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Forest Whitaker tax case: withholding is key

Academy Award-winning actor and director Forest Whitaker is famous for his impassioned portrayal of such varied characters as ruthless dictators and obedient soldiers. He now has another – much more dubious – claim to fame: a high-profile tax collection saga recently decided by the Ninth Circuit Court of Appeals.

Whitaker’s years-long tax problems began in 2014, with the filing of his 2013 income tax return. That year, the actor and his wife reported, on their joint tax return, an income of almost $1.5 million, with a corresponding tax liability of about $427,000. However, withholdings and estimated tax payments for the year totaled only $15,000.

IRS action begins

Based on the actor’s filed tax return, the IRS assessed taxes for tax year 2013 at $426,812. Accounting for the payments made through estimated taxes and withholding, that left nearly $412,000 due. The IRS assessment in late 2014 led the actor’s representatives to seek a payment plan arrangement in early 2015 to address the arrearages.

While the payment plan request was pending, Whitaker filed his tax returns for tax year 2014. The huge discrepancy between tax liability and withholding/estimated tax payments was even more pronounced the following year. The 2014 return revealed an income of about $2.5 million (tax liability of roughly $800,000), with payments to the IRS of only $17,000 throughout the year.

The IRS declined to allow a payment plan for the 2013 taxes, given that the actor’s continuing lack of tax compliance in 2014. The agency also denied the request for a payment arrangement for the 2014 tax year arrearages.

Whitaker’s representatives filed an appeal with the tax court, alleging that the IRS abused their discretion in denying the proposed payment plan. The tax court disagreed, finding that the IRS acted within its authority because the actor failed to demonstrate a good faith effort at compliance with tax regulations and failed to provide necessary documentation upon request.

Then Whitaker appealed the tax court decision to the Ninth Circuit Court of Appeals, again basing arguments around the IRS’ alleged abuse of discretion. The Appellate court agreed with the lower one.

What you shouldn’t do

The Whitaker case is a very high-profile one because of the actor/director’s celebrity status. It will likely serve as a cautionary tale for other taxpayers, giving prime examples of what not to do in dealings with the IRS. The IRS is usually very willing to offer payment plans to taxpayers because, at the end of the day, the agency wants to collect taxes due and ensure compliance. In this case, it wasn’t granted, because the actor didn’t follow “best practices” in negotiations. These include:

  • Always make a good faith showing of compliance by cooperating with request for information, additional documentation, etc.
  • Make reasonable offers for payment during negotiations (for example, offering to pay $75 a month on a tax arrearage of $150,000 is not reasonable)
  • Keep the lines of communication open with the IRS during any negotiations
  • Demonstrate willingness to correct compliance issues; file on-time tax returns, make payments in a timely manner, adjust withholdings to correct issues

Successful negotiations with the IRS are possible, but they must be done in good faith and with due diligence. An experienced tax attorney can advise about the best strategies for addressing tax issues while avoiding penalties and staving off criminal charges. Reach out for help today.

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