ACORN Officials Offer Tax Advice (and a Word or Two About Being a Pimp)

Late last week, news broke that officials with the group ACORN were secretly videotaped allegedly offering advice to folks posing as a pimp and prostitute. While accusations have flown about what was or was not said/meant/intended/edited, it’s clear that at least one of the officials was offering improper tax advice.

Here’s the set up for the video. James O’Keefe, a 25-year-old independent filmmaker, and a young woman paid a visit to an ACORN office in Baltimore. O’Keefe posed as an over the top pimp and the young woman pretended to be a prostitute. They told the officials at ACORN that they were hoping to find housing where the young woman could continue to operate as a prostitute. Both acknowledge and are advised that prostitution is illegal. And that’s where the fun begins.

The young woman is first advised that she should file taxes even if she’s working as a prostitute. This is absolutely true. Gains from illegal activities are still reportable and taxable.

Next, the staffer advises the young woman that she needs a “code” for her occupation for purposes of her tax return. She’s referring to the “Principal Business or Professional Activity Codes” that the IRS requires for Schedule C. The instructions state:

Select the category that best describes your primary business activity (for example, Real Estate). Then select the activity that best identifies the principal source of your sales or receipts (for example, real estate agent). Now find the six-digit code assigned to this activity (for example, 531210, the code for offices of real estate agents and brokers) and enter it on Schedule C or C-EZ, line B.

After the young woman has advised that she’s a prostitute, the ACORN staffer advises her to refer to herself as a freelance performing artist. Hmm… I think I would have suggested “812990 – All other personal services.”

The young woman tells an ACORN tax advisor that she earns about $8,000 per month. The ACORN employee, it has been reported, then advised the young woman that she would report $9,600 per year on her tax return (as opposed to $96,000). It sounded very deliberate when I first read the reports but watching the video made me change my mind. Tax evasion or bad math? I vote bad math on this one.

The staffer goes on to advise (properly) that self-employment income reported on a Schedule C would be subject to self-employment tax unless it could be offset by expenses. The staffer goes on to improperly advise that clothing and grooming would be deductible as expenses (who honestly believes that what a prostitute wears would pass muster with IRS as a uniform?). She also suggests that gifts to clients might be deductible – they are, to a point. But those would be subject to limits. The “pimp” then suggests that condoms could be considered a client gift. I actually think condoms would be considered a legitimate business expense (certainly ordinary and necessary in the trade of prostitution), not a gift.

The “pimp” and the young woman then tell the staffers that they plan to bring in young, illegal immigrants to work as prostitutes. The “pimp” wants to keep them off of the books but the staffer advises that they should issue 1099s, a good idea except for the teensy-weensy detail that they’re illegal. When the “pimp” points this out again, the staffer backtracks and says, “well then, you don’t have to worry about them.” She’s right in that, without a proper tax ID number, you can’t issue a 1099. But that doesn’t mean that you don’t report those workers, it means that you don’t hire them in the first place. That should have been the answer.

The most disturbing part of the video is when the staffer suggests that the girls who are being trafficked for the purpose of prostitution could be claimed as dependents. The IRS defines a dependent as a qualifying child, or a qualifying relative. There’s no way that these girls could be described as a “qualifying child.” They almost fit the definition of “qualifying relative” since the intent is to live with the taxpayer “all year as a member of your household” – however, there is a caveat that the relationship must not violate local law. Clearly, in this situation, it does violate local law on a whole bunch of levels.

So it’s a mixed bag on the advice. Occasionally on the right track. But mostly bad/wrong/illegal.

A lot has been said on both sides about the tape, including noting the holes in the editing. I’m glad that I watched it, though, rather than relying on reports from either side of the debate. Is it scream worthy? You can watch the tape here and judge for yourself what you think:

Reportedly, both staffers have since been fired.

By the way, if you’re wondering about the legality of the video, it likely cannot be admitted as evidence even if a criminal investigation is instigated since the state of Maryland requires the consent of both parties before taping or videotaping conversations. In fact, it may even be criminal (O’Keefe should have had a chat with Linda Tripp about that…).

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17 thoughts on “ACORN Officials Offer Tax Advice (and a Word or Two About Being a Pimp)

  1. KPE-

    I agree with you on the choice of “Principal Business or Professional Activity Code” and that condoms would be “ordinary and necessary”.

    As for wardrobe – what if she dresses up as a nurse, or in a Catholic school girl or Girl Scout uniform as part of her “performance art”? These would clearly be “costumes” not adaptable to general use.

    TWTP

  2. IRS Pub 17 Your Federal Income Tax states the correct way the income should have been reported (page 91):

    Income from illegal activities, such as money from dealing illegal drugs, must be included in your income on Form 1040, line 21, or on Schedule C or Schedule C-EZ (Form 1040) if from your self-employment activity.

    That leaves open how to describe the income and occupation. On page 49 of the book “Stand Up To The IRS” the author, Frederick W. Daily, recommends writing “Fifth Amendment” as the source of the income and also as the occupation of the taxpayer. He also recommends to consult with a tax attorney before filing a ‘Fifth Amendment’ tax return.

    A “Fifth Amendment” tax return would probably increase your chance of an audit but it avoids a possible charge of perjury from using an occupation code that isn’t correct.

  3. This is so ridiculous. This story would be on every newspaper’s front page, along with hourly updates from CNN/MSNBC if this happened at a conserv. tax prepayer or even a private establishment like H&R Block.

    But Noooo lets not worry about it because it happened at a poor minority supporter

  4. My Journey,
    To be fair, it made the top story on CNN last week when the story broke. I didn’t post about it until this week because of my back to school series.
    If you Google it today, you’ll see “501 related articles” on the first line. It’s been pretty well covered.

  5. I pretty much agree that condoms should be essential and normal. And as for the clothing that she will wear, nurse dress and the like should be considered as costumes that are not adaptable to use.

  6. Before we jump all over ACORN’s tax advisor, maybe we should secretly videotape for a few hours inside a “mainstream” tax-preparation office such as H&R Block, Jackson-Hewitt, etc. I bet you’ll find tax advice at least as bad as ACORN’s on matters equally esoteric. Come on now, how often does one of these tax prep offices deal with someone whose “occupation” and questions are so far off the mainstream?
    Tax “preparers” at these outfits receive a couple of weeks “training” and are turned loose on the public. They can do a 1040-EZ and a “simple” 1040 that doesn’t have a Schedule C. The Schedule C is where they fall down a black hole, and if there’s depreciation involved I bet most of them have no idea what’s going on.
    So far as I can tell, the lady at ACORN did the best she could with this oddball situation. Certainly if these “taxpayers” had consulted with a different preparer in the same office (or at one of the “mainstream” offices) they would have received different, although maybe equally inappropriate advice. The proper respoinse by the preparer should have been, of course, “this is pretty involved and I don’t know if I can give you the answers you need; you need to go to a tax expert such as a CPA.”
    In passing, I have a friend who works in one of the “mainstream” tax prep locations and she tells me that their whole system is, basically, a ripoff and that with difficult questions their instructiuons are to take the most conservative least-likely-to-generate-an-audit approach, potentially costing their clients a bundle in unnecessary taxes. They’re playing cover-your-@$$ for their employer rather than looking out for their clients’ best interests.

  7. JBruce-

    I agree that the “pimp and pro” would probably receive a similar response, or worse, from Henry and Richard, Jackson Hewitt or Liberty.

    BTW- the proper response should be “You need to go to a tax expert. (PERIOD)”. No need to add “like a CPA”. A CPA is not necessarily a tax expert.

    TWTP

  8. This whole thing was obviously a setup — how else would it have got on camera? And now, of course, the “there’s nothing racist about this!” right wingers are creeping out of their holes to righteously denounce this terrible travesty, bla bla bla.
    I didn’t see the “top story” run on CNN, but I’m sure it showed a couple of cute sound bites and said nothing about the possibility that the advisor was just in over her head. And, of course, the tape reveals nothing about a “policy” by ACORN to go out and advise pimps and ho’s.

  9. I think the difference is that ACORN holds itself out to be a non-for profit getting TONS of money from the gov’t and this is just yet ANOTHER story about how corrupt the orginization and its leaders are.

  10. The San Francisco Chron reports that ACORN has received 53 million dollars since 1994 from the federal government. yes tons, i say, tons of money.

  11. Years ago, a young lady came into the tax office that I managed here in Salt Lake City. She needed tax returns prepared because she had received several 1099’s. She had gone to the Blockheads, Jennifer Love Hewitt, and Give Me Death Tax Service and each of the preparers told her that they couldn’t help her.

    She was in her 20’s and had never filed tax returns because she had never received a W-2. She had worked as an exotic dancer, or in less polite circles as a stripper. The year I met her, she had received 1099’s for the previous 2 years while working in Nevada as, you guessed it, a prostitute. She was clearly frightened that I would kick her out of the office as the other “tax professionals” had done.

    First, I explained that the source of her income while in Nevada was legal. Second, I explained that any income she earned anywhere else while performing the same services, still needed to be reported to the IRS. The real problem that she had was not how she had earned the money, but that she really had no clue about how much she had made. Somebody along the way had told her that it was best to do everything in cash to conceal her illegal activities — and, no I don’t think it was anybody at ACORN.

    Ultimately she determined income and legitimate expenses and I filed a Schedule C — using “Other Personal Services” as the code. Every year since then I have filed her taxes. Each year I tell her that she should earn her money in legal ways, and each year she tells me that she will — eventually. As a tax professional, it is not up to me to report her activities. If I knew for a fact she was harming minors or enticing them to engage in this illegal acitvity, I would report her anonymously to the local authorities.

    I watched the video and watched the reports on Fix Noise when they came out orginally. I saw outrage on both sides. First, it was apparent to me, as a manager of a tax office and as a trainer of tax preparers that these people had no business being anywhere near the words “tax preparation” and that ACORN had apparently fallen down on their responsibility to ensure proper training. Second, the whole video seemed like entrapment to me and that I could see where an untrained person might fall into the trap of wanting to help a person. But it seemed outrageous that a “pimp” would bring a “prostitute” to ANY office looking for tax advice for HER.

    To me, this story is LESS about corruption and MORE about education. Anybody armed with an education could have dealt with the situation honestly and accurately. I would hope that at some time in the future ACORN is able to educate their tax preparers and be able to participate in VITA.

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