The Risks of Professional Athlete and Entertainer Taxation
Global sports and entertainment have created many new opportunities as well as challenges for those individuals, who are multi-jurisdictional earners. The IRS has taken a keen interest in cross border sports and entertainment in the context of U.S. tax enforcement. This scrutiny has been expanded to include directors, producers, technicians, managers, promoters as well as others.
Recognizing that professional athletes and entertainers are globally mobile and have unlimited earning capacity, the IRS formed a task force charged with the responsibility of improving federal tax compliance among high income athletes and entertainers, through taxpayer awareness and increased enhanced enforcement efforts.
Other countries are likewise interested in professional athletes and entertainers, who earn income while performing services in venues outside of the U.S. Recent global tax enforcement initiatives signal that athletes and entertainers who evade taxes within and without the United States will be vigorously pursued. Specifically, the standards contained in FATCA and the Common Reporting Standards will facilitate the mutual exchange of information, transparency and the detection of those who are determined to evade paying their fair share of income taxes to the United States and its global partners.
In determining whether a professional athlete or entertainer is subject to U.S. income tax, the IRS will always key in on whether the athlete or entertainer is a resident for federal income tax purposes. The IRS will also look at how the income is characterized, whether the athlete or entertainer made use of a shell company or other device to avoid paying U.S. tax and whether the individual unreasonably relied upon a tax treaty or income allocation.
A U.S. tax resident is subject to U.S. income tax on his or her worldwide income.
As such, whether an athlete or entertainer is a resident for U.S. income tax purposes is the critical starting point. Generally, U.S. citizens and permanent resident aliens are considered U.S. tax residents and subject to federal income tax on their worldwide income.
In certain circumstances even a non-resident can be considered a U.S. tax resident if the individual spends the requisite number of days in the United States. A non-resident who is physically present in the United State for 183 days or more during a calendar year is considered a U.S. tax resident. A non-resident can also meet the physical presence test under a formula. If an individual is present in the United States for less than 183 days during a single tax year he or she may nevertheless be considered a U.S. tax resident in that year if the individual spends at least 31 days in the United States in the current year and, by application of a certain carryover formula, where the number of days in the United States in the current year plus the number of days from the prior two years equals 183 days or more.
Finally, a non-resident, who files and signs a joint tax return with a U.S. citizen or legal permanent resident, may also, be subject to federal income tax based upon his or her worldwide income.
Residency for federal tax purposes is significant to the IRS for the following reasons:
- Athletes and entertainers, who are considered tax residents of the United States, are subject to U.S. income tax on their worldwide income. As such, the IRS is particularly interested in determining whether the athlete or entertainer received income from foreign sources, and if so, whether that income was properly reflected on the individual’s U.S. tax return.
- Foreign athletes and entertainers, who are considered non-residents for U.S. tax purposes, are only subject to U.S. income taxon compensation received for services rendered in the United States, as well as royalties, rents from investments in U.S. real property, dividends, interest, and income derived from U.S. business operations. The IRS will focus on these individuals to determine if the foreign athlete or entertainer is reporting his or her U.S. source income. The IRS will also scrutinize the number of days a foreign athlete or entertainer spends in the United States for purposes of determining whether the individual meets the physical presence test.The unintended consequences of a non-resident athlete or entertainer, who is present for 183 days or otherwise meets the physical presence test under the formula, can be financially devastating.
Many professional athletes and entertainers may not be aware of their U.S. filing and reporting obligations if they are represented by a tax professional that is unfamiliar with cross border tax reporting. Too often, athletes and entertainers rely upon professional agents and management companies for direction in selecting legal, accounting and tax professionals to assist them with their financial affairs. Relying upon a professional agent or management company in the selection of a tax professional is inherently suspect and should be avoided at all costs. The simple reason for this is lack of independence. Moreover, while a recommended tax professional may have a general understanding of U.S. taxation, the individual may not be familiar with the mechanics of taxation in a multi-jurisdictional context.
Similarly, athletes and entertainers who rely upon friends or family in vetting and selecting a tax professional may eventually find themselves at odds with the Internal Revenue Service. An athlete or entertainer may also continue to use his or her existing tax professional out of loyalty, due to a personal relationship or based upon the assumption that the tax professional has the requisite experience, skill and knowledge related to cross border earners. However well intended, these methods for selecting a tax professional can result in adverse tax consequences.
A an athlete or entertainer, who fails to comply with his or her U.S. Tax and filing obligations can be subject to civil and criminal penalties. In cases where the athlete or entertainer has engaged in a systematic pattern of non-compliance, the individual may be subject to criminal prosecution, imprisonment and heavy fines. The IRS is particularly interested in the prosecution of famous athletes and entertainers, since the IRS considers high profile prosecutions a strong deterrent to potential tax cheats.
Running afoul of the U.S. tax laws may also result in loss of work visas and deportation of green card holders and individuals in the United States on visas. In addition, where the IRS has assessed income tax, an athlete or entertainer may not be permitted to leave the United States until federal tax liability is satisfied.
If you are a professional athlete or entertainer, you should speak with a tax attorney. Even athletes or entertainers who are currently in high school or college and anticipate signing a lucrative contract, it would be wise to speak with a tax attorney for purposes of evaluating the tax implications.
A final word of caution unrelated to the topic of taxation. Never permit an agent, accountant, attorney or financial manager to manage your financial affairs or have access to your assets. The investment, reporting and custody functions should always remain segregated as a safeguard against potential misappropriation of assets or making ill-advised investments. Any appearance of a conflict of interest should be a red flag. If a financial advisor, attorney or accountant suggests an investment, you should always get an independent attorney opinion prior to parting with your hard earned money. Just ask Hall of Famer, Scotty Pippen or superstar singer Rihanna.
© 2016 Anthony N. Verni, Attorney at Law, Certified Public Accountant
November 12, 2016