dependents

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…).

{ 17 comments }