Beyonce Is Fighting Her $2.7M Tax Bill In Court

(Photo by Kevin Winter/BET/Getty Images for BET)

Last April, the public learned that superstar Beyonce underwent an IRS tax audit. At the end, the IRS proposed that she pays over $2.7 million for taxes, penalties, and interest. But she is fighting it and taking the IRS to court.

The proposed bill was due to the auditor denying various business and personal deductions. Some of the larger ones included $473,738 in legal and professional service fees, $761,455 in other expenses, charitable contributions of $868,766 carried over from a previous year, and over $3.3 million in depreciation expenses.

Beyonce filed a petition to the United States Tax Court. The petition did not say much other than the IRS determinations were incorrect. The IRS filed its answer to the petition last June.

It should be noted that as Beyonce and her husband Jay-Z have substantial wealth and are one of music's power couples, she could pay the proposed tax due. If she did, Beyonce can also sue the IRS in federal district court or the Court of Federal Claims instead of going to the U.S. Tax Court. These courts only have refund jurisdiction over federal tax issues.

Why would a taxpayer want to go to the other courts rather than the U.S. Tax Court? Sometimes case law from the Court of Federal Claims may be more favorable to the taxpayer. In district courts, a jury can decide the case assuming the case is not decided through a summary judgment. The right jury can be sympathetic to the taxpayer-plaintiff's side of the story and may be inclined to rule in her favor. But a jury composed of mostly middle-class W-2 employees could look down on the plaintiff trying to take an aggressive tax deduction.

Unfortunately, the payment-in-full requirement puts these courts out of reach for most taxpayers although the option is still available even if substantial time has passed.

Beyonce's case will soon be assigned to an IRS appeals officer in the hopes that they settle as many issues as possible. Appeals officers generally try to settle the case. Or at the very least narrow the issues to promote case efficiency. They have the authority to concede questionable issues if there is a chance that the court will not rule in favor of the IRS.

According to Section 1.1.7.1 of the Internal Revenue Manual, the mission of the Independent Office of Appeals is to resolve federal tax controversies without litigation on a basis which is fair and impartial to the government and the taxpayer, promotes a consistent application and interpretation of, and voluntary compliance with, the federal tax laws, and enhances public confidence in the integrity and efficiency of the Internal Revenue Service.

The outcome of the case will depend on the how the IRS appeals officer and attorney assigned to this case will approach it. Given Beyonce's superstar status and the publicity it has generated, they will give special attention to this case as it will have an effect on public compliance and respect for the tax laws. A hard-lined approach could make taxpayers and tax professionals think twice before taking an aggressive tax deduction. But if the IRS is seen as being cruel or as unfairly targeting someone, it could trigger public backlash. This can lead to congressional hearings where Democratic and Republican politicians are likely, for different reasons, to publicly admonish the IRS.

The notice of deficiency stated that certain expenses were disallowed because Beyonce or her representative did not furnish information needed to support the claimed deduction. This seems strange as it isn't an outlandish assumption that Beyonce has a full-time assistant or bookkeeper who would keep adequate records. It may be possible that the documentation was misplaced and may turn up later.

Also, the IRS denied most of the other business expenses for 2018 because the auditor claimed that the business expenses claimed were not paid and that the expenses were not ordinary or necessary to her business. I do not know what these other expenses are, but entertainers have certain expenses that could raise eyebrows at an audit. Clothing is a good example of this. For clothing purchases to be tax deductible, they cannot be suitable for everyday wear. Also, the cost must be reasonable.

I did a Google search on Beyonce's concert outfits and, in my Gen X opinion, they are not appropriate for everyday wear, even under modern standards, as they would attract attention. As such, wearing these outfits on the street would be problematic for Beyonce's safety as it would draw a mob of fans demanding a Destiny's Child reunion.

If settlement talks with the appeals officer fails, then the case will be prepped for trial and sent to an IRS attorney. It is possible that the attorneys could try to settle the case as well.

Most tax court cases settle although sometimes a high-profile case may result in a trial and a detailed opinion. For example, a few years ago, the Tax Court decided on the valuation of Michael Jackson's assets at the time of his death. Beyonce's case is likely to settle as well so long as the missing documents are produced and questionable issues are resolved by all parties.

Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at stevenchungatl@gmail.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.