TAX COURT CASE OF UNREPORTED INCOME
February 11, 2022 - Douglas Myser
Tax Court case of unreported income. This particular case went in front of the Eleventh Circuit Court of Appeals, where a famous author of crime novels was held liable for unreported self employment income. Karin Slaughter appealed the tax court's decision that she owes almost $190,000 in self employment taxes for 2010-2011. She argued that the tax court erred in determining that her trade or business included promotional activities and that all of her publishing income during those years was derived from her trade or business. Self employed individual's must pay federal income tax as well as self employment tax on the net self employment income received during the year. Net self employment income is essentially your gross income from your business activities less deductible business expenses. Tax Court case of unreported income.
In 2010 the author received more than $5.4 million from publishing contracts after deducting her agent's fees and expenses. On her income tax return for that year, she reported only $875,000 as gross business income. She reported, after expenses and $18,725 in taxes, $4.55 million as supplemental income. Similarly, in 2011 the taxpayer received about $3.6 million from her publishing contracts after deduction of her agent's fees and expenses. But on her income tax return for that year, she reported only $930,000 as gross business income. After deductions, she computed as self employment tax of close to $18,000 on the income and reported the remaining amount as supplemental income. She didn't report any self employment tax on the supplemental income.
The Appeals Court ruled that her argument, that the supplemental income was not taxable, didn't work due to the fact that it was not a regular activity, like her writing. It was not a full time activity like her writing, and was interrupted at times. They concluded that the Tax Court did not err in its judgement and the taxpayer had to pay a large amount to the IRS, including penalty and interest.