The IRS can impose a number of penalties and interest charges. It can even throw you in jail if you don't file your tax returns. It doesn't matter if you are a big Hollywood star or a country singer, you can get in trouble with the IRS. Here are five celebrities who found themselves on the wrong end of a tax audit.
Willie Nelson's long history with the IRS began in 1984 when the agency chose to review his tax returns back to 1972. The extensive audit stretched out for years and the IRS presented him with a bill for more than $6 million in underpaid taxes. He also owed over $10 million in interest and penalties. Nelson's accounting firm had filed for the singer every year, but it had claimed tax shelters that the IRS disallowed. The IRS seized most of Nelson's assets and sold them at auction. Most were purchased by friends and supporters who gave them back to the singer. The settlement was negotiated down further and Nelson ended up paying it off. He later sued Price Waterhouse, now PricewaterhouseCoopers, and settled with the accounting firm for an undisclosed amount.
Wesley Snipes is currently contemplating his actions behind bars. Snipes was charged with felony tax evasion for not filing returns or reporting over $14 million in income earned between 1999 and 2001. He was also charged with filing false information to receive tax refunds. Snipes was connected to a group that contends that federal taxation is illegal and unconstitutional. Although Snipes was acquitted of the felony charges, he was convicted on three misdemeanor counts of failing to file tax returns. He was sentenced to three years in jail.
Annie Leibovitz, the American photographer famous for capturing celebrity moments, found herself in front of cameras in 2009 when she was at risk of losing all of her assets, including the rights to her photographs, because she could not repay a loan. Part of the need for the loan was a debt to the IRS of $1.4 million plus interest and penalties for not reporting income earned between 2004 and 2007. Leibovitz also struggled to pay the estate taxes on her home and other properties. Leibovitz has since restructured the loan and is no longer at risk of losing her assets.
Snipes is not the only celebrity to have to cool his heels in prison. In 1982, Italian actress Sophia Loren was ordered to jail for 30 days for underreporting income in 1970 to the tune of 5 million lira (around $8,000 at the time). She served 17 days of the sentence before being released under a court order. She has had no public tax troubles since that time.
Lauryn Hill, who has won eight Grammy awards in her career, is one of the most recent celebrities to face tax problems. She was charged with three counts of failure to file tax returns because she did not file between 2005 and 2007. She currently owes the IRS $1.5 million plus penalties and interest. Hill faces a maximum one-year sentence on each count and will be sentenced this November. According to Hill, she willingly did not file after she left the music industry so she could protect her children. Hill has said that she will elaborate on her reasoning further at her sentencing hearing.
The Bottom Line
Income taxes are a reality for everyone, including the rich and famous. The IRS, and other tax authorities, can send tax evaders to jail on top of assessing penalties and interest on unpaid taxes. No one escapes the tax man, especially not those who are always in the spotlight.