Voluntary Compliance is Mandatory

April 1, 2004

By Associate Professor Martin Dennehy

It is the time of year again when we must face one of the certainties of life: taxes. For some of us, this eventuality may seem worse than the other certainty: death. But, it doesn't need to be this way.

It is some consolation to note that of all the countries across the globe that have some form of taxation, the United States of America imposes some of the lowest income tax rates in the world. This fact should not go unnoticed as you prepare to file your 2003 return. We still keep quite a bit of what we earn.

 

  The following are allowable deductions:
  • vehicle mileage allowance of $.36 per mile (this deduction requires an accurate log of business mileage) 
  • parking, transportation, and food expenses for professional travel
  • rehearsal space rental fees
  • telephone expenses (the taxpayer must have at least two lines to qualify for this deduction. Cellular service is considered a second "line"
  • stage clothing and dry cleaning expenses (only outfits appropriate for stage wear exclusively may be deducted)
  • full or partial cost of purchasing a computer
  • software for contract writing, music editing, notation, and sequencing
  • costs associated with conducting business via the Internet (includes ISP costs, website development, and hosting charges)
  • promotion costs: photos, mailings, cost of throwing a CD release party
  • instrument and/or voice lessons (individual circumstances dictate whether this is an allowable expense)
  • cost of rented or leased equipment
  • new musical equipment purchases
  • equipment repair or maintenance costs
  • cost of vaccinations for foreign touring
  • cost of applicable insurance (equipment, liability, worker's compensation, health and dental insurance)
  • a portion of home mortgage deduction (if office space or rehearsal space is maintained there)
  • Cost of tax return preparation

    IRS Hotline The IRS has a hotline (800) 829-1040 for tax questions, your tax history information, and requests for hard copies of federal tax forms.

There are many ways to reduce our tax bill. But to help ourselves, we must have a basic understanding of the tax laws.

 

This understanding starts with self-education. In an article I wrote for the spring 2000 issue of Berklee today, I provided some tax tips and stressed the number one point: Avoiding a tax is legal, but evading a tax is illegal.

The Internal Revenue Service (IRS) requires that all taxpayers keep records, both personal and business-related. In order to keep good records, we must have some degree of self-discipline and organization. We must make the effort to save (and be able to locate easily) this information in order to prepare a tax return and possibly to justify aspects of the return if we are audited in the future. 

Some folks use one of the many software programs that are readily available. Others use accordion-style folders. Others use the shoe box or grocery-bag method. Any system is better than none. Just ask someone who was disorganized and then got audited. The audit process requires a taxpayer to prove some or all of their income or expense claims as reported on a prior tax return. The IRS will not accept the excuse that a taxpayer did not know he or she had to keep good records. Filers are expected to know that. Hence the title for this article: voluntary compliance is mandatory.

As a direct result of the Internet, information concerning income taxes is increasingly more available and accessible than ever before. The IRS has developed a terrific website (www.irs.gov) where lots of helpful information can be found. Those states that levy income taxes also have websites to assist taxpayers. Most of these sites have built-in search engines to help taxpayers locate the specific information they seek. 

As always, an accountant is a good information resource for answers to tax questions. The latest figures available suggest that about 58 percent of all taxpayers engage a tax professional to assist with the preparation of their return. The rationale is clear: doing it right can greatly reduce the risk of an audit.

This past year, I monitored IRS audits that involved two of my clients. One client is a performing artist, and the other has an independent record label. Each was extremely stressed out about the audit, and understandably so. I prepared each client for the audit, and told them what to do, how to do it, when to do it, and finally, what not to do. I am pleased to report that neither client was charged with additional tax or penalty fees. These two clients listened to advice, employed the techniques, and came away none the worse for it. They also learned the importance of compliance.

So what should you be doing? It is advisable to save information regarding income and expenses for seven years. Whether you work with a garage band, a marquis act, or an independent artist, the concepts are the same. One must keep track of, and report, all income earned during each tax year from performances, merchandising, royalties, and publishing. Keeping bank statements is also a good idea.

Obtain and save receipts for all expenses that are related to your business. Remember to keep your bank and credit-card statements, too. If you have cash performance travel expenses, pay special attention to this area. If you travel frequently, it may be difficult to store all this information while on the road. I recommend that you mail or ship the information back home to a spouse, a parent, or a trusted friend. 

For additional suggestions on lowering your tax bill, make sure you take advantage of the legal deductions listed in the column to the right. Staying within the IRS guidelines and keeping good records will help you avoid or get through an audit.

Associate Professor Martin Dennehy is a public accountant and tax specialist and a professional musician. Contact him at mjdennehy@juno.com.

This article appeared in our alumni magazine, Berklee Today Spring 2004. Learn more about Berklee Today.
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