You know those commercials that promise you can settle your tax debts for pennies on a dollar? While there are ways to reduce your tax obligations, the Internal Revenue Service (IRS) isn’t likely to do so unless you can demonstrate that you meet specific criteria, such as financial hardship. Actor Wesley Snipes learned that the hard way this week: The U.S. Tax Court has rejected his bid to reduce his tax debt by millions.
Snipes’ tax troubles date back to 2006. That year, Snipes was indicted on charges of attempting to claim nearly $12 million in fraudulent tax refunds and not filing any tax returns for several years. His first attorney, Billy Martin, said in a statement at the time, “We believe the evidence in the case will show he has been the victim of unscrupulous tax advice. And this trial will help vindicate him.”
Snipes pleaded not guilty on all counts, and the matter went to trial in 2008. Despite a lengthy list of potential witnesses (including Muhammad Ali, Spike Lee, and Barbara Walters) and claims that the defense could take up to a month, the Snipes team rested after less than an hour. The defense felt pretty confident that the government had not proved its burden, saying, ”We could have put on a big show, but we don’t do that. We’re not going to waste the jury’s time.”
The prosecution, however, presented evidence to show that Snipes avoided paying tax. IRS agent Steward Stich testified that Snipes earned almost $40 million in the years 1999 through 2004 and failed to file tax returns or pay any taxes on that income. He also alleged that Snipes also tried to have almost $12 million in taxes paid in prior years 1996 and 1997 refunded to him.
Snipes was acquitted of felony federal tax fraud and conspiracy charges but convicted of failing to file tax returns from 1999 to 2004. He faced up to three years in prison on the charges, and he received the maximum sentence.
After his conviction, Snipes immediately promised an appeal, which he delivered (more than once) claiming, among other pleadings and filings that his sentence was unreasonable, that his defense was lacking and that he was not able to get a fair trial in Ocala, Florida, which Snipes had previously referred to as a “hotbed of KKK activity.” He was supposed to report to prison on June 3, 2008, but that was delayed, pending the outcome of the appeal. Eventually, his request for a new trial was denied, and he reported to prison the McKean Federal Correctional Institution on December 9, 2010.
While serving time, Snipes again appealed his case, this time to the U.S. Supreme Court. On June 6, 2011, Snipes’ petition for certiorari was denied, which means that the Court declined to hear the matter.
Snipes was released from prison on April 2, 2013, after serving 845 days of his three-year sentence. He was back to work shortly afterward.
It’s important to note that serving time for a tax crime doesn’t wipe out your tax debt. When Snipes was released from prison, he still owed millions to the IRS. Snipes claimed he didn’t have the cash and filed an Offer In Compromise (OIC).
An OIC allows you to resolve your tax obligations for less than the full amount you owe. You generally submit an OIC because one of three things apply:
- You don’t believe you owe the tax;
- You can’t pay the tax; or
- There is no doubt that you owe the tax nor that you could pay it, but an exceptional circumstance exists.
According to court documents, Snipes made a cash OIC of $842,061, less than 4% of his total underlying liability, claiming, among other things that he did not have the means to pay the debt. The offer was rejected. In response, Snipes filed an appeal with the U.S. Tax Court.
Tax Court cases generally proceed reasonably quickly, at least compared to other federal court cases. However, this one dragged on for years. Snipes filed his petition on November 5, 2015, and it was scheduled for a December 5, 2016 trial date. That court date didn’t happen. In October of 2016, U.S. Tax Court Judge Kathleen Kerrigan remanded the matter back to the IRS Appeals Office. Those discussions weren’t productive, and by January 18, 2018, a new trial date had been set for May 14, 2018. A few motions and a few new attorneys later, the matter went to trial.
On November 1, 2018, Judge Kerrigan upheld the IRS decision to reject the offer. Judge Kerrigan found that Snipes failed “to provide bona fide documentation to prove his assets and financial condition.” She weighed his offer against what the IRS believed to be his reasonable collection potential and determined that the IRS “did not abuse” discretion when rejecting the offer.
How much of a discrepancy existed? At the time the petition was filed, Snipes owed approximately $23.5 million (it’s worth noting that the 2002 debt of $1,497,645 was eventually paid off). Snipes offered to settle for less than $850,000. The IRS initially concluded that Snipes’ reasonable collection potential, based on his assets and income was much higher: $17,482,152. Despite that finding, Snipes did not increase his offer.
Snipes countered that his financial adviser, W. Johnson, had taken loans against his assets without his knowledge. He provided an affidavit to that effect but not much else. Despite a lack of documentation, the settlement officer nearly halved the original reasonable collection potential to $9,581,027 in an effort to settle. Snipes refused to budge, clinging to his original $842,061 offer. The IRS eventually rejected Snipes’ offer in total. Snipes filed suit, claiming an abuse of discretion.
Judge Kerrigan found no such abuse, noting that the settlement officer “spent considerable time and effort in her endeavor to determine petitioner’s income and assets, as well as his equity in his assets, trusts, and businesses.” And while Snipes claimed that paying more than his offer would cause an economic hardship, Judge Kerrigan found that he had not submitted “complete and current financial data” and therefore, “did not make a showing of economic hardship necessary to qualify for special circumstances.”
(You can read the Tax Court Memo here.)
So what’s next? The offer has been rejected. Typically, the IRS will continue to collect and will continue to maintain federal tax liens previously filed against Snipes. The IRS may also try to seize his property through one or more levies.
Don’t confuse a lien and a levy. A lien acts as a placeholder. The purpose of a tax lien is to protect the government’s interest by putting creditors on notice that the government has a legal right to your property. This is important because the government often has a priority claim: the lien lets creditors know that they may not be first in line if you don’t pay up on other debts. What this does, realistically, is affect your ability to get credit. If and when you sell any of your assets, you may be forced to turn over the proceeds to the IRS to satisfy your debt.
If you pay your tax liability in full, the IRS will release the lien. The IRS may also work with you to release the lien under other circumstances, including efforts to demonstrate compliance while you’re on a payment plan. Filing for bankruptcy doesn’t necessarily help you out: a federal tax lien may continue even after you’ve filed for bankruptcy.
In contrast, a levy means that the government is taking action to seize your property to pay your tax debt (more on levies here).
Liens and levies can be financially devastating which is why it’s important to resolve your tax obligations promptly. The IRS is willing to work with you, and a reputable tax professional can help you navigate the sometimes confusing maze of options, including an Offer in Compromise or an installment plan. But don’t think that the IRS is going to accept those “pennies on a dollar” offer if they reasonably believe they can collect more. An offer or installment plan has to make sense.
As for Snipes? In addition to real estate holdings that IRS claims Snipes has interests in, he’s still working in Hollywood. According to IMDB, Snipes has a few ongoing projects, including a movie, Dolemite Is My Name, featuring Eddie Murphy and Chris Rock. He also made an appearance at San Diego’s Comic-Con this summer where he fueled speculation that more Blade movies might be on the way.