The IRS contends that it made no mistake when it sent pop superstar Beyoncé a tax bill disallowing various business expense deductions and asserting that she owes $2.7 million in tax and penalties.
In its terse June 16 answer in Knowles-Carter v. Commissioner, the IRS categorically denied Beyoncé’s claims that the agency erred in determining that she has tax deficiencies of nearly $2.3 million for 2018 and 2019 and is liable for almost $450,000 in penalties.
Beyoncé filed a Tax Court petition April 17 to contest a deficiency notice reflecting several adjustments to her personal tax returns. For 2018 the IRS added unreported royalty income; disallowed a portion of legal and professional services expenses and “other” expenses reported on Schedule C, “Profit or Loss From Business”; and disallowed a deduction of nearly $869,000 attributable to a charitable contribution carryover.
For 2019 the IRS disallowed various expenses reported on Schedule E, “Supplemental Income and Loss,” including utilities, insurance, management fees, taxes, and depreciation. The expenses were generally disallowed because of the taxpayer’s failure to substantiate. The notice asserted that Beyoncé is liable for section 6662(a) substantial understatement penalties of $161,170 for 2018 and $288,549 for 2019.
Beyoncé’s petition contended that she properly reported all expenses and that if any taxes are owed, accuracy-related penalties shouldn’t apply because she acted reasonably and in good faith.
In addition to denying Beyoncé’s specific claims of alleged errors, the IRS’s answer states that it “denies generally each and every allegation of the petition not herein specifically admitted, qualified or denied.” The filing asks that the court deny the relief sought in the petition and that “respondent’s determination, as set forth in the notice of deficiency, be in all respects approved.”
Beyoncé’s attorney, Michael C. Cohen of De Castro, West, Chodorow, Mendler & Glickfeld Inc., didn’t respond to Tax Notes’ request for comment by press time. In an April 29 statement to Business Insider, Cohen said, “We are working with the IRS and anticipate that the matter will be resolved shortly.”
Justin Miller, national director of wealth planning at Evercore Wealth Management LLC, said that while he’s generally not a betting person, “I would be willing to bet a dollar that the Beyoncé case does not make it all the way to a Tax Court decision.”
“Wealthy people — and especially wealthy celebrities — tend to take privacy and confidentiality very seriously,” Miller told Tax Notes. “When it comes to a tax dispute, a famous taxpayer needs to consider not only the possibility of an unsuccessful tax result, but also the potential reputational risk of negative publicity that could be detrimental to their career. When you add in the cost and hassle of tax litigation, most tax advisers are going to do their best to help taxpayers settle a tax dispute before enduring a full Tax Court proceeding.”
The case is Knowles-Carter v. Commissioner, Dkt. No. 5695-23.