Most foreign athletes & artists who receive compensation in the United States must pay U.S. income tax and may also be required to file U.S. tax returns.
- In recent years, the Internal Revenue Service (IRS) has heightened enforcement activity for ALL foreign athletes & artists.
- Managers and support teams for foreign athletes & artists are also under IRS scrutiny and may face U.S. tax liability.
- Failure to comply with U.S. tax obligations can result in substantial fines, imprisonment and/or deportation.
IRS Requirements & Penalties for Foreign Athletes and Artists
The IRS considers a highly-publicized prosecution to be a strong deterrent to potential tax avoidance, and high-profile athletes, artists and entertainers often receive press attention when prosecuted for alleged tax crimes.
In 2007, the IRS launched a task force specifically to concentrate on tax compliance by high-income golfers, tennis players and musicians. In the first year, the task force led to audits of at least 60 golfers and tennis players who allegedly owed millions of dollars in back taxes.
The IRS has recently expanded that initiative and developed a fully staffed Issue Management Team to focus on ALL foreign athletes, entertainers, their representation and their teams. The IRS seeks to improve income reporting and tax payments in the U.S. by providing more detailed information to taxpayers and increasing enforcement efforts.
- Payments to foreign athletes and entertainers are subject to withholding under a complex set of rules. Refer to Artists and Athletes (Income Code 20) in Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.
- In order to identify their U.S tax obligations, foreign athletes and entertainers must determine their Alien Tax Status.
- A Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN) must be furnished on tax returns, statements, and other tax related documents. In general, only non-citizens who have permission to work from the Department of Homeland Security can apply for a Social Security Number. Other non-resident aliens must apply for an Individual Taxpayer
Violations of your U.S. tax filing and reporting obligations can result in criminal or civil penalties. In deciding whether to recommend prosecution or to impose civil penalties, the IRS takes into consideration whether the person who allegedly violated tax laws is a high-profile individual. As noted above, the IRS considers a highly-publicized prosecution to be a strong deterrent to potential tax avoidance.
- You can be subject to a $250,000 fine and/or 5 years in prison for a willful failure to report foreign bank accounts by a foreign citizen who is also a U.S. resident. The maximum penalty can be increased to a $500,000 fine and/or 10 years in prison if there are violations of certain other laws in addition to the failure to report foreign bank accounts.
- You can be subject to a $250,000 fine and/or 5 years in prison for willfully attempting to evade taxes.
- You can be subject to a $250,000 fine and/or 1 year in prison for willfully failing to file tax returns or to pay tax due.
- You can be subject to a $250,000 fine and/or 3 years in prison for willfully filing a false tax return.
- You can be subject to a $250,000 fine and/or 5 years in prison for willful tax evasion.
Certain tax crimes may result in deportation for green card holders and individuals in the United States on visas. In addition, in rare circumstances, an individual may be temporarily barred from leaving the United States until federal tax liabilities are paid.
- You can be subject to a penalty of 300% of the value of the accounts for a willful failure to report foreign bank accounts by a foreign citizen who is also a U.S resident.
- You can be subject to a penalty of up to 47.5% of tax due for willful failure to file tax returns and to pay the tax due.
- You can be subject to an accuracy-related penalty of 20% for any underpayment of the correct amount of tax that is the result of negligence or disregard of rules and regulations.
- You can also be subject to the 20% accuracy-related penalty for any understatement of tax that exceeds the greater of 10% of the correct tax or $5,000.
- If any part of an underpayment of the correct amount of tax is due to fraud, you can be subject to a penalty of 75% of the underpayment attributable to the fraud.
There are a number of steps you can take with the help of a qualified professional to avoid the pitfalls that can ensnare athletes and artists in tax controversies.
1. Tax-Efficient Structuring:
- See if you can benefit from reduced tax rates and exemptions under a tax treaty.
- Apply for central withholding agreements to retain more of your income.
- Set up deferred compensation arrangements to delay tax payments while investing your income and allowing it to grow.
2. Proper Filing:
- Avoid problems and penalties by understanding your tax residence status and your filing payment obligations.
- Know the proper forms and deadlines for filing returns and paying taxes.
- Work with experienced professionals to ensure that your income and deductions are properly reported.
- Be prepared with effective and experienced counsel when contacted by IRS or state tax authorities.
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