How to Avoid Catastrophic Back Taxes: The Story of Wesley Snipes
Tax debts have a way of catching up with you. If you’re not careful, you can end up owing back taxes, but that’s not all. Poor tax planning strategies can lead to severe financial penalties and even prison time in some cases. This is evidenced by the unfortunate case of Wesley Snipes, who could have avoided a difficult situation had he used the right strategic tax services.
Wesley Snipes’ Legal Issues
In 2008, Wesley Snipes — an extremely successful Hollywood actor at the time — was convicted of three misdemeanor counts of failing to file tax returns. He had failed to pay $7 million in taxes he owed from 1999 – 2001, and he received three years in prison for his mistake.
Eddie Ray Kahn and Douglas P. Rosile, Snipes’ financial advisors, led him severely astray, telling him that only foreign-sourced income was taxable. Although there are strategic tax services that can help to reduce your tax burden, Snipes’ advisors were incorrect, and they received even longer prison sentences for charges of conspiracy and tax fraud. It’s impossible to know if Snipes knew what he was doing or if he was genuinely misled by his financial advisers. That said, failing to perform his due diligence was an egregious error that led to prison time for everyone involved.
Many tax protestors attempt to avoid paying taxes by concocting incorrect tax payment theories such as the one that fooled Snipes. The IRS considers these tax positions to be frivolous, which is one step below charges of fraudulence. Using reputable financial advisors and strategic tax services is the key to preventing the steep penalties associated with back taxes.
An Offer-in-Compromise
After Snipes was released in April of 2013, he still owed the IRS money in back taxes and penalties. The IRS attempted to collect $23.5 million, but Snipes responded with an offer-in-compromise (OIC), saying he didn’t have the assets to pay more than $850,000.
While an offer-in-compromise can reduce the overall amount of taxes are owed, the IRS didn’t find $850,000 to be a reasonable amount. That’s why hiring a professional to handle strategic tax services is so critical. If Snipes had a qualified, skilled accountant on his side, he may have been able to settle with a reasonable offer-in-compromise and reduce his tax obligations.
Instead, after the IRS rejected his offer to pay a mere $850,000 in back taxes, Snipes filed a petition to overturn the IRS’ ruling, which was also rejected. A settlement officer analyzed Snipes’ estate and determined that $17.5 million was a reasonable amount to collect.
Snipes continued to fight, stating that his financial advisers were to blame because they had eliminated his assets and taken out loans in his name unbeknownst to him.
While Snipes did sign an affidavit stating that his statements were true, there was insufficient evidential documentation for him to prove it. That’s why when it comes to strategic tax services, it’s critical that your accountant maintains a clear paper trail. Eventually, Snipes’ tax liability was reduced to $9.5 million — an expensive lesson that won’t soon be forgotten.
How to Prevent Back Taxes and Penalties
Whether you currently owe taxes or you just want to avoid a Snipes situation, some basic tax planning strategies can go a long way in keeping your finances in check. First and foremost, you should always make sure to file your taxes on time, even if you can’t afford to pay them immediately. It’s always better to file and not pay than to not file at all.
As long as you file your taxes, the IRS is usually willing to work with you. You may be able to request a payment plan so you can pay off your tax debt in smaller increments over time. If you take this approach, it’s vital that you make your payments on time, as even one late or missed payment can cause the IRS to cancel the payment plan.
You may also be able to use strategic tax services to prove that you deserve penalty relief. For example, if you served in the military or had a serious illness, you may be able to reduce your tax burden.
The most effective way to prevent tax problems entirely is to prepare for tax season all year. For example, if you’re self-employed, you should set aside around 15-30% of your income every time you get paid. That way you have a nest egg ready when it’s time to pay your taxes.
Hire a Qualified Tax Professional
Without a doubt, the best way to avoid a situation like Snipes’ is to work with trusted financial advisers. If Snipes had used strategic tax services from a reputable accounting firm, he never would have fallen victim to such an easily avoidable scam, and he wouldn’t owe the back taxes and penalties he does today. Unfortunately, hindsight is 20-20.
Beyond just preventing legal issues and debt, a financial adviser can argue your case with the IRS if you already owe money. Countless high-net-worth individuals overpay in taxes every year simply because they don’t realize that there are better options available. An experienced tax accountant is a crucial asset who can help you to legally reduce your tax obligations.
Shahen Derderian & Associates is ready to assist in reducing your tax burden. We offer a wide range of strategic tax services that help you save money and prevent legal problems. Call us now, and we’ll be happy to talk in detail with you about your unique situation. Never underestimate the power of a solid financial advisor and accounting professional when tax season rolls around