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Thread: Fed and State Budget Deficits cause tax crusade

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    Banned Melonie's Avatar
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    Default Fed and State Budget Deficits cause tax crusade

    An announcement came out this week that 40 states have agreed to directly co-operate with the IRS in tracking down "tax cheats", using their combined investigative resources and sharing their financial records. The stated reason for this was the deep red ink of the federal budget, as well as huge budget deficits in most states. By stepping up enforcement of "tax cheats", the federal and state governments figure they'll be able to take in a much higher amount of previously unpaid income taxes at very little cost of enforcement.

    One of the areas that is going to be heavily targeted is "tipped workers", because these workers do not have their income reported or their income taxes withheld by their "employers". The IRS has already descended heavily on Casinos, now requiring that the Casinos start reporting both base pay and also estimated tip income for every worker at the casinos. They have also descended heavily on cab companies, requiring the companies to issue log books to cab drivers such that every fare and tip will be recorded. In the case of the Casinos, the IRS and Casino owners cut a deal such that the Casinos would agree to report waitress and dealer incomes, and in exchange the IRS would agree not to open a full scale investigation of the Casino's own books and taxes.

    While I have not yet seen or heard of a special effort against dance clubs, it is logical that clubs will get some significant attention as well. This is particularly the case since dancers are likely to earn significantly more than Casino waitresses or dealers, or cab drivers, such that the IRS and state tax people stand to recover more dollars per investigation from dancers.

    How risky might this be ? Well consider the example of an upscale Manhattan club. There are several posts in the club section mentioning earnings levels. Even if you take half of the mentioned amounts, you're still talking about grossing $4,000 a week for a full time dancer. Over 50 weeks that's pushing $200K a year. The federal tax rate for someone earning that kind of money is 33%, meaning the IRS will be after $67,000. The NY state tax rate is 9.5%, meaning the state will be after $19,000. The NY City income tax rate is about 4%, meaning the City of NY will be looking for $8,000. And on top of all of this, the IRS will be looking for another $7,000 or so in Social Security/self employment tax. Total tax obligation for a NYC dancer grossing $4,000 a week is therefore likely to be in the $100,000 ballpark if that dancer doesn't have offsetting tax deductions such as home ownership. Total tax obligation for a NYC dancer earning even half of this amount, $2,000 a week or $100K per year, is still going to approach $40,000 without offsetting tax deductions such as home ownership.

    If the IRS, state and city tax people start poking around in Manhattan club records, and come up with real names and SS#'s of dancers plus records of how many private dances/champagne room trips they did over the course of the year, some HUGE tax bills could hit dancers next April 15th. While I used NYC as the example because I live in NY and happen to know all of the tax rates, this is just as likely to happen in other states which have huge state budget deficits as well. As with the Casino owners, it is also probable that if the IRS offers club owners a deal to report dancers' incomes in exchange for an agreement that the IRS will not investigate the clubs' own books and tax liabilities too closely, the owners would be stupid not to take the deal to avoid further investigation into club finances. Clubs doing this would, of course, leave dancers who have not reported/underreported their incomes in a very vulnerable position next April 15th, i.e. discovering that clubs have reported their income to the IRS and that they now owe $40,000-$100,000 in taxes .

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    God/dess Zofia's Avatar
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    Default Re: Fed and State Budget Deficits cause tax crusad

    I would add, that the IRS has cut these typs of deals with restaurants and bars in the past. The usually move city by city. Now is the time to get your financial house in order.

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    Banned Melonie's Avatar
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    Default Re: Fed and State Budget Deficits cause tax crusad

    I would add, that the IRS has cut these typs of deals with restaurants and bars in the past. The usually move city by city. Now is the time to get your financial house in order.
    Zofia, I don't mean to be the prophet of doom and gloom here. But I really get a feeling that with the strong motivation of huge budget deficits and with the new investigative tools available as a result of the Patriot Act and improved computerization, that there are going to be some huge income tax surprises in store for dancers next January-April. You're very in touch with the "corporate", legal and government world, do you think I'm being unduly paranoid ?

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    God/dess Zofia's Avatar
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    Default Re: Fed and State Budget Deficits cause tax crusad

    Mel,

    My guess is, the IRS will start a rolling program in the 40 states that have signed information sharing deals. The service and those states will start with the egregious tax shelters. Doctors and Dentists with their complicated leasing schemes and letters that aren't really tax advice will get hit first.

    All the big CPA firms and the tax shelter spin-offs are getting visits from the IRS or the State Auditors. The law firms that give out the bogus letters that "aren't legal advice" are getting visits too. Personally I think the IRS should just tighten the outside advice rule, but the service doesn't want to mess with publishing. They think that they can intimidate these law firms. And, because the firms say that their letters aren't legal advice, they can't then hide behind attorney client privilege. Very poor thinking on the part of some greedy lawyers.

    California has gone a long way along this path already with their cash register rules. At some point the clubs out there will start cutting deals with the FTB and IRS. I suspect that 1099s will fly on January 31. The casino deal is probably the template. But, as I said, the IRS has done that with restaurants and bars in cities around the country. I've always been surprised that they haven't done it to the clubs. Clubs and dancers are ripe for a hit.

    Z

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