Tax return tips for adult industry?

March 11, 2006 7:36 AM

How can I best avoid an IRS audit? My occupation may complicate things: I’m a professional in the adult entertainment industry with a job that is legal (but often perceived as illegal) and an entirely cash-based business.

I want to make filing a tax return a quiet, simple, pain-free process. Just like any other American. However, something tells me an “adult entertainer” with a sole proprietorship with very high revenues for someone my age will certainly cause an IRS-person to give my return a second glance. I know the IRS doesn’t care what I do for a living – they just want a chunk of my earnings, but they do target people in certain professions (waitresses, hairdressers, dentists, lawyers) who earn through tips or who keep their own books. I can’t help but think that if I’m truthful on the occupation line I’ll make myself an ideal target.

I want to deduct my business expenses, but again, don’t want to raise red flags. I’m not talking about a plastic surgery, lingerie and designer shoes. This is airfare, hotel stays, and meals when I’m traveling, the same expenses a businessperson in any field incurs. My expenses were approximately 25% of my income, but should report them as being lower, or not at all to avoid being picked for an audit?

Seriously underreporting my income is an alluring idea, but for several reasons it’s not an option: a) I love my country (even though its laws may not be friendly towards my profession), and I indeed want to pay my taxes in full, b) there’s the “paper trail” of having deposited money into my bank account which would be incriminating if audited, c) I’d like to move my savings plan away from the cash-in-mattress method and towards the more mainstream IRA/stocks/real estate thing. My tone is tongue-in-cheek, but I’m serious :)

For reference purposes, my 2005 income is more than double what I earned in 2004 (which was the first year I earned anything significant) and I filed my 2004 return 6 months late (I know, but better late than never). I’m in my early 20s, and have been a full-time college student for much of the time that I’ve been working in this capacity. I haven’t kept meticulous records and my business is entirely cash-based, so an audit would be unpleasant to say the least.

Super bonus question: Any ideas for what I could tell my parents I’m doing that would explain the income? This is important for tax purposes as well, since they still claim me as a dependent. They know I’m earning more than the average recent college graduate with a B.A. in English, but to actually tell them how much I earn as a “waitress” might give one of them a heart attack. They would rather think I’m selling nuclear arms to rogue states than know what their daughter actually does.

Little note: I love my job, am emotionally healthy, have a great relationship with my family. Some people might not agree with what I do, but I’m looking for advice for my tax return at the moment, and not to start a moral discussion. Thanks! :) I’m posting this anonymously for apparent reasons; I can be reached at [e-mail] for any private messages.

posted by anonymous to work & money (20 comments total)

I am not an attorney, and this advice is general and not specific to your situation. But very very few individuals are audited these days. Like fractions of a percent. The number of investigators / auditors that the IRS has is down a lot over the last 20 years (but apparently up from 2 or 3 years ago). It's a numbers game and there are flags and stuff that they look for. Since you do business in cash, this may well raise some flag, but as far as I understand it, even all of the flagged tax filings are not investigated.

Some tips to "fly under the radar":

File electronically (i.e., "eFile"), but also use turbotax or whatever. Even better might be to spend more (like $80 or $90 I think) and have a tax preparation place do it for you. You could even take out "Audit Insurance"... which I wouldn't recommend for anyone, but if you're really sure that you'll be audited, then maybe it's a good idea.

File earlier. I think that statistically, they're more likely to give a pass to early filers than ones who file at 11:35 PM on the 15th of April. You'd think this wasn't the case (i.e., while they're gearing up for the season, they've got time to investigate). But I think that they use profiling to filter individuals, and filing later is a sign that someone is lazy, disorganized, "trying to pass" (i.e., walk in with a crowd to avoid identification), etc.

I would file your business income and outflow (and deductions) separately from your personal income and deductions. At least in future years. If this is your profession, file to become a sole proprietorship / LLC... I don't know how to do this, but my fiancee did it and it was fast and pretty painless.

Report all of your expenses. If you're being honest and want to report your full income, then you should report all of your expenses. Hopefully you can substantiate these trips with receipts and stuff, but even if the record is spotty, things like bank withdrawls in other cities, or half of a flight's ticket stub is helpful. Also do not forget that you can deduct a "home office" based on square footage if you work out of your home. And you can deduct a percentage of your phone bills (the percentage that you use for work, say 30%).
posted by zpousman at 8:01 AM on March 11, 2006

For one thing, there is no need to put "adult entertainer" in the occupation box. That would be a red flag. "Business owner" is just fine.

The truth is that you will inevitably put up red flags all over the place, given the nature of this work. Thus, your question should be "How do I survive an IRS audit?" And the answer is meticulous record-keeping and invariably honest reporting.

As for your parents, put your money in the bank and live a modest lifestyle.

You're not my daughter, are you?
posted by yclipse at 8:03 AM on March 11, 2006

Not to derail, but I've found myself musing a few times about the dynamic of adult performers and their families especially in regard to well-adjusted, highly functioning families. I even pondered how my family would take it if I were in the industry (not that I'm qualified by any means).

Do most performers keep it secret? Is there a double standard held by parents as to whether or not they have a son or daughter in the biz?

As for taxes, is there any need to indicate "adult" in any way?
posted by sourwookie at 8:18 AM on March 11, 2006

You can leave the occupation line blank, if you wish.

Your parents are unlikely to be able to claim you as a dependent. The rules just changed, but the standard used to be they had to provide more than half your support during the year, which seems untrue for 2005.

Your work looks much like a consulting business. Indeed, it is a consulting business. Expenses are fine - keep receipts to document them, of course.

You will be reporting income without an employer - no W-2. This automatically raises some flags to the IRS. But as noted above, the Republicans have been gutting the IRS for many years. Enforcement is centered mainly on the very rich (where the IRS has a lot to gain from audits) and on the very poor (where Congress has mandated that the IRS catch those nasty tax cheats who are costing the system tens of dollars each year). If you're reporting all of your income, there's nothing to fear from an audit - how can they prove that you made more than you reported, if you didn't?
posted by jellicle at 8:30 AM on March 11, 2006

Find a good CPA, s/he'll save you more than their fees, take the responsibilities for accuracy of your records, and show you exactly how to do it
posted by growabrain at 8:58 AM on March 11, 2006

anon - I was in the same situation last year for taxes, although dancing wasn't my only source of income for the year. I ended up going to a tax prep place (H&R). They were really good about asking me what expenses I had to deduct - even for shoes, etc. And of course, it was priceless to watch the gal swallow her tongue when she asked my occupation and I said "exotic dancer".

It sounds like you're a very organized person, so you should be fine. My advice to you is to have a professional do your taxes for you.

And as for your parents...my mom and I had a real tear-jerker of a conversation over my Christmas Break this year. It was hard, but not as terrible as I'd imagined it would be. My father still doesn't know. Maybe you could tell them you work somewhere that is high-commission based...real estate or even an electronics retail store.
posted by ArsncHeart at 9:08 AM on March 11, 2006

A CPA once told me, to be safe, take your total recorded income and calculate what you would owe with no deductions, pay at least 51% of that with deductions.
posted by StickyCarpet at 9:23 AM on March 11, 2006

Is there any legitimate way she could classify herself as a consultant in the entertainment industry?
posted by kimota at 9:27 AM on March 11, 2006

Is there any legitimate way she could classify herself as a consultant in the entertainment industry?

That depends on what she does. If she's a dancer, possibly. If she's an escort, probably not. The details are murky; it would be hard to answer this without more information.
posted by Civil_Disobedient at 9:43 AM on March 11, 2006

You're making decent money and are asking here?

Get thee to a nunnery decent CPA and pay for them to save you money!

You know it makes sense ;)

As for telling M&D what's what, what; the truth shall set you free.
posted by DrtyBlvd at 9:43 AM on March 11, 2006

Get thee to a decent CPA and pay for them to save you money!

Seconded. I started using a specialist tax accountant about 5 years ago, and couldn't be happier. He specializes in serving the industry in which I work (the entertainment industry, although not the branch of it you're in...) and knows exactly how to claim deductions, income, expenses, etc., and which ones I'm eligible for. Although it costs me about $350 to use him, he has saved me much more than that each year, and he takes care of all the troublesome paperwork that I don't want to.

If I am inferring correctly from the details you've given in your question, I would guess that you reside in the state of Nevada (or, alternately, in the San Fernando valley). If that is correct, I would imagine that there are innumerable accountants in your area who specialize in preparing tax returns for people in your profession. Ask your...umm...colleagues who THEY use.

Don't, however, bother with the H&R Blocks of the world. In my experience, all they do is fill out paperwork-- they don't help you find deductions and expenses you might not have been aware you were entitled to.
posted by dersins at 12:00 PM on March 11, 2006

Since you are making money, find a good CPA. My CPA is honest- He tells me when I am out of line and need to pony up the cash. He also finds the deductions no one else does. A CPA is paid to know what flags / doesn't flag the IRS. A word of advice when dealing with your CPA: Do not tell them anything they do not want or do not need to know.

Do not use any tax professional who charges a percentage of the amount of tax dollars saved.

Many young people have high incomes, unless you are making seven figures I can't imagine anyone looking twice.
posted by vaportrail at 12:09 PM on March 11, 2006

I hadn't thought of the possibility that Ms. Anon. could be a prostitute. I don't know how that might affect deductions, since it's a legal profession in Nevada but not the rest of the country. That is, if you pay for a flight to New York to meet a client, but prostitution is not legal in New York, can you still list it as a business expense? If you bought the tickets in Nevada, and board the flight in Nevada, but perform the "business" part of "business expense" out-of-state (and thus illegally), how would that work?
posted by Civil_Disobedient at 1:06 PM on March 11, 2006

"Not to be too harsh, but if you're worried about what to tell mom and dad, maybe you should stop working as a prostitute and find a less profitable profession.
posted by gage at 11:04 AM PST on March 11 [!]"

Way to be a worthless dickhead, pal.

I knew someone that was in a similar situation, but she never slept with anyone. She simply worked as a travelling stripper (man, she was hot) and made so-so money.

Just because someone works in adult entertainment doesn't mean they're a prostitute, you clueless idiot.
posted by drstein at 5:44 PM on March 11, 2006

Do NOT claim a deduction for a home office. Unlike most of the "red flags" that are rumored to exist, the home office deduction is a real red flag. Because it's usually BS.
posted by MrZero at 6:10 PM on March 11, 2006

You make "very high revenues", yet your parents are claiming you as a dependent?
You'd best have them double check that with the IRS and/or a tax advisor.
In order to qualify as a dependent, among other things, you can't provide more than half of your support.

As for the rest of it, you're basically an independent contractor, so treat yourself as one. Make sure you don't forget the self-employment tax, that's where a lot of people get caught. You need to pay your Social Security so the old folk don't end up on the street. heh.

Keep scrupulous records of _all_ income and _all_ expenses in the future, and if an audit comes you won't have any trouble.
For this year, since you haven't kept exact records, go back over your bank account statements, add up all the deposits that you can relate to your job, and use that as your income. Overestimating is better than underestimating, but don't go crazy with it. The chances of an audit are really very small.
I wouldn't get too fancy with your expenses, claim only the ones you can back up with receipts, and do it better next year.

For retirement, look into a SEP or Keogh, then a Roth IRA.

For your parents, unless you plan on becoming very famous doing this, or doing it for the rest of your life, then I don't think you need to tell them anything.
Don't have them claim you as a dependent, do your own taxes, and there is no reason they need to know how much you make. If you are old enough to do that type of career, then you are old enough to stand on your own.

I also second the suggestion of asking your colleagues where they go for taxes. I can't imagine there isn't someone out there who specializes in just that type of tax return.
posted by madajb at 6:37 PM on March 11, 2006

Civil_Disobedient: the legality of an income source has no significant bearing on taxes.

Speaking as somebody who has worked in a high-profit, cash-based, legally questionable business, I third the suggestion of asking your more responsible colleagues about accountants.

There are some great accountants who are smart enough to spot a niche where they can provide a valuable service, and get clients who don't make a fuss about money.

For what it's worth, I've been audited, and survived. I can't think of anything special I did aside from keeping meticulous financial records, and taking great pains to follow all the rules my accountant gave me.
posted by I Love Tacos at 3:55 AM on March 12, 2006

drstein - nice language.

I inferred that her job was not a stripper based on the comment in the original post: "with a job that is legal (but often perceived as illegal)". Strippers are generally not perceived as illegal.

Regardless, my point is and was this: If you're doing something you don't want mom and dad to know about, then maybe that's a signal that you should do something else.

all the best,

g
posted by gage at 4:29 AM on March 12, 2006

gage, I think the problem is that the two parts to your clause don't necessarily connect as cleanly as you'd think. For instance, I have a friend who is a Republican. My reluctance to tell them about the book What's the Matter with Kansas is not necessarily a sign that I should stop being a Democrat. I chose not to talk to them about it because I know it wouldn't change anything, and it may cause hurt feelings. If (in this case) someone she loves still maintains a stubborn, backwards attitude towards her profession, her reluctance to tell them about it could be indicative of their desire not to hurt their feelings.

That is, just because she doesn't want to tell them about it doesn't mean it's wrong. It could just as easily mean that she loves them enough to not want to hurt them, and knows them well enough to realize they're not going to change their minds any time soon.
posted by Civil_Disobedient at 7:16 AM on March 12, 2006

Civil_Disobedient -- I understand your intent, but think your analogy doesn't fit. Your case is avoiding bringing up contentious ideas with an acquaintance. Her case _appears_ to be actively deceiving her parents about her actions.

I agree with you that compassion for other's feelings is very important, as indeed are one's motivations. This does not, however, render either the action done or one's attitude to those actions necessarily irrelevant.

So, to let thead die, I never said 'wrong' in my posts. I did suggest that she could weigh deceiving her parents against the money she makes.

best,

g
posted by gage at 4:01 PM on March 12, 2006