Warning all production executives: keep track of your expense receipts! The Internal Revenue Service has just ordered a copy of the Hollywood Creative Directory in its efforts to clamp down on tax abuse in the entertainment industry.
Clamp down, though, isn’t how the IRS views its role. “Understand” is the operative word, according to IRS assistant public affairs officer Jan Gribbon.
Within the past two months, the government agency has assigned 36 agents and auditors in its Los Angeles headquarters to a newly formed specialty group “to understand the entertainment industry,” Gribbon emphasized. “The purpose in establishing the group is to develop some expertise.”
Obviously, the agency is casting a wide net. The 127-page Hollywood Creative Directory lists some 1,300 production companies and their 5,000 employees. And it’s the first time the IRS has plopped down $ 42 in taxpayer dollars for the volume.
By using its non-profit status, the budget-conscious agency also made sure it didn’t have to shell out an additional $ 3.46 in tax for the book, according to Kathrine Chappell, office manager at the HCD.
Many of the IRS agents have also enrolled in entertainment business courses at UCLA as well.
“We don’t want to waste the time of CPAs and attorneys trying to train IRS people about how the industry works,” Gribbon said. “The media is covering this like we formed this hit group. But it’s not inconsistent with what is done in other industries.”
The garment and legal industries also merit own speciality groups, she added, though with fewer agents assigned. “If we were in a city where the steel industry was the lion’s share of employment, we’d have formed a speciality group for the steel industry just so we’d be able to do audits,” Gribbon added.
But the steel industry isn’t sprinkled with gold dust. “It’s more fun to audit Tom Cruise than Bill Cruise,” says Bill Tanner, a business manager at Tanner Mainstain & Hoffer, who counts several celebrities among his clientele. “Anyway, the tax force can make a lot of money from this.”
Experts say the IRS effort could yield hundreds of millions of dollars in uncollected taxes, though the agency hasn’t been specific about what potential tax abuses in particular it is investigating.
Tax experts, however, speculate that tax issues surrounding talent loan-outs, pension plans and international cash flows are likely targets. “There’s a variety of tax issues that have gone unanswered in the industry,” said Gary Basil, a partner with the accounting firm Ken Leventhal & Co. in Century City. Among these is whether or not a performer is an employee or an independent contractor in a loan-out situation, he said.
Basil said there’s clearly more activity in the number of audits being conducted by the IRS in the entertainment sector.”The IRS won the tax shelter wars in the ’80s and now its redeploying its excess capacity to the entertainment industry,” he said.
While Gribbon acknowledged that the entertainment speciality group is “functional,” she said the actual number of IRS employees in the L.A. district has dropped to 2,700 from more than 3,000 in the 1980s. The agency’s Hollywood office was consolidated into the agency’s L.A. headquarters several years ago, she added.
As for experts on the other side, the attitude is a combination of wait-and-see while searching for further information. “We’re definitely reading up on the issues,” said John Mucci, a business manager.