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Lessons learned from celebrity tax troubles

By Brandon Ferdig, Contributing writer
Published On: Mar 19 2012 02:24:58 AM CDT
Updated On: Feb 10 2014 09:40:26 AM CST
tax forms with pen, calculator, taxes

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Thanks to celebrities who learned their tax lessons the hard way, we all have great examples of what to do -- and, more to the point, not to do -- when it comes to our taxes.

Are you thinking about "sneaking one by" the IRS? Beware what happened to Wesley Snipes. Looking for a little tax shelter? Look first to country singer Willie Nelson.

Yeah, the IRS loves the celebrity culture -- or at least the agency likes to use it to get across its message. The dollars are big and the drama ratcheted up. So since it's all exaggerated for us to view, we ought to look at these celebrity examples as more than gossip banter.

Why not learn a little something while reveling in the problems of the rich and famous? If you don't already love celebrities, maybe you will after reading these stars' cautionary tales ...

Willie_Nelson

Willie Nelson: Check up on your tax shelters

It makes sense that "outlaw" country legend Willie Nelson would have run-ins with the law. Of course, tax evasion doesn't exactly scream "bad boy," but nonetheless, he sure got in trouble.

Tax shelters are places you can invest to reduce your tax burden, such as start-up mining companies or even your own retirement account. In 1990, Willie Nelson came under IRS ire for his investments in illegitimate shelters.

He ended up with a wee tax bill of $16.7 million and had his accounts frozen, assets seized and royalties signed over to the government.

Maybe you think this only applies to the rich, but you don't need to be a millionaire to invest in shelters. So if/when you do, be on the up and up. Or have a fan club. Some of Nelson's loyal followers and friend bought his items at auction and returned them to him.

Wesley Snipes

Wesley Snipes: Beware of illegal tax loopholes

Certain attempted tax loopholes have been so well-worn that they make up the IRS's "Dirty Dozen" list. Snipes tried for one of these in 1996 and 1997.

His strategy, known as the Section 861 Argument, utilizes language in the tax code describing taxable foreign income. Based off this language, it is argued then that income made in the U.S. is non-taxable.

That's not what these sections are written for.

Regardless, Snipes claimed he had zero taxable income from these years, and after having paid the taxes already, was actually refunded his $12 million. Soon after, though, the IRS said "wait a minute," and an audit ensued.

Snipes ended up receiving a three-year sentence for willful failure to file federal income tax returns and reported to prison on Dec. 9, 2010.

Joe Francis, Girls Gone Wild

Joe Francis: Watch those business deductions

It's typical to get creative and squeeze every penny out of your deductions. Sure, that blender was for office use.

Probably everyone who writes off deductions (itemizes) stretches the truth a bit. For celebrities, wiggle room can be precarious because of the attention they get.

In enters the "Girls Gone Wild" dude, Joe Francis, with a string of legal woes to taint his credibility even more. But focusing on tax troubles alone, Francis was charged in 2007 with two felony tax evasion counts over $20 million of false business deductions for 2002 and 2003.

Of course, with the torrent pace of courts, little got moving until 2009. After Francis pleaded guilty in November 2009 to misdemeanor charges of filing false tax returns and bribing Nevada jail workers, the IRS slapped him with an enormous tax lien of $33,819,087.14.

Yeah, gotta get those last fourteen cents.

Pete Rose

Pete Rose/Richard Hatch: Pay income tax on all of your income

Two celebrities offer great examples of what can happen when you don't claim key areas of your bread winning.

Pete Rose pleaded guilty in 1990 for not paying taxes on money made from selling memorabilia, signing autographs and betting on horse racing. We know what you're thinking: Who comes out ahead playing the ponies? Apparently, Pete Rose.

Except baseball's Hit King had to serve five months in prison, pay $366,000 and do 1,000 hours of community service.

The other fella is Richard Hatch, otherwise known as "that 'Survivor' guy." He didn't claim his $1 million in winnings. How'd he miss that? Such an oversight makes you want to give him the benefit of the doubt. But the courts haven't, dismissing his claims that CBS agreed to cover the taxes.

Hatch ended up serving three years in prison, but landed in trouble again in December 2010, with the IRS contending he had violated the terms of his release by failing to file federal income tax returns. He ended up serving an additional nine months in prison during 2011.

LeBron James dunking basketball

LeBron James: Moving to new state can mean tax savings

Regarding state tax bills, celebrities can also provide examples of ways to save money. Here's a maneuver that saved one guy anywhere from 5 to 7 percent.

NBA star LeBron James shaved a significant tax burden with his controversial decision to "take his talents" to Florida. The Sunshine State is one of a handful that doesn't have a state income tax. New York, on the other hand, is the highest at more than 10 percent for the wealthiest folks. James saves himself a couple million each year by playing for the Heat instead of the Knicks. And he stays warmer.

Ohio, the state that James' former team, the Cleveland Cavaliers, calls home has a tax rate of about 6 percent for the state's wealthiest residents, so, while Cavs fans may still curse his name for eternity, he's still saving on his taxes while living in South Beach.

Though the tax man will nod with approval, you may face some popular opposition. But if you're sour against people avoiding taxes; don't hate the player, hate the game.

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