The Growing IRS Focus on Digital Creators

For IRS purposes, an influencer is an individual monetizing digital following through (1) platform payouts and ad revenue; (2) brand sponsorships and partners; (3) affiliate marketing commissions; (4) merchandise and digital products; (5) subscriptions and memberships; and (6) speaking and appearance fees. In an IRS audit, there are three critical areas where the IRS or state agency will audit (1) whether the influencer is engaging in a trade or business or being an influencer as a hobby; (2) whether the influencer is an employee or independent contractor; and (3) whether the influencer is conducting a combined business or conducting separate ventures.

The Importance of Recordkeeping

The bottom line is that the IRS and state tax agencies are generally skeptical about influencers’ deductions because there is a concern that influencers may be disguising personal vacation expenses as tax-deductible business expenses, or improperly deducting wardrobe costs, or deducting home office expenses that were personal in nature and turning personal meals into deductible business expenses. The IRS and state tax agencies alike will be successful in challenging these deductions unless the influencer maintains appropriate documentation and records establishing that all their deductions are business expenses and therefore deductible.

Social Media as an Audit Tool

Make no mistake that the IRS will also be scrutinizing the income reported by influencers. The IRS will be looking at the influencer’s social media profile to determine whether the lifestyle that is portrayed in the profile is properly reflected on the influencer’s tax return. Just as with the student athletes discussed in our first installment, cash is not the only thing that results in income. The influencer must report the FMV of all goods and services received in connection with its influencer business. Many influencers run into problems because they receive free products from companies or all expenses paid trips to hotels in exchange for a few posts about the product or hotel. These items are taxable and if the FMV of these items are not properly reported, the influencer may create significant tax issues for themselves.

When to Seek Professional Guidance

In conclusion, it is imperative that digital content creators consider the financial and tax implications of running their respective businesses and select the appropriate business structure to suit their needs. Mistake of law is never a defense in the course of a civil tax audit and if the IRS feels that a taxpayer has willfully failed to report income to the IRS or inflated its tax deductions, these taxpayers could find themselves facing criminal charges for tax fraud in addition to being slapped with civil liabilities.

For more information, or to seek counsel from our Taxation practice group, please reach out to request a consultation or call us at 216-696-1422.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

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What Are Common Income Streams for Performers?

Artists, entertainers, musicians, and “road crews” may receive both W-2 wages as employees for stage work and Forms 1099 for their services such as coaching and teaching. The IRS has had much success in challenging these taxpayers in the following three areas: (1) deductibility of expenses; (2) worker classification; and (3) income sourcing.

As previously discussed in our first installment, expenses are only deductible if they are ordinary and necessary expenses paid or incurred during the taxable year in the carrying on of a trade or business. Expenses that will be denied include wardrobe, general makeup, hair styles for auditions, or to maintain an image for these taxpayers. Additionally, these taxpayers often find themselves violating rules related to deducting expenses that have a dual purpose (i.e., both business and personal). There is a general presumption that meals, entertainment, gifts, all expenses paid trips, boats, and non-deductible personal expenses are not deductible, unless the taxpayer proves otherwise. This presumption is not easily overcome and requires significant documentation to be provided by the taxpayer to show that these expenses were ordinary and necessary business expenses.

Deductibility of Business Expenses

Employees are not permitted to deduct business expenses. As such, artists, entertainers, and musicians who are employed by a company cannot deduct any of their expenses spent from their own personal funds. However, there is an exception for a qualified performing artist when the artist (1) performs services for at least 2 employers; (2) has allowance expenses that exceed 10% of the artist’s gross income from performing arts; and (3) has an adjusted gross income (“AGI”) not exceeding $16,000. This exception is not that helpful, because the $16,000 AGI limit is not adjusted for inflation, and most artists have an AGI higher than $16,000 per year. As such, if the IRS is successful in arguing that an artist, entertainer, or musician is not an independent contractor but rather than employee, the IRS and state agencies will be able to deny virtually all deductions that were taken by the artist, entertainer, or musician.

State and Local Tax Obligations

The third issue is a state issue that involves sourcing income to the applicable state or states. An artist, entertainer, or musician may create nexus with multiple states by performing in a variety of states during each year. Many states have non-resident return filing requirements and use duty days formulas to allocate income across the state jurisdictions. Many cities, like Cleveland, also have an income tax on performers doing a show within city limits. Many artists, entertainers, and musicians fall into the trap of only filing state income tax returns in the state where they are domiciled (i.e., reside, have a permanent home, etc.). Many states allow taxpayers to take credits for taxes paid in other states to avoid double taxation, but these artists, entertainers, and musicians may find themselves paying significant penalties for non-compliance and interest (to the extent tax was owed to the jurisdiction).

Planning Ahead to Avoid Costly Tax Issues

In conclusion, it is imperative that artists, entertainers, and musicians consider the financial and tax implications of running their respective businesses and select the appropriate business structure to suit their needs. Mistake of law is never a defense in the course of a civil tax audit and if the IRS feels that a taxpayer has willfully failed to report income to the IRS or inflated its tax deductions, these taxpayers could find themselves facing criminal charges for tax fraud in addition to being slapped with civil liabilities.

For more information, or to seek counsel from our Taxation or Business & Corporate practice groups, please reach out to request a consultation or call us at 216-696-1422.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

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The NIL Rule Change & Its Tax Impact

In July 2021, the NCAA changed its rules and began allowing student athletes to profit from their NIL. These student athletes are now permitted to enter endorsement deals, appear in advertisements, sell merchandise, and receive compensation for social media content. Student athletes are generally young adults between the ages of 18 and 22 who may not have any experience with filing their own taxes, as they are often claimed on their parents’ tax returns as dependents while they are in college. However, this change in their ability to profit from their NIL deals will have significant financial and tax implications that neither they nor their parents may fully understand or are prepared to handle.

What Counts as NIL Income?

For example, a student athlete does not always realize that NIL income is more than just cash. It includes non-cash compensation like merchandise, gift cards, cars, and other benefits, such as expense paid trips. The fair market value (“FMV”) of goods and services is considered taxable income. Student athletes must track all income, whether it comes in cash, goods, or services, and every dollar must be accounted for on their tax filings. When the IRS or state tax agency audits them, the IRS often finds out during their audit that the student athlete or the family have not reported the FMV of all of the goods and services the student athlete and/or their family received in connection with the student athlete’s business.

Common Deduction Mistakes & Risks

Additionally, a student athlete and their families may not fully understand what a student athlete may deduct on their returns. Some student athletes and their families have gotten themselves into predicaments with the IRS and state tax agencies because they have deducted exorbitant amounts in expenses without the required documentation to support the expenses. As a general rule, expenses must be ordinary and necessary expenses paid or incurred in the carrying on of a trade or business. Ordinary expenses are those that are common and accepted in your type of business, and necessary expenses are those that are helpful and appropriate for your business. However, reimbursable expenses for which the taxpayer has the ability to be reimbursed by a third party for those expenses are never deductible by the taxpayer.

Planning Ahead to Avoid Consequences

In conclusion, it is imperative that student athletes and their families, if applicable, consider the financial and tax implications of running their respective businesses and select the appropriate business structure to suit their needs. Mistake of law is never a defense in the course of a civil tax audit and if the IRS feels that a taxpayer has willfully failed to report income to the IRS or inflated its tax deductions, these taxpayers could find themselves facing criminal charges for tax fraud in addition to being slapped with civil liabilities.

For more information on this topic or to seek counsel from our Taxation group, please reach out to request a consultation or call us at 216-696-1422.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

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As is typical when Congress changes the tax law, the new rules are complicated in practice, and each taxpayer should consult their personal tax advisor as to the optimal way to file their income tax returns. But note that while the filing date for personal tax returns is not until April 15^th of next year, the decisions you make in November and December of this year will establish the “facts” of your possible allowable 2025 tax deductions. This is because individual taxpayers are on the cash method of accounting. This means that to claim a tax deduction for 2025, you must make a payment by December 31, 2025. In the case of a gift of appreciated stock to a charity, the gift must be completed by December 31, 2025.

How the New Tax Rules Change Tax Planning for Itemized Deductions

Beginning for tax year 2025, for taxpayers with an adjusted gross income of less than $500,000 (but subject to phaseout for adjusted gross incomes above $500,000), the cap on state and local itemized deductions has increased to $40,000 from the prior limit of $10,000. As an example, consider a taxpayer with $15,000 of real estate taxes plus $25,000 of state and local income taxes paid ($40,000 total tax bill). Under the prior law, the taxpayer who itemized their deductions was limited to deducting only $10,000 of those taxes that they paid. But under the 2025 rules, the taxpayer would be eligible to claim itemized deductions for $40,000 of state and local taxes. Since that amount is greater than the 2025 standard deduction amounts, the taxpayer should choose to itemize deductions. In these facts, if the taxpayer also makes charitable contributions in 2025, all the charitable contributions made in 2025 will reduce taxable income and save the taxpayer federal tax dollars.

This means that taxpayers who pay state and local income and property taxes plus mortgage interest at or near the amount of the standard deduction may want to consider itemizing in 2025 and make charitable contributions in 2025 to maximize their 2025 federal tax deductions.

Note that for tax years after 2025, the charitable contribution rules change and establish a “floor” before taxpayers may itemize charitable contributions. This means that itemizing taxpayers cannot deduct charitable contributions until their charitable contributions exceed 0.5% of their adjusted gross income. In 2025, taxpayers are not yet subject to the “floor” for charitable contributions, and charitable donations are subject to the existing rules. Because the “floor” has not yet taken effect, taxpayers may consider making larger charitable contributions in 2025. To the extent these charitable deductions go unused in 2025, the deductions can be carried forward. This strategy is called “bunching.” To the extent “bunching” makes sense for you, please consult with your tax advisor. 

Also note that the prior tax law about contributions of appreciated stock to a charity remains unchanged. So, if a taxpayer has low basis stock with a significantly higher market value, the taxpayer can contribute that stock “in-kind” (i.e., without selling it) to the charity. In such a case, the taxpayer can claim a charitable deduction equal to the market value of the stock on the date of contribution without having to pay any income tax on the built-in tax gain. As an example, if the taxpayer held public stock that they had purchased for $100 per share with a market price of $250 on the date of contribution, the taxpayer could contribute, say, 100 shares to the charity. The charity would sell the stock for $25,000, and the taxpayer would get a tax deduction of $25,000. The difference between the market price and the cost basis of $100 per share would not be taxed. 

While everyone’s individual tax situation is different, itemizing may make sense for you. As such, please consult with your tax advisor before taking any tax positions.

For more information or to seek counsel from our Taxation practice group, please reach out to request a consultation or call us at 216-696-1422.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

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The United States federal government officially shut down as of 12:01 am on Wednesday, October 1, 2025. The good news is that the Internal Revenue Service (IRS) does have a plan for operating during the government shutdown. The bad news is that the plan only involves keeping the agency open and operating at normal capacity for the first five days of the shutdown.

The American Institute of Certified Public Accountants (AICPA) has urged the IRS to keep all IRS agents working during the entire shutdown, citing the negative impacts the shutdown of the agency would cause for taxpayers nationwide.

However, the IRS has indicated that they will not be giving taxpayers any extensions of the following deadlines despite the shutdown: 1.) Extended 2024 individual tax returns are still due by October 15, 2025; 2.) Tax-exempt organization returns are still due November 17, 2025; and 3.) Expatriate tax returns are still due by December 15, 2025. 

Additionally, all taxpayers should assume that the Taxpayer Advocate Service (TAS) center will be negatively impacted by the government shutdown as well. The Taxpayer Advocate Service is critical for taxpayers facing serious issues in dealing with IRS disputes.

If you have any questions regarding the contents of this legal advisory or to seek counsel from our Taxation group, please reach out to request a consultation or call us at 216-696-1422.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

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What are Dividends vs. Capital Gains?

Dividend income is generally generated when a corporation distributes a portion or all of its profits to its shareholders during the year on a pro rata basis according to each shareholder’s ownership percentage in the Company, whether shares are owned directly or through a fund. Dividends are typically treated as ordinary income and are subject to the tax rate applicable to the shareholder who receives the dividend income.

Certain dividends, called “qualified dividends,” are subject to the preferential long-term capital gains rates. For the dividend to be a “qualified dividend,” the taxpayer, whether directly or indirectly through the fund, must hold the shares for more than 60 days during the 121-day period that begins before the ex-dividend date (which is the date after the dividend has been paid and processed).

Capital gain is generally generated when a taxpayer sells (directly or through a fund) a capital asset, such as stocks, bonds, real estate, or other investment property. Certain capital gains are typically taxed at a rate of 20% if the assets in question have been held by the taxpayer for more than 12 months. If the investment has been held for less than 12 months, the capital gains are classified as short-term and are subject to the higher ordinary individual income tax rates.

This is best illustrated with an example. Let’s say you received the following Informational Tax Reporting Statement from your fund.

The amount reported as “Qualifying Dividends” is also included in the “Total Ordinary Dividends.” However, the amount included in “Qualifying Dividends” is subject to the lower preferential long-term capital gains rates as opposed to ordinary income, subject to the higher individual tax rates. As such, you would report $80,000 in ordinary income and $20,000 in capital gain.

Understanding Dividends

It’s important to understand which types of dividends are subject to the higher individual tax rates versus those eligible for the lower long-term capital gains rates to properly determine your tax liability for the year in question.

Additionally, if you sell a capital asset, such as real property or other assets held for investment purposes, it’s vital to understand the holding period tax implications related to the sale. If the investor holds the asset for 12 months or less, any resulting capital gain will be considered a short-term capital gain subject to the ordinary individual income tax rates.

Finally, if you are serving as a trustee of a trust, the same rules apply regarding dividends and capital gains. However, trusts are subject to additional regulations governing the distribution of dividends and interest, which must be carefully considered when managing the trust’s tax obligations.

In summary, the above example highlights the importance of consulting with a qualified tax advisor to assist you with reviewing and interpreting the tax forms related to your investments. Doing so ensures accurate reporting and helps prevent overpayment of taxes.

For more information or to seek counsel from our Taxation group, please reach out to request a consultation or call us at 216-696-1422. 

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Please note that Christine Townsend is licensed only in Massachusetts. This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

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The Internal Revenue Service (IRS) is warning taxpayers and tax professionals about a national scam regarding fraudulent IRS impersonations using emails. “The IRS does not send emails about your tax refund or sensitive financial information,” said IRS Commissioner Chuck Rettig. “This latest scheme is yet another reminder that tax scams are a year-round business for thieves. We urge you to be on-guard at all times.”

The IRS said that unsolicited emails have been linked to multiple websites that mirror the official IRS website which is IRS.gov. The emails include details pretending to be about taxpayer refunds, electronic returns or tax accounts. The emails also contain a “temporary password” or a “one-time password” to which you are urged to enter in a response to the fake IRS email.  Your response then enables the computer hackers to insert a malicious file into your computer.  The malicious files or “malware” infect computers once users have accessed them and then the imposters may gain control of the taxpayer’s computer or secretly download software that tracks every keystroke, which gives them passwords to sensitive accounts such as financial accounts.

Please remember the following if you should receive such an email claiming to be from the IRS:

• The IRS does not send unsolicited emails and never emails taxpayers about the status of
• The IRS doesn’t initiate contact with taxpayers by email, text messages or social media channels to request personal or financial information. This contact includes but is not limited to: requests for PIN numbers, passwords, or similar access information for credit cards, banks or other financial accounts
• The IRS will generally first mail a bill to any taxpayer who owes taxes
• The IRS does not call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer

Please contact our tax attorneys at 216-696-1422 if you have any concerns regarding suspect communications by IRS imposters.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

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The IRS has made clear that only special circumstances necessitate calls to a home or business, and that most often, regular mail is used to initiate contact with a taxpayer. Making threats and demands over the phone is not characteristic of the IRS. This has been reiterated by the IRS on numerous occasions, yet phone customers continue to be victimized by scammers purporting to be IRS representatives. Modern technology allows scammers to spoof, or mimic actual IRS phone numbers, which has fooled countless taxpayers into believing they are actually being contacted by the IRS.

What’s more troubling, is that in the aftermath of a natural disaster, scammers have been known to increase their efforts hoping to exploit the generosity of those wanting to help. Usually, these scams take the form of a phone call wherein donations are solicited by a phony or impersonated charity. Sometimes these scammers may claim to work for, or on behalf of the IRS. By purporting to be a charitable organization, scammers may promise tax incentives in exchange for a donation. The IRS recently issued a memorandum following Hurricane Florence urging taxpayers to exercise caution when fielding phone calls from purported “charities.”

If you receive a call from an unknown number, remember that the IRS rarely calls individuals and be wary of any threats or demands. The IRS advises that you should never give out personal or financial information over the phone, including your Social Security number or credit card information. In the event you receive a request over the phone and are unsure of its validity, simply ask that they follow up with a written letter containing all the details.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

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This is not the first time a celebrity of such stature has died without simple estate planning documents. Prince died in 2016 without a will and after high-drama in court, it was determined his estate passes to his siblings, both full and half-siblings. Amy Winehouse died in 2011 without a will and a court decided the heirs of her estate were her parents, even though a documentary about the singer indicated she had a strained relationship with her father.

It is unclear how Ms. Franklin’s estate will play out in court. The initial court filings list her sons as interested parties in the estate. Even though the next of kin are presumed to be her four sons, and the probable rightful heirs to Ms. Franklin’s immense fortune, the lack of a will opens the door for potential unknown heirs to come forward. A will would have clearly stated her next of kin and her family relationships. Further, it is not known what type of relationship she had with her family. For instance, in addition to her sons, she could have been extremely fond of her grandchildren, nieces or nephews. Without a will (which is an intestate estate) the opportunity to include bequests to additional members of her family is lost as the Michigan rules of intestacy control. Ms. Franklin also loses the opportunity to remember any of her favorite charities. Bequests to charities specifically named in a will or a trust would have reduced the estate tax that will be payable, as well as honored her memory. As the intestate rules control her estate, the opportunity to leave assets to a charity and reduce any tax is missed.

A will would have also stream-lined the probate administration. A will gives the named Executor or Personal Representative power to act on behalf of the estate. The powers can range from selling the property to the ability to make certain distributions to the heirs. Without a will, the court will have to grant the Executor the power to act on behalf of the estate. This becomes both time-consuming and costly.

Without a will, all of Ms. Franklin’s individual assets are now subject to probate administration and the public disclosure of those assets. In addition to a simple will, a revocable living trust would have preserved the anonymity of her assets and the values. Ms. Franklin’s long-storied successful music career certainly garnered her a multi-million-dollar estate that would also include rights to her songs. Now the nature of those assets and the applicable values will be very publicly reported in court. Not to mention, that any future rights and the preservation of her image are at the discretion of the court.

The thought of making a will or revocable trust is something people don’t like to think about. Maybe it is the acceptance of one’s mortality or maybe it is the cost and possible family issues involved. What is clear is that a lack of a will is more a burden in death than in life.

The probate administration is never swift. It may be years until Ms. Franklin’s assets are fully distributed. Before any assets are distributed to the heirs, the estate will first have to settle with the tax man. At a 40% estate tax rate, the estate tax bill will be substantial and the value of the assets will certainly be debated with the IRS. This will make for a lengthy administration that could have been simplified with the proper estate planning.

Unfortunately, the final chapter of the story of Aretha Franklin is just beginning. Sadly, it is not a chapter she has written. That will be left to the courts.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

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