December 1, 2010

The conclusion of Mr. Halpern's address:

The bottom line for success in responding to the IRS at any stage of the process is to provide the information requested in a timely and orderly manner that makes it easy for the examiner to follow.  The key is to have some document that supports each item in question.  Failure to be able to provide back-up for any particular item may lead to disallowance of that item.  Usually the biggest item in question, in terms of dollar amount, is the agent fees paid by the athlete during the year.  For example, the client I mentioned earlier that was awakened from his slumber by a proposed tax due of $319,127 had paid $1,040,000 of agent fees in the year being examined.  This accounted for 95% of his disallowed expenses.  This should not be too difficult to document by obtaining an invoice from the agent and either canceled checks showing payment of the invoiced fees or a receipt from the agent showing the amount has been paid.  Properly documenting agent fees will generally substantially reduce any amounts of additional taxes assessed by the IRS.               

How are these returns being selected for examination?  I have spoken with one CPA that has a sizable practice working with professional athletes that believes it is the deduction claimed for agent fees, which as I just explained can be a rather large number, that is triggering the examinations.  He thinks that if we can somehow make the IRS aware of this, perhaps it can set their computers to not “red flag” for examination returns simply because they contain a large deduction for agent fees.  While this may be one of the triggers, I do not believe it is the only trigger or that the IRS will agree not to “red flag” these returns for examination.  I believe that the IRS has determined that professional athletes, as a group, claim many unreimbursed business expenses that it believes are either not allowable or not properly substantiated pursuant to IRS guidelines.  I believe these examinations are a fact of life for professional athletes as long as the IRS believes it is having success at assessing and collecting enough taxes to make these examinations worthwhile.

So, where do you all come in?  As financial advisors working closely with professional athletes, and oftentimes in contact with the athlete more frequently than any other advisors, you should be proactive and educate your clients that the IRS is performing examinations of professional athletes’ income tax returns and that if they receive correspondence from the IRS, or any other taxing authority, it is critical that the correspondence gets in the hands of their tax advisor as soon as possible.  This will help their advisor to protect their rights and can minimize your client’s costs in terms of taxes, interest, penalties and professional fees.

You would be amazed the amount of times I receive IRS and state correspondence from prior years when a client sends me his/her information for the current year.  They simply set it aside in their “tax” pile, oftentimes not even opening it.  One suggestion that can be made to a client is that the address of the tax preparer or the address of their financial advisor be used on the return.  When I do this for clients, I simply include a statement with the return indicating that the address on the return is that of their tax or financial advisor and then I provide the taxpayer’s address for the tax year.  I include this “extra” statement because it provides further documentation with respect to any potential residency issues.  While this greatly increases the likelihood that correspondence from the IRS or state taxing authorities is handled in a timely manner, not all preparers or financial advisors will agree to put themselves in this position for fear of potential liability if something is not handled in a timely manner that results in taxes, interest or penalties that the client would not have otherwise incurred.  This can more easily occur in a larger firm environment where these tasks are delegated and not carefully monitored.         

Additionally, at the time your client’s tax returns are initially prepared, you can help your client gather the necessary documentation to support the expenses they wish to claim on their return.  It is a lot easier, and far more cost effective, for me to respond to these examinations when I already have the information in our files or the financial advisor has the information in his/her files.

Please use this opportunity to contact your clients, educate them and show them that you are “in the know” about current issues that can significantly impact their financial plans.  Doing so should strengthen your relationship with your professional athlete clients and further enhance your image as their “go to” person.  Who knows, it may even lead to referrals if they are aware of other athletes facing these issues with little guidance from their advisors. 

Mitchell S. Halpern, J.D. is a principal at O’Connor & Drew, P.C., a CPA firm located in Braintree, Massachusetts, where he is the Director of the Firm’s Sports and Entertainment Accounting Practice.  He is also a board member of the Sports Financial Advisors Association and a member of the Sports Lawyers Association.  Mitchell authored the chapter on State and Local Taxation of Professional Athletes that appears in Gary Uberstine’s legal treatise, “Law of Professional and Amateur Sports”, has spoken at numerous national conferences on tax issues relevant to professional athletes and has been quoted in various newspapers. Mr. Halpern has been interviewed by SLT on previous occasions. 

SLT is grateful to Mitchell Halpern for his kind permission to share excerpts from his presentation made 11/13/10 at the Sports Financial Advisors Association Annual Conference with our readers.