It mystifies me. Joe Luis, Mike Tyson, some others I heard, and now Manny Pacquiao, had trouble with paying their taxes. You’d think a champion boxer, supported by a bevy of coaches, doctors, trainers and finance consultants, would have at least one competent accountant in his employ. Why do they end up owing the IRS almost equal to their gross earnings, and why does the tax whallop usually come when they’re over the top and unable to sustain their previous level of earnings?
Other entertainers suffer the same fate (M.C. Hammer springs to mind, I’m sure there are plenty of others). I can’t say for sure (and I’m sure there is more than one reason, and not all broke boxers got that way the same).
One reason I would imagine is that they did hire an accountant/financial advisers who talked them into all sorts of different investments and tax shelters that didn’t pan out like they hoped (investments failed/tax dodge was illegal or loophole was closed). I’m sure there are plenty of other non-famous people who get fleeced by a greedy or incompetent financial advisors (paging Bernie Madoff), you only hear about the famous ones.
I would imagine one of the issues is the way they are paid. If you receive a biweekly check, and have taxes taken out of it, at the end of the year you’ve already paid a substantial chunk of what you owe (or maybe even more than you owe). But if your earnings for the year consist only of a small number of prizefight payouts (maybe even a single payout), and out of that you have to pay back any debts you’ve incurred, plus of course buy yourself some stuff to celebrate your success, you’re far less likely to have a chunk set aside to pay your taxes in April.
Remember Richard Hatch, the Survivor winner who went to prison for tax evasion? You need to report and pay taxes on big winnings.
Most of those who get into trouble are people who aren’t interested in money matters and thus delegate them. That makes them prey to con men who will, say, funnel their taxes to their own accounts instead of the IRS. Or they trust a friend who doesn’t really know what he’s doing.
This can go on for years without the athlete knowing it’s happening. By the time the IRS catches up, they are on the downside of their career.
^
Bad. At least with Pacquiao he was careful with what “little” he ended up with. He has quite a number of prime properties both in the US and Philippines. He’ll have to liquidate those at a discount to pay up.
It turned out that Hatch had been cheating on his taxes for years before going on Survivor. His mistake was thinking he could keep on doing it. He apparently didn’t realize winning a million dollars on a top rated TV series was noticeable and he was no longer invisible in the crowd.
I recall reading that during WWII, Joe Louis had made substantial donations to the government to help with the war effort. Do you think that made any difference to the IRS? Not on your life. But the main reason, at least in the early days was exactly all those handlers, hangers on, sycophants, etc., etc. They gave them money freely and made no provision for taxes.
Although not mentioning any boxers, this superb Sports Illustrated article is about why so many athletes go broke. In summary: athletes are surrounded by “friends” and relatives who milk them dry, there’s a strong culture of conspicious consumption in sports, and even if they do find good financial help they usually get ignored in favor of get-rich schemes and flashy-but-risky investments like nightclubs.
In the case of Joe Louis he would fight exhibitions and then donate his purse to the war effort. It was later determined by the IRS that he should have paid taxes on the money he donated and he did not. He also owed lots of interest. He then had to to schedule fights to to pay off his back taxes, but the tax rates were so high for someone in his bracket that it was almost impossible to make enough money to pay off his back taxes. It was really horrible what they did to him.
In this country, a high income person like a boxer or a footballer, would usually turn themselves into a company. They can then pay themselves dividends which are taxed at a lower rate than earnings. They can also set off all their business expenses against tax.
The Spice Girls had a large number of companies. I believe that apart from Spice Girls limited, Each member was a company and later, each album and each tour was a separate business.
Do Americans not have the same option?
Pro athletes playing for teams in the U.S. are employees, who get their taxes taken out of those checks. They can (and many do) incorporate for things like endorsement deals. As mentioned in that Sports Illustrated story above, those guys go bankrupt mostly because of bad investments, an unsustainable lifestyle, and divorce. Taxes are usually the problem - though since they often get taxed cities and states they play in as visiting players it is tricky.
I recently saw Mike Tyson’s one-man show (directed by Spike Lee). He said that Don King was billing him some insane amount for basically nothing. $30,000 for towels, or something like that.
You know, i remember hearing something about this a long time ago, but I never really realized what happened.
If what is being identified in this thread…that Joe Lewis boxed and gave his earnings to the government to help the war effort and the IRS ground him up for not paying taxes on the winnings, I’m more than pissed. I’m infuriated. That is so wrong on so many levels, and makes me believe more than ever that the IRS should be abolished.
Here’s a guy who is helping his country in the best way he knows how, and he gets screwed by that very same country? What is wrong with this picture? I need to read more about this to see if there was any other reason why the IRS hounded him. But if this was basically the reason, I am sick to my stomach. That poor guy.
Nitpick: Louis gave his money to private charities related to the war effort (primarily the Navy Relief Society and Army Relief Fund). He had voluntarily given money to the government, but that was well before the war. Had he been “donating” his earnings directly to the government he would have had no tax liability. Not that it makes his story any less sad, but fighting ignorance and all that.
I could only speculate on the rest, but this part I can address specifically. It has to do with the speed of bureaucracy. (If c, the speed of light, is the fastest anything can go, then b, the speed of bureaucracy is the slowest.)
The IRS has three years to audit a return for any reason. Six years if a substantial mis-statement of income is made. And forever, if they show fraud. The IRS doesn’t send letters right away - usually your first letter about a problem with a return comes 6 to 18 months after your filing. You can ignore those letters for about 6 more months before the IRS starts putting the hammer down to get a response. Then you hire a CPA who spends another 6 months sparring with the IRS. In the meantime, the IRS expands the audit to cover as many years as they feel justified in asking for. This means the CPA needs to do more work, and with complex tax returns, it could tax months or years just to put this information together. (The IRS will give you more time, as long as you agree to extend their statute of limitations - nice, eh?)
So… we’re probably now 3-4 years after the most recent return was filed (9-10 after the oldest). The audit process has arrived at a final assessment. Naturally, you disagree with it. So your tax attorney takes it to court. The fastest Tax Court settlement I’ve ever seen took 4 months (because we agreed with the IRS), but this disagreement won’t be so short. When the Tax Court rules against you, you appeal it - add another year. And when the District Court rules against you, appeal it to the Supreme Court - add another year.
So, you’ve managed to defer the inevitable for as much as 6 years, and the oldest return in that examination was 7 years older than that. For a boxer, 13 years puts them past the peak of their career, when they’re having financial problems anyway.
Note that managers/agents are also great at not actually handing the money over to the performer/athlete. As far as the IRS is concerned, the manager who took the money doesn’t actually owe any taxes, the person who never saw the money is.
The documentary about the Cowsills gave an example of this. The manager/father/jerk took most of the money the kids earned. And the kids ended up in the hole to the IRS for a lot more than they ever actually got.
Boxing promoters are really good at doing this. Really good.
But the corporation pays taxes as well. If the corporation is really just the individual, then you pay 39% of the “corporate profits” as tax and then an extra 15% on the “dividends” you receive as income. You take a tax hit as a corporation, but it pays in form of limited liability.
I suspect there is a difference between competent accountant and honest accountant. Those entertainers don’t attract a bevy of honest people. I suspect they get taken advantage of. A lot.
Hollywood actors and other entertainers do this. Their corps are hired for projects, then they “loan out” the services of the actors. Many of our pro athletes are employees, as mentioned by another poster. However, I think boxers would certainly qualify as an exception and I imagine most of them are paid out through corporate entities. I remember seeing a Mayweather pay stub somewhere and it was paid out to a company, but it may have just been an LLC.
True, but I think it is easier to expense things and pay OTHER employees (including friends/hangers-on, but certainly legit services as well) through the corp. There are also various benefits and expenses that can only be paid and deducted through corporate entity, though said benefits are not universally attractive or worthwhile.