Lamar Odom’s win over the IRS was based on well founded legal precedent and IRS tax regulations.
Lamar Odom is a high profile athlete who last season won the NBA’s sixth man award for the defending two time champion LA Lakers. This season, following a well publicized trade to the Dallas Mavericks, he is scheduled to earn $8.9 million. But it’s Odom’s recent well publicized victory over the IRS that’s making headlines for the 6’10” power forward.
Last October, Odom filed a law suit in Federal Tax Court in response to an IRS tax audit. The IRS decided not to allow his itemized business expenses and so reassessed (increased) his tax liability—and charged him interest. They said his deductions were not allowable because they were personal expenses rather than business expenses. These so-called “personal expenses” included $12,000 in NBA fines and $178,337 for conditioning costs.
As a professional athlete, Lamar Odom is a popular employee in a multibillion dollar sports industry. Playing sports is his business, and he is entitled to certain tax deductions for business expenses. His victory over the IRS was not an upset. It was based in solid legal precedent and IRS tax regulations. Odom’s case highlights two important tax considerations:
1. Athletes who earn more than $1 million are likely to be targeted for further examination by the IRS—and ultimately, audited. In fact, the IRS is increasing its scrutiny of high income earners’ tax returns. Why? Because there are two ways the federal government can raise revenue: increases taxes or increase enforcement of current tax levels.
2. Because they are more likely to be audited, athletes who earn more than $1 million a year should understand their tax rights, consult with a tax advisor for guidance, and comply with IRS guidelines when filing tax returns.
Recently, the IRS released last year’s enforcement and service results, showing they examined 1.1% of 140,837,499 income tax returns–nearly identical to 2010 and slightly higher than five years earlier at .97%. But for those who earn more than $1 million, the percentages are greater. Last year, the IRS examined 12.48% of the 291,831 tax returns filed by people with incomes greater than $1 million — nearly double the percentage of 6.42% just two years ago.
As the government increases enforcement of the tax code, athletes need to understand and plan for their tax situations. Lamar Odom’s recent settlement with the IRS is a common outcome for those who can substantiate their tax positions. Though $178,000 in conditioning expenses may seem extreme to the average individual, for an athlete like Lamar Odom it is justifiable and within the guidelines of the Internal Revenue Code (I.R.C.).
I.R.C. Sec. 162 entitles athletes to deduct trade or business expenses as long as they are ordinary and necessary to carry out the business of playing professional sports. The IRS defines “ordinary” and “necessary” in Publication 334 Chapter 8: “ordinary” means “common and accepted” while “necessary” means “helpful and appropriate.” It is important to note that, “an expense does not have to be indispensable to be considered necessary.”
Finally, allowable deductions must include proper documentation. This is where most fall short, unfortunately. Athletes must provide proof they paid for the specific expense or the IRS will not allow the deduction. Be sure to save your receipts!
Bottom line: Athletes are prime targets for tax audits, so they should seek professional advice before filing their tax returns. In many cases, a professional tax consultant can show the athlete tax strategies to lower his taxes. It appears Darryl Strawberry did not consult with a tax professional but it looks like Lamar Odom received tax guidance and followed through with it to successfully defend his case.
Clearly, all professional athletes would benefit from proper tax guidance—especially when it comes to complying with federal and state tax regulations.
For information about income tax deductions and key tax issues for professional athletes, please contact me at 585-705-3405.
ALAN POGROSZEWSKI is an Assistant Professor of Sports Studies at St. John Fisher College and the President of his own tax consulting business whose clientele include professional athletes performing services on three separate continents. Prior to accepting his position at St. John Fisher College, Mr. Pogroszewski was the Vice President of Business Operations for Sports Consulting Group, a firm that specializes in the representation of professional hockey players. Mr. Pogroszewski received his M.B.A. from Rochester Institute of Technology in 1996 and his M.S. in Taxation from St. John Fisher in 2003