionaires, what do all of these individuals (and many other celebrities) have in common? At some point in their professional lives, they all failed to pay their federal and/or state income taxes. As a result, at one time or another they have had a combined tax liability of over $10 million.
The first question many of us ask when we learn of these stars' failures to pay their taxes is “how people with such significant earnings cannot have sufficient funds to pay their taxes?” While there are likely many different explanations for as to why these individuals were unable or unwilling to pay their taxes, one problem that many high-income individuals run into is their failure to comply with, or lack of understanding of, the federal estimated tax deposit system.
These individuals often fail to realize that if they either owed money to the IRS at the time of filing their most recent tax returns, or expect to owe more than $1,000 at the time of filing their upcoming return, they generally are required to make quarterly estimated tax payments to the IRS in the current tax year. The purpose of doing so is to ensure that at the time they file their upcoming tax return their balance due to the IRS is either minimized or completely eliminated. Use of this system is not discretionary, but mandatory; therefore, failure to meet the IRS's requirements will result in the assessment of substantial failure-to-deposit penalties and interest.
Those who are subject to the estimated tax payment requirements are most likely those who have significant taxable income other than standard employee wages, such as income from the operation of a business, the liquidation of certain retirement accounts, or from the sale of investments or other assets. Because federal income taxes may not be withheld from these types of income, the taxpayers who earn the income generate tax liability throughout the tax year without making any tax payments. If they do not remit the required deposits to the IRS or utilize proper tax planning, these taxpayers may have a significant tax liability at the time of filing their tax return with no ability to pay it. The consequences of not paying a balance due with a tax return can range from harassing phone calls and letters from the IRS, filing of federal tax liens (which are public records), IRS seizure of financial accounts and wages, or even criminal charges.