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Dual Licensed Tax Attorney & CPA for Entertainment Companies

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    California is the heart of the U.S. entertainment industry. Enduring and iconic, Hollywood is home to the film and TV industries, attracting actors, producers, directors, and screenwriters from all over the country and the world. Los Angeles also draws countless numbers of musicians, dancers, comedians, and entertainers, driven by opportunities to perform in world-famous clubs and theatres. However, while the entertainment industry presents life-changing opportunities, it is bound by strict tax regulations. The failure to comply with those regulations can end in a tax audit that gives rise to costly penalties, or even an IRS criminal tax investigation.See our Audit Representation Q and A Library See our Audit Representation Q and A Library Actors, musicians, production companies, movie theatres, and similar entities are routinely audited to ensure they are filing and paying state and federal taxes correctly. If noncompliance is discovered, the outcomes may include civil penalties, interest charges, or even federal prosecution. At the Tax Law Office of David W. Klasing, our innovative, forward-thinking team of tax attorneys and accountants provides audit and appeals representation, criminal tax defense representation, and business bookkeeping services for entertainment companies statewide. Whether you are facing a state or IRS tax audit, are concerned about criminal tax exposure, or simply have questions about best practices for bookkeeping and accounting, rely on our California tax lawyers and CPAs for clear and trustworthy guidance.See our IRS Appeals Q and A Library See our Tax Litigation Q and A Library

    IRS + California Tax Audit Attorneys for Entertainment Companies, Musicians, and Performers

    The IRS and California tax authorities, including the Franchise Tax Board (FTB), the California Department of Tax and Fee Administration (CDTFA), and the Employment Development Department (EDD) understand that even with the exposure to the array of severe civil and criminal negative consequences a taxpayer faces when they get caught cheating, you, as an Entertainment company, will have little incentive to comply with the tax laws if you believe that the authorities will not catch you. To this end, federal and California tax law grants the IRS, FTB, CDTFA and the EDD with authority to investigate your returns and determine whether you owe additional tax, penalties, and interest, at best, and will face criminal tax prosecution, at worst. To exercise this power, the authorities will review your filings and examine or investigate on a deeper level the returns that appear the most questionable.

    The first step, administrative review of all your returns, involves scoring the returns and matching them to information returns filed by third parties. The IRS scores returns by applying an algorithm to each return called the Discriminant Index Function (DIF). The higher the DIF Score, the more likely a return will undergo further scrutiny. When the IRS receives a tax return that is inconsistent with third-party information returns, it follows up with the automated underreporter program to resolve the discrepancy. If the problem persists, the IRS will ordinarily contact you to verify certain information.

    Although assigning a DIF score is not a full examination, the scoring process still changes the calculus for you if you are considering the likelihood of getting caught cheating. A one percent audit rate amounts to a one percent likelihood of getting caught only if the IRS chooses the returns for audit at random. The mere fact that the selection process is not random skews the likelihood of getting caught. The fact that the DIF score is highly sophisticated and undergoing continuous improvement skews the likelihood of getting caught even more over multiple tax years. Unfortunately, a probable outcome becomes a complete unknown when considering that the DIF score algorithm undergoes frequent calibration (i.e., the IRS continuously improves it).

    The second step in the IRS’s tax determination is to examine returns that it suspects have underreported tax liability. To do this, the IRS must select returns, obtain information from taxpayers by legal compulsion, if necessary, address their responses to its requests for information, and, if an examiner concludes that a taxpayer owes more tax, propose adjustments to the returns at issue.

    The final step is for the IRS to issue a final determination via an audit report. If the taxpayer is unwilling to voluntarily sign off on the report the IRS will eventually issue a statutory notice of deficiency or 90-day letter. If a taxpayer signs off on the audit report, they give up all appeal rights and the IRS can immediately begin collection action.

    The taxpayer’s only recourse if they disagree with a 90-day letter is to file a tax court petition which starts the IRS appeals process in motion. The IRS has a 98% settlement rate, and we are ordinarily successful in improving our client’s audit results where we are of the opinion that the law and facts are squarely in our client’s corner and are willing to go to tax court if necessary to prove it.

    Though the likelihood of selection for an audit is low for most taxpayers, there are various government agencies that may choose you or your business for an examination. If selected, you will receive written notification with an explanation of the reason for the audit. Examples of “red flags” and taxpayer attributes that can trigger an audit include the following:

    • Claiming improper actor tax deductions or other tax deductions for entertainers
    • Failing to file tax returns
    • Failing to pay self-employment taxes, where applicable
    • Filing late (delinquent) tax returns
    • Omitting certain sources of income from returns
    • Underreporting or overreporting income
    • Working with companies or individuals who have been audited or who are presently under investigation

    Most taxpayers are already familiar with the Internal Revenue Service (IRS), which strictly handles federal tax matters. State tax audits are, depending on the issues in focus, performed by either the Franchise Tax Board (FTB), including California income tax audits; the California Department of Tax and Fee Administration (CDTFA); or the Employment Development Department (EDD). Our tax firm represents entertainers and entertainment companies in IRS tax audits, FTB tax audits, CDTFA tax audits, and EDD tax audits, including criminal tax audits such as reverse eggshell audits.

    When the IRS or a California taxing authority is not satisfied with the amount of tax reported by you, it may determine the amount required to be paid on the basis of any information within its possession or that may come into its possession. In the case of an appeal, the authority has a minimal, initial burden of showing that its determination was reasonable and rational. Once the authority has met its initial burden, the burden of proof shifts to you to establish that a result differing from the authority’s determination is warranted. Unfortunately, unsupported assertions are not sufficient to satisfy such a burden of proof. Our team specializes in helping forward-thinking, entrepreneurial organizations and individuals within the entertainment and media industry by providing a full range of services designed specifically with their needs in mind. We are trained in dealing with complex tax issues for privately held, high-growth mom and pop to middle market entertainment companies and are accel at identifying tax-planning opportunities that may apply to their businesses.

    Types of Audits

    Eggshell Audit

    During an “eggshell audit,” the IRS or a California taxing authority is looking for the possibility that you, as a subject of a seemingly civil audit, will make criminal admissions and or sufficient badges of fraud are discovered to provide the criminal investigation division sufficient information to lead to the initiation of a potential criminal tax investigation followed by a criminal tax prosecution. As your dual licensed Criminal Tax Defense Attorney & CPA representing you in an eggshell audit, our goal is extremely clear: the resolution of the audit without a referral by the civil examiner to the IRS’s criminal investigation division (CID). An eggshell audit could lead to disastrous outcomes, including unexpected tax assessment, costly accumulated interest, and or substantial civil penalties, including the potential for a civil fraud penalty. However, none of these potential consequences even come close to the danger involved when and eggshell audit morphs into an IRS or California criminal tax investigation. If the federal or state government discovers or develops strong enough evidence to prosecute you for tax evasion or related tax offenses successfully, you will be at risk of jail time, in addition to much higher financial fines and criminal restitution and possible the loss of any professional license that has a moral character requirement.

    Correspondence Audit

    A correspondence audit takes place by mail. As a general matter, this type of audit is rather narrow in scope. The IRS sends a letter by mail requesting documentation for one or more return items it chooses to challenge. According to the IRS’s regulations, if you receive a notice that the IRS has initiated a correspondence audit, you may alternatively request to meet with an examiner in person, we however do not recommend that.

    Please be aware that in a correspondence audit, you have a limited amount of time to respond to the IRS’s inquiries. From our experience, if you do not respond within the allotted time, the IRS, rather than resorting to its summons power, may disallow the item at issue and notify you that the disallowance may be appealed through the IRS’s internal appeals process.

    Field Audit

    A field audit shall often be requested to take place on your business premises or within your home. This type of audit is often broad in scope. The IRS will seek information about numerous issues and pursue new issues as they arise. During a field audit, the IRS seeks information on an informal basis by issuing Information Document Requests (IDRs). If you refuse or fail to respond to such a request, the process becomes formal, and the IRS turns to its summons authority. The IRS shall issue a summons to you that describes the documents or records the IRS desires, which gives you a second opportunity to respond to the IRS’s request. If you still refuse or fail to respond, the IRS may refer the summons to the Department of Justice for enforcement in federal district court under the court’s contempt power. You can be sequentially and incrementally fined or indefinitely jailed under a court’s contempt power, until you comply.

    Office Audit

    The third type of audit is the office audit. An office audit takes place in the IRS’s offices. An examiner shall request you to bring documents to the IRS’s office to talk with an agent face-to-face. The typical office audit is broader than a correspondence audit but narrower than a field audit.See our Employment Tax Law Q and A Library See our Sales Tax Q and A libraryNote: If you have concerns about the privacy of our initial or subsequent communication and are unable to easily travel to our Irvine / Orange County Main Office, consider scheduling a GoToMeeting to safely and securely establish an initial or maintain an existing attorney client relationship.  With end-to-end encryption, strong passwords and top-rated reliability, no one is messing with your meeting. To schedule a reduced rate initial consultation via GoToMeeting follow this link.   Call our office and request a GoToMeeting if you are an existing client. We are generally happy to travel to any of our appointment only satellite offices for a subsequent meeting in appropriate circumstances once a relationship is established via a signed engagement letter and the payment of an initial retainer or where enough retainer is available where a current client to cover the reasonable travel time and time required for the meeting.

    Will it cost me more to hire the Tax Law Offices of David W. Klasing, who’s main office and the vast majority of the firm’s staff is located in Irvine California, but an appointment only Satellite office is close to my location, as opposed to a local company?  Absolutely not!  See our policies that address this issue here:

    State + Federal Tax Audit Appeals Representation

    When an audit concludes, the auditor may find that you owe additional taxes (called a “deficiency”), owe interest, and/or are subject to civil penalties, such as the monthly 0.5% penalty for failure to pay taxes. However, your auditor does not necessarily have the final word. Open to taxpayers who meet the applicable eligibility and deadline requirements, “appeals” is the process for contesting an IRS, FTB, CDTFA, or EDD finding – for instance, an improper finding that you owe additional taxes, or are subject to civil penalties. If you have a factual or legal basis for disagreeing with the results of the audit, our attorneys are prepared to vigorously represent your interests by filing an appeal, representing you at mediation, or if necessary, litigating your case in federal court.

    How Does the IRS Specifically Target Entertainment Companies?

    The IRS is very thorough in its approach and has a deep understanding of all vulnerable areas related to the tax filings of those in the entertainment industry. The IRS audits entertainment companies so frequently that it has even developed an Entertainment Audit Technique Guide to assist its IRS Revenue Agents during audits by providing insight into the issues, accounting practices, and methods unique to the entertainment industry. In general, the guide identifies issues unique to the entertainment industry of which the Revenue Agents should be aware. It directs Revenue Agents to look for certain vital sources of information and outlines steps and techniques to be taken in conducting effective and focused audits/investigations of entertainment companies.

    However, using our extensive experience, we use the same tools to the advantage of our clients. In other words, we know what weapons and strategies the other side will likely employ, making us ready, willing, and able to defend every blow that might come your way. For instance, we know that the IRS and California taxing authorities are aware of the fact that, historically, taxpayers in the entertainment industry tend to be aggressive or abusive when deducting expenses that may or may not be related directly to their business activities (i.e., personal expenses). The IRS has stated as one of its goals to bring the allowable deductions back within the internal revenue code’s strict legal confines. It is working to ensure that the distinction between ordinary/necessary and extravagant must be clearly drawn.


    To deduct meals and entertainment expenses, the IRS expects you to establish that the expenses are directly related to the active conduct of your trade or business and ordinary and necessary to your business or profession. For example, knowing that you can only deduct 50 percent of the allowed expense, and regarding meals specifically, there is a limitation that it be “not lavish or extravagant under the circumstances,” we anticipate the issues that might arise and structure our strategy accordingly. In our experience, business deductions claimed by entertainers, either as employees or independent contractors on the entertainer’s individual income tax return, are subject to more scrutiny and more frequent challenge by the tax authorities.

    Royalties and License Fees

    A particular focus for IRS is Royalties and License Fees as they are a common form of income received by people in the entertainment industry. These are periodic payments received by copyright owners, such as songwriters, recording artists, and authors. They are paid by those who perform, exhibit, run, or otherwise distribute copyrighted works for a prescribed time period or purpose. It is important to remember that royalties are portfolio income and are considered non-passive. The IRS might look to see whether you included royalties on forms that improperly permit deductibility of passive losses and credits. This is because passive losses and credits are generally deductible only to the extent of passive income. There is a single exception only for royalties derived in the ordinary course of a trade or business of licensing intangible property, which permits royalties to be treated as passive income. This exception is highly restrictive and rarely seen.

    A person who produces a motion picture or performs “qualified production services” is the consumer of, and tax applies to the sale to such persons of raw film, sound tape, or videotape stock; paintings; models; artwork; and other tangible personal property for such use. “Qualified production services” are any fabrication performed by any person in any capacity (including, but not limited to, an employee, agent, or independent contractor) on film, tape, or other audiovisual embodiment in connection with the production of all or any part of any qualified motion picture. Qualified production services include, but are not limited to, photography; sound or music recording; creation of special effects or animation on film, tape or other audiovisual embodiment, including animation drawings, inkings, paintings, tracings and celluloid “cels”; technological modification, including colorizing; adaptation; alteration; computer graphics, including transfers of computer graphics on computer-generated media; sound dubbing or sound mixing; sound or music or effect transferring; film or tape editing or cutting; developing or processing of negatives or positives; timing; coding or encoding; creation of opticals, titles, main or end credits; captioning; and medium transfers (e.g., film to tape, tape to tape).

    You might qualify for California Motion Picture and Television Production Credit if you produced a motion picture or television show in California. There are four types of motion picture, and television production credits currently available. You can claim any of the following:

    • Original California Motion Picture and Television Production Credit
    • New California Motion Picture and Television Production Credit
    • Program 3.0 California Motion Picture and Television Production Credit
    • California Soundstage Filming Tax Credit, enacted under Senate Bill 144

    If you own a business in California, and you expect to be making sales, leasing equipment, or purchasing items from out of state, you must apply for a seller’s permit or otherwise register with the California Department of Tax and Fee Administration (CDTFA). When you hold a seller’s permit, you must file sales and use tax returns and pay any sales or use tax due on your sales and purchases. Whether you are a new filmmaker in California or growing your existing filmmaking business, you may be eligible for a tax credit that can be used against your sales and use tax liabilities.

    For taxable years beginning on or after January 1, 2020, and before January 1, 2023, the Film and Television Tax Credit sales and use tax offset is limited to $5,000,000 per claimant. Any excess credit amount, or assigned portion, may be used as an offset in the reporting periods in the five years following and including the reporting period beginning on and after January 1, 2024.

    The California Film Commission (CFC) administers the Film & Television Tax Credit Program. This program provides tax credits based on qualified expenditures for qualified productions produced in California. The CFC allocates credits to applicants planning to produce qualified productions. Interested applicants must submit applications for proposed productions through the CFC’s online application portal. Once an application is processed, the CFC will notify the applicant as to whether its production is eligible to receive credits. Allocated credits may only be used after a qualified production is completed and the CFC has verified the qualified expenditures for the production and issued a credit certificate.

    California CPA + Tax Lawyer for Entertainers, Actors, and Film Production Companies

    Supported by a knowledgeable and hardworking team of business CPAs our versatile, award-winning California tax attorneys are dedicated to protecting your business if you have been chosen for an audit, targeted for a criminal tax investigation, or questioned by the IRS regarding another taxpayer’s case. We are sensitive to unique tax needs of media and entertainment companies, enabling our team to deliver tailored, strategic service that aligns with your goals and promotes your creative vision. We can assist you with a film production audit, movie theatre audit, intellectual property or royalty audit, or any other type of examination.

    For questions regarding a civil tax audit, a criminal tax issue, or other tax compliance issues, contact the Tax Law Office of David W. Klasing online, or call our main office at (800) 681-1295 to arrange a reduced-rate consultation. With tax offices located in Los Angeles, Irvine, San Francisco, Panorama City, Sacramento, Oakland, San Diego, and beyond, we are positioned to serve taxpayers throughout Northern and Southern California. We also provide an array of international tax services, including FBAR audit and foreign account tax audit representation, enabling us to provide tax support for entertainment companies and performers who are on tour or on location overseas.

    What to Do if You Cheated on Your Taxes and the IRS or California CDTFA FTB or EDD Wants to Speak with You?

    If you know you cheated on your tax returns, the biggest mistake you can make is to consult the original preparer. The reason is that they are likely to become the primary witness against you if the government decides to initiate criminal proceedings. They would have absolutely no incentive to protect you and are likely to reveal everything, including the information that you thought was confidential. A CPA, EA, or CTEC certified preparer generates most of his income from tax accounting and preparation; thus, they are strongly motivated to protect their reputation with the taxing authorities at the expense of your reputation. As uniquely qualified and extensively experienced Criminal Tax Defence Tax Attorneys & KovelCPAs, our firm provides a unique platform to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth.

    You would think that a forensic accountant may be able to spot issues or identify explanations for your failures. You may also think an accountant may be able to identify additional deductions or characterizations of income that reduce the potential deficiency in tax. However, you should know that the privilege provided by the Internal Revenue Code for certain communications between an accountant and a taxpayer does not exist in the context of a criminal case. Thus, communications between you and the third-party accountant would be subject to IRS discovery and potentially admissible evidence in the event of a criminal trial. That is why you need us and the unique solutions we provide, because David Klasing is a former public auditor and dual-licensed Tax Lawyer and CPA with over a decade of specialized training in criminal tax defence and has a full staff of Kovel Accountants that he trained personally to assist him.

    How Can We Help You Survive?

    You should be aware that the IRS and California taxing authorities have a keen insight into the working of the entertainment industry. It has trained its agents, so they are equipped with the knowledge of all the issues and terminology pertinent to players in the entertainment industry. The goal is simple—the IRS and the California taxing authorities want to ensure that their examiners are fully equipped to catch any irregularity, big or small, while they examine your tax returns.

    Therefore, it is crucial that you are thoroughly prepared for an audit. While representing you, we strive not to be surprised by anything raised by the IRS or a California taxing authority conducting the audit or by information that may be inadvertently disclosed by you during the audit. That is where our years of experience comes in. Once we determine that you might be facing potential criminal liabilities, our primary goal becomes the prevention of initiation of a criminal investigation, and we do whatever we legally can to achieve that. Consequently, attempting to prevent the taxing authority from interacting directly with you goes a long way towards that goal.See our FBAR Compliance and Disclosure Q and A Library 

    See our Foreign Audit Q and A Library See our 2011 OVDI Q and A Library Note: If you have concerns about the privacy of our initial or subsequent communication and are unable to easily travel to our Irvine / Orange County Main Office, consider scheduling a GoToMeeting to safely and securely establish an initial or maintain an existing attorney client relationship.  With end-to-end encryption, strong passwords and top-rated reliability, no one is messing with your meeting. To schedule a reduced rate initial consultation via GoToMeeting follow this link.   Call our office and request a GoToMeeting if you are an existing client. We are generally happy to travel to any of our appointment only satellite offices for a subsequent meeting in appropriate circumstances once a relationship is established via a signed engagement letter and the payment of an initial retainer or where enough retainer is available where a current client to cover the reasonable travel time and time required for the meeting.

    Will it cost me more to hire the Tax Law Offices of David W. Klasing, who’s main office and the vast majority of the firm’s staff is located in Irvine California, but an appointment only Satellite office is close to my location, as opposed to a local company?  Absolutely not!  See our policies that address this issue here.

    Here is a link to our YouTube channel: click here!

    More Commonly Asked Tax Audit Questions

    California Sales Tax Questions and Answers

    Questions and Answers for Criminal Tax Representation

    Questions about delinquent payroll taxes and trust fund recovery penalty

    Tax Help Videos

    Representing Clients from U.S. and International Locations Regarding Federal and California Tax Issues

    Main Office

    Orange County
    2601 Main St. Penthouse Suite
    Irvine, CA 92614
    (949) 681-3502

    Our headquarters is located in Irvine, CA. Our beautiful 19,700 office space is staffed full-time and always available for our clients to meet with our highly qualified and experienced staff of Attorneys, Certified Public Accountants and Enrolled Agents. We also offer virtual consultations and can travel to meet with clients in one of our satellite offices.

    Outside of our 4 hour initial consultation option, we do not charge travel time or travel expenses when traveling to one of our Satellite offices, or surrounding business districts, where it is necessary to meet personally with taxing authority personnel, make court appearances, or any in person meeting deemed necessary for the effective representation of a client. To make this as flexible, efficient, and convenient as possible, David W. Klasing is an Instrument Rated Private Pilot and Utilizes the Firms Cirrus SR22 to service client’s in California and in the Southwest by air. Offices outside these areas are serviced via commercial jet airlines. None of these costs are charged to our clients.

    Satellite Offices

    (310) 492-5583
    (760) 338-7035
    (916) 290-6625
    (415) 287-6568
    (909) 991-7557
    (619) 780-2538
    (661) 432-1480
    (818) 935-6098
    (805) 200-4053
    (510) 764-1020
    (408) 643-0573
    (760) 338-7035
    (602) 975-0296
    New Mexico
    (505) 206-5308
    New York
    (332) 224-8515
    (512) 828-6646
    Washington, DC
    (202) 918-9329
    (702) 997-6465
    (786) 999-8406
    (385) 501-5934