The tax troubles of some celebrities tend to receive a good deal of press coverage in California and around the country seemingly because of the interest in famous people rather than the underlying tax issues. But such stories do provide an important opportunity to talk about problems that affect taxpayers across the country, famous or not.
This week, the U.S. Attorney's Office charged Grammy Award recipient and actress Lauryn Hill with failure to file income tax returns. In a document filed with the U.S. District Court, the government alleges that Hill willfully failed to file returns for the years of 2005, 2006 and 2007.
The document also states that Hill is the owner of four subchapter S corporations. A subchapter S corporation is most prominently distinguished from the more common subchapter C corporation by the tax treatment it receives. An S corporation passes income through to its owners, who then pay taxes. By contrast, C corporations are taxed as a separate entity before distributing earnings to shareholders.
According to the charges, Hill earned approximately $1.8 million during the years in question, largely from royalties collected on her songs and appearances in films. Failing to file returns and failing to pay taxes can subject a person to substantial financial penalties in addition to jail time.
Each of the three charges leveled against Hill could place her in prison for up to a year and require her to pay a $100,000 fine. In addition, Hill faces penalties and interest on the tax owed, which could dramatically increase her financial liability.
Although most Americans do not earn as much as Hill, some may have tax issues similar in kind, if not in degree. In particular, tax returns for corporations and partnerships can be quite complex, posing trouble for some business owners. When the Internal Revenue Service comes calling, it is important to know the options to minimize any potential penalties.
Source: The Wall Street Journal, "Lauryn Hill Charged With Failing to File Income Tax Returns," June 7, 2012.