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Forest Whitaker case a cautionary tale about tax withholding

Actor and director Forest Whitaker recently made the news not for a new movie or television project, but instead for the resolution of a years-long tax collection case brought against him by the Internal Revenue Service (IRS). 

Procedural history, complete with taxpayer missteps

The saga began in 2014, as Whitaker (along with wife Keisha) reported nearly $1.5 million dollars in income with a corresponding tax liability of roughly $427,000 for tax year 2013. His tax return showed that withholdings and estimated tax payments sent to the IRS only totaled $15,079, however. Clearly, this is a massive shortfall.

The IRS assessed taxes due from Whitaker as $426,812. It's important to note that this assessment didn't come from an IRS audit or investigation; the information was pulled directly from Whitaker's own tax return. He admitted to the tax liability, and there has never been an issue as to whether the taxes were due, only about the acceptable payment scheme.

In early 2015, Whitaker (through a representative) appealed to the IRS for a payment plan to correct the arrearage after the agency filed a notice to levy the actor's assets. The IRS first demanded that certain conditions be met, including:

  • Filing of the 2014 tax returns
  • Payment of any taxes due for 2014
  • Good-faith showing that the withholding issues were being addressed

Unfortunately, 2014's tax returns showed an even greater deficiency than 2013. Even though income of $2.5 million (corresponding tax liability of $800,000), only $17,000 in taxes was withheld the entire year. The actor's representative then modified the request for a payment plan to include the 2014 arrearage as well, but the IRS denied the request for a payment plan unless and until such a time that proper withholding methods were in place.

An appeal was made by Whitaker's team to the Tax Court regarding the denial of payment plan arrangements, arguing that the IRS had abused its discretion. The Tax Court ultimately disagreed, saying that Whitaker failed to provide any substantiation of an attempt to correct the withholding issues, and there's no record of additional payments during this time.

After the Tax Court's decision, Whitaker and his representatives appealed to the Ninth Circuit Court of Appeals, again arguing that the IRS abused their discretion. The appellate judge upheld the lower court's decision.

What not to do

This case brings not only recognition to the topics of tax withholding, payment plans and overall compliance, it also shows the importance of:

  • Making a good faith showing by providing substantiation when requested by the IRS
  • Demonstrating willingness to correct deficiencies (making payments in a timely manner, filing returns, exhibiting changes in withholding or estimated taxes to prevent further underpayment)
  • Negotiate with the IRS reasonably (offering to pay $50 per month on an arrearage for $100,000 likely won't be seen as reasonable)
  • Maintain open lines of communication with the agency while requests for payment plans, audits, investigations and other matters are pending

If you are facing arrearages with the IRS, you are not powerless, and you are not doomed to levies, garnishment or seizure of assets. It is possible to successfully negotiate with the agency. You shouldn't try to "do it yourself," though. This is not the time for a DIY approach. A tax attorney who has knowledge of the relevant tax codes and experience with similar actions can save you significant time, money and stress throughout the process.

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