Celebrity Tax Evasion: What Did Wesley Snipes Do and What Happens Now?

If you watch the comedy Everybody Loves Raymond, you know that whenever trouble strikes, the mother asks the son, "What ...did you... do?" Right about now, Wesley Snipes' mother might be asking the same thing of her son. But a better question is "what didn't you do?" Unlike the sitcom, this is no laughing matter. If the charges against him prove to be true, Snipes might be looking at several years in jail for stiffing the IRS for millions of dollars.

An eight-count indictment was filed against Wesley Snipes on charges of failing to file tax returns and filing false amended returns. The indictment includes charges against two Florida men, Eddie Kahn and Douglas Rosile Sr., who assisted him in the alleged tax fraud. The movie actor who once played the role of a fugitive from justice may now be one himself, as his whereabouts are unknown. If Snipes knows he is under indictment and has deliberately vanished, his disappearance could add five additional years tacked onto his possible sentence.

The indictment includes six charges of failing to file income tax returns from 1999 to 2004, each of which could result in one year in prison. Plus after filing returns for 1996 and 1997 and paying the $12 million in taxes due, he later amended the returns, asserting that his income should have been reported as zero and that he was due refunds. The IRS issued the refunds, and then took a closer look at Snipes' amended returns. After determining that the actor's claims of zero income were bogus, they notified Snipes that he must repay the $12 million. Snipes refused, answering that because his last several movies went straight to video, he had no money.

Why Did Snipes Claim He Was Entitled to Pay No Taxes on Millions of Dollar of Income?

With the help of tax preparer Douglas Rosile Sr. and Eddie Ray Kahn, founder of American Rights Litigators, Snipes used what is known as the Section 861 Argument. According to the IRS, this is an old chestnut, tried by numerous taxpayers. It is based on the false assertion that only income that is earned from foreign sources is subject to federal taxes. Since Snipes earned his mega millions in the United States, his amended tax returns showed zero taxable income.

The Section 861 defense is a favorite of tax protestors. In fact, it appear on the IRS Dirty Dozen list of most common tax scams (http://www.irs.gov/newsroom/article/0,,id=136337,00.html). But Sections 861-865 of Title 26 of the tax law are intended to help taxpayers determine whether or not income from foreign sources is taxable. What these sections do not do, is render income earned within the United States nontaxable. Still, that has not stopped tax protestors like Snipes from trying it.

A Little History About Co-Defendants, Eddie Kahn and Douglas Rosile

Kahn is the founder of American Rights Litigators (ARL) and its successor, Guiding Light of God Ministries (GLGM). According to the indictment ( http://news.findlaw.com/hdocs/docs/tax/ussnipes101206ind.html) GLGM claims to be a non-profit "Christian ministry and organization established to assist men and women in their pursuit of truth and freedom as Americans." In reality, the indictment says, the ARL and the GLGM were for-profit commercial pursuits that sold fraudulent tax schemes to the public that sought to interfere with the government's tax revenue laws. ARL charged clients a fee for tax preparation, half of which was paid to Rosile as the tax preparer. And any tax refund that resulted from fraudulent tax returns generated a 20 percent fee for ARL, half of which was paid to Rosile.

Rosile is a former CPA who practiced accounting after his licenses in Florida and Ohio were revoked. He is currently being sued by the Justice Department for allegedly filing bogus tax refunds for clients in 32 states, totaling more than $36 million. The suit is still pending.

U.S. Attorney Paul I. Perez reports that Rosile is currently in custody in Ocala, Florida, and Eddie Kahn is believed to be out of the country. In a news conference regarding the Snipes case, Perez said, "It's a conspiracy against the IRS, basically to harass the IRS, from doing its lawful job in terms of collection of taxes."

Celebrities and Other Rich People and the IRS

You probably remember that, not long ago, Willie Nelson was under IRS scrutiny for investing in abusive tax shelters. The shelters promised $10 in deductions for every $1 invested. Sound too good to be true? It was. Instead of the tax savings what Willie got was a tax bill for over $16 million. To pay up he had to allow the IRS to sell his ranch and other assets, and sign over a royalty interest in his album "Who'll Buy My Memories?" In the end, a new IRS policy that encourages settlement agreements allowed Willie Nelson to agree to pay $9 million additional taxes over five years, for a total of $12.6 million instead of the original $16 million.

You may also remember when Leona Helmsley (aka "The Queen of Mean") was sent to prison for 18 months for tax evasion and mail fraud. She was the widow of real estate tycoon Harry Helmsley and at that time, one of the richest women in the country. But according to her housekeeper, Helmsley's tax philosophy was summed up by saying "We don't pay taxes. Only the little people pay taxes." Eighteen months in prison may have caused her to adjust her thinking, though if the gossip sheets are accurate, she's still the Queen of Mean.

More importantly though, Helmsley was wrong. In spite of the fact that Americans constantly complain that the rich pay little or no taxes, the opposite is true (though there are notorious exceptions, like Nelson and Helmsley and possibly Snipes). Year after year, statistics prove that almost all federal income tax revenue collected is paid by the top earners. In fact, the rich pay more now than they did under the previous administration.

The Department of Treasury estimates that for 2006:

- The top one percent of income and wage earners (those making nearly $408,000 annually) will pay about 23 percent of all federal tax.
- The top 5 percent (earning more than $169,500) will pay about 42 percent of the total federal tax collected.
- The top 10 percent (over $123,700) will pay 54.5 percent.
- And the bottom 50 percent (less than $36,700) will pay about 6 percent of the total revenue.
- But wait... the last 6 percent figure is misleading. Because many who make less than $30,000 pay nothing because they qualify for refundable credits like the Earned Income Credit. And still others who had nothing withheld all year long still get large Earned Income Credit refunds.

Some people hear these facts and refuse to believe them, mainly because they feel the pinch in their paychecks. But in many cases they are forgetting that much of that pinch is Social Security, not federal tax. They also do not consider the fact that, if they end up with a refund, they get much or all of that back.

Where Do Your Sympathies Lie?

It's an odd fact of life in America...many people are livid when they hear that a rich business person, like Leona Helmsley has cheated on his or her taxes yet they are willing and eager to give a free pass to rich celebrities like Wesley Snipes and Willie Nelson who do the same thing. But rich is rich and however their money was made, in business or in movies, or even illegally, the tax bill still has to be paid. And in spite of the popular myth that the wealthy don't pay taxes, statistics prove that most of them do. They pay their share and their share is generally much more than that of the middle class. Those who don't, may eventually face not only the Tax Man, but also penalties and prison.

What do you think?