Agent Fees Often Raise A Red Flag To The IRS

Last week I published a couple of posts about taxes (see Cliff Lee Thinking About Texas Taxes and Did Taxes Have A Role In Cliff Lee’s Decision?).  I have no formal education in that particular area and I imagine that many agents similarly are not well versed on various state and federal tax laws.  Thus, it is important to bring tax professionals into your “team” to make sure that your athlete clients are covered in all areas.

Over the weekend, I read a copy of a presentation on the recent spike in the IRS examination of professional athlete tax returns, made by Mitchell Halpern at this year’s Sports Financial Advisors Association annual conference.  Halpern is a lawyer who works at O’Connor & Drew, P.C. and specializes in taxation of professional athletes.  He wrote the chapter on State and Local Taxation of Professional Athletes in Gary Uberstine’s Law of Professional and Amateur Sports and is a board member fo the Sports Financial Advisors Association.

Halpern’s presentation focused on the process regarding various deductions typically claimed by athletes.  In November, Lamar Odom sued the IRS after it said that he could not deduct taxes on his $12,000 in fines from the NBA and $178,000 spent working out to get in playing shape.  As Halpern explained in his presentation, the lawsuit existed only because the IRS selected Odom’s 2007 income tax return for what was most likely a correspondence examination, where a taxpayer is asked to provide specific documentation for certain items on their tax return.  Recently, the IRS has focused on examining returns that include “un-reimbursed business expenses” of professional athletes.  In particular, the IRS is focusing on claimed deductions for agent fees.

Usually the biggest item in question, in terms of dollar amount, is the agent fees paid by the athlete during the year.  This should not be too difficult to document by obtaining an invoice from the agent and either cancelled 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.

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…that is triggering the examinations.

Halpern has been involved with 8 correspondence examinations; he has received 6 “no change” reports from the IRS and the other 2 are still in the IRS pipeline.

When the IRS is interested in an athlete’s tax return, it usually sends a letter which indicates that Schedule A – Itemized Deductions and Unreimbursed Business Expenses are being examined.  The athlete has 30 days to respond, but may ask for an extension within that window.  If the athlete does not respond at all, the IRS will issue an examination report disallowing deductions for the items it is examining and showing a proposed tax due.  The athlete generally has 30 days from the date of the issuance of this examination report to disagree with the proposed changes and provide support for his allegations.

Failure to respond to the examination report within the time frame allowed will generally result in the issuance of a Notice of Deficiency; the IRS will assess the taxes it believes are owed, and the athlete will have 90 days to either pay the tax or file a petition with the U.S. Tax Court.

Keys for athletes = (1) responding to IRS requests on time and (2) keeping documentation to support each claim.  I will add a (3), which is having an experienced tax professional to aid the athlete in this process.