Former pop megastar Britney Spears is now fighting the IRS. Last month, Spears filed a petition with the U.S. Tax Court to contest a $720,000 bill for the year 2021 which includes taxes and penalties. This amount does not include interest.
The U.S. Tax Court specializes in resolving tax disputes before payment is required, making it a common venue for taxpayers unable to pay disputed amounts upfront. Taxpayers can also sue the government in federal district courts to challenge the tax but the court only has refund jurisdiction which means the taxpayer must pay the tax in full first.
According to the IRS report, the auditor added $1,390,922 to Spears’s taxable income as a result of an audit of her S corporation return named Shiloh Standing, Inc. An S corporation is a pass-through entity so the corporation’s income or net loss is transferred to the shareholders based on their ownership percentage.
The details of Shiloh Standing Inc.’s audit is unknown since the corporation has its own taxpayer ID number (known as an Employer Identification Number or EIN) and was audited separately. But the tax court petition states that the entity is in the business of performing arts and entertainment.
The auditor then disallowed $608,120 in medical expenses claimed as an itemized deduction claiming that Spears did not prove the amount claimed was a medical expense and paid in 2021. As a result of this disallowance and thanks to complicated tax calculation rules, the IRS added back $334,372 originally claimed as an itemized deduction.
The thought of spending $608,120 in medical bills would be toxic for most Americans. But for some current or former celebrities with wealth, this is not that unusual as high-end rehab facilities can charge five-figure fees monthly.
The petition asked the court to remove the accuracy-related penalty against Spears because there is no tax due, and in the alternative, she acted in good faith and made reasonable attempts to comply with the tax laws and IRS guidance.
Generally, the IRS forgives most tax penalties if the taxpayer can show reasonable cause. Reasonable cause is shown when a taxpayer exercises ordinary business care and prudence in determining their tax obligations but is unable to comply with those obligations due to circumstances beyond their control. Common situations favoring reasonable cause include reasonable reliance on a tax professional, severe health issues for the taxpayer or their immediate family, a natural disaster, or inability to obtain records that are not the taxpayer’s fault.
Spears states in her petition that the penalty was not approved by an immediate supervisor and so must be removed. Supervisory approval is required by law, specifically section 6751 of the Internal Revenue Code. Generally, when a taxpayer is presented with a tax adjustment calculation that contains a penalty, the auditor includes in the report a letter signed by a supervisor approving the penalty. While this is usually standard procedure for an IRS auditor, it can be missed at times. If the taxpayer can prove that there was no supervisor approval, the penalty can be automatically removed without proving reasonable cause.
From 2008 to late 2021, Spears was placed in a conservatorship by her father due to her mental health issues. At the time the 2021 returns were timely filed, which would be before April 15, 2022 or October 15, 2022 with an extension, it is unclear how much she knew about her financial affairs or whether she understood the numbers in her 2021 tax returns. If she reasonably relied on her tax preparer and her fiduciaries, she has a strong case for showing reasonable cause. But ultimately, it is Spears’s responsibility to ensure that the tax returns are correct, even if it requires her to hire a second professional to double check the returns.
Since the case appears to be about business and medical expenses, this case is likely to settle quickly if Spears can produce the documentation to IRS satisfaction. While the case is in the tax court’s docket, it will be sent to a settlement officer from the IRS Office of Appeals. As the name implies, a settlement officer must consider the hazards of litigation so they may allow a deduction in a close case.
What can a noncelebrity learn from Britney Spears’s fight with the IRS?
First, keep good records of all business expenses as you may never know when the IRS will audit the returns. This is particularly important if the expenses are unusually large. Medical expenses can be large if someone is uninsured, or if the insurance does not cover the entire bill.
Second, if you feel uncomfortable about claiming a large deduction, particularly if the nature of the expense seems to be in a gray area, consult a tax professional about it.
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at stevenchungatl@gmail.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.
The post Gimme More (Deductions): Britney Spears Challenges The IRS At The US Tax Court appeared first on Above the Law.