Nicolas Cage just won a deal with the Internal Revenue Service to pay $666,000 plus interest for improperly deducting $3.3 million in personal expenses from 2002 to 2004. Earlier this year, Cage contested a personal IRS bill for $814,000 in taxes, interest and penalties, while his Saturn Productions of Los Angeles company was stuck with a bill for $988,000.
While Cage’s settlement includes $99,000 for an accuracy related penalty, no penalties were incurred related to fraud. This deal may leave the average taxpayer wondering if the rich and famous really do enjoy special privileges – even from the IRS. But I don’t think that’s the case here. What you have to keep in mind is that Cage’s income tax returns are done by a business management firm tied to his agent, producer, etc. It is very likely that Cage didn’t even read or know what went into the preparation. It’s not his fault if he can’t read a 1040 form if you paid him to.
I think that the firm preparing his return knew that he (they) had exposure due to the many gray area items (not exactly cheating) they tried to deduct. This is not unusual in the entertainment biz and he probably had an agreesive tax preparer. However, a new law was passed by the IRS on May 27, 2007 that has dramatically increased the preparer fraud penalties from $1,000 to $5,000 when a preparer willfully attempts to understate taxes. The new standard states that the preparer should have a reasonable belief that theIRS is “more likely than not” (MLTN) to agree with the tax laws. And I’ll bet you Cage’s tax preparer had some penalties of his own to pay regarding this return.
Additionally, I would say that Cage’s treatment was not that out of the ordinary because in every tax case that goes to Appeal, a good settlment is where both parties “hurt” a little bit. Also 85% of cases that end up at Appeals settle (out-of-court). Partly because of the IRS’s Appeals Division Mission Statement that says they are supposed to “weigh” the hazards of litigation in every case they get. If they lose in court it’s generally all or nothing. I don’t think they wanted to take that chance and open up a door they don’t want to. At least admistratively you can do a great deal of haggling. That’s what we do as tax negotiators. And that’s what happened here.
So do you think justice was served? Or do you think wealthy taxpayers get all the breaks? And are Gulfstream turbojets really a necessary expense in the entertainment industry?
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