Ralph Sevush: We’re going to be talking today about taxation issues unique to writers and artists. This conversation is inspired by a recent case involving artists, Susan Crile v. Commissioner of Internal Revenue. I think it’s important for you to know from the experience of writers what happens when the IRS comes knocking and decides that your career as a writer and your art is really just a hobby from their perspective. So we’ll start with my Co-Executive Director Gary Garrison, who unfortunately had this issue arise.
Gary Garrison: I have a very complicated tax situation: I have four sources of income. My key income comes from the Dramatists Guild, where I am employed full-time as one of the Executive Directors. So any expenses that I might have related to anything that I do with the Guild, I am reimbursed through the Guild. Then I’m also, I taught for many, many years (almost 23 years full-time at NYU) and became a part-time lecturer when I went to the Guild. I teach playwriting there, and I have expenses associated with going to and from work, being sent out by NYU to represent NYU in different places.
Those expenses are not reimbursed. I’m also a lecturer across the country because I’ve written four or five books. And that’s all on me when I go out somewhere to talk from one of my books; those are all my expenses. Oftentimes, my travel expenses will be picked up by the people who are hosting me. I get a stipend. Some of the expenses are reimbursed and some are not. And then I am a playwright and I go and see my own productions. I do everything that you guys do: I submit my material, I’m out and about for dinners, I check into hotels. It’s often not paid for, so I report those expenses as a playwright, sometimes a screenwriter, and sometimes a television writer. So the IRS looked at me and just thought I was a big ole mess. In 2011, I was audited. Here’s what I was audited for: all of my playwriting expenses because they considered my playwriting a hobby, even though I’m the Executive Director of Creative Affairs at the Dramatists Guild, which is a national playwriting organization, and even though I teach playwriting at NYU, and even though all my books are on playwriting. All their questions had to do with my expenses as a playwright. And the person on the phone that I actually spoke to at one point said, “We consider this a hobby.” So what I was asked to do was to write a narrative. I had to submit a narrative audit. I had to justify every expense of mine narratively to the IRS.
Ralph Sevush: Well, you’re a storyteller.
Gary Garrison: (laughs) Yes. Which means, I had to document all of my appointments, all of my expenses, all of my hotel, all of my travel, all of my meals and I had to put that against my journal. I’m a fastidious record keeper. This is the only reason, I’m convinced, that I came out okay in this.
And “okay” is relative by the way. But I keep good records of everything. It took me almost two months to complete, every day. And I submitted seven notebooks to them, of expenses and calendars and appointments and explanations. It would be everything: lunch with an Artistic Director. Here is their webpage. Here is this Artistic Director’s bio, here’s what we talked about at the meeting. All in narrative form. For over 250 appointments.
Ralph Sevush: Wow.
Gary Garrison: It was maddening. This was for 2011, I had a certain deadline I had to make. I submitted them on Friday and then on Monday, I got my audit notice for 2012 for exactly the same thing. I was angry for months. I was angry because I always thought that if I got audited, I would end up in somebody’s office, to be really frank with you. I mean who knew I was going to have to sit and write a narrative about every single expense I had? That was just insanity to me. The way my accountant ex- plained it to me was because the IRS is short-staffed that this is what they would prefer to do now. I was clear to all but $1,500. I had to pay $1,500. I was so angry and so tired and so overwrought with all of it, this is in the 2011 audit, I asked my accountant, “Can I just pay the penalty?” I’m so tired, I was so battered and beaten down. Which would have been substantial. And he said, “It’s an admission of guilt if you do. It will open the door for seven years."
Ralph Sevush: So did you hire a lawyer at any part of this?
Gary Garrison: I had a lawyer ready to go but I never had to use him because I was cleared in 2011 and I was fined in 2013. I still don’t know what I was fined for. I mean I was so just ready for it to be over with, I just signed the check and sent it in. I don’t know if that’s an admission of guilt. I was just glad to get it over with. I was just beaten down.
Ralph Sevush: Have you gotten any other audit notices?
Gary Garrison: No, no, I’m good so far.
Ralph Sevush: Now, let’s continue with Michèle Rittenhouse, a Dramatists Guild member and playwright who unfortunately had a similar experience. Michèle, could you tell us what happened?
Michèle Rittenhouse: Yes, in late March of 2014, I received my first love letter from the IRS for $21,000 and a “come on in to my office and let’s talk about it” from the caseworker. I freaked out. I did a worksheet, and I had sent it to my accountant and I paid a fair amount of money to have my taxes done every year because I’m also the director of a theatre arts and technology program at New Jersey Institute of Technology and I’m a playwright, and so my accountant said, “Oh, well I will meet with this guy if you turn over a power of attorney to me.” So I went, "Okay," and the following week I received my second love letter for 2012. 2011 was the first one, 2012 was the second one for $22,000. I said, “Okay, here’s the power of attorney, do something.” And my accountant eventually met with the IRS representative and nothing was resolved, and I had to do a narrative, just like you, Gary. And the IRS agent disallowed absolutely everything that I deducted, whether as a theatre director or a playwright. I just didn’t understand what was going on and then my accountant came back and said that the caseworker thinks that I’m a hobbyist and not a true playwright. And that’s when I freaked out and I emailed Gary and in the subject line it said, “Am I a playwright?” All of a sudden, the US Government was packing for me. They were telling me I was not an artist. Well, I am vocal about this situation at my university, and I also work at Rutgers University in Newark as an adjunct because we have a joint program with them. I found out that three of my colleagues who are also artists were audited for the same year for the same reasons.
Gary Garrison: So we were audited, and we didn’t know each other when we were audited the exact same two years.
Michèle Rittenhouse: I guess those are the targeted years because it was 2014. I signed the power of attorney. There were lots of negotiations back and forth. I did the narrative. The IRS said, “That’s not good enough.” Then they wanted spreadsheets, so I did the spreadsheets. I photocopied all my material for both years and made a copy for myself and then my accountant called and said, “Well, how can you prove you’re a playwright?” So I sent him thirteen scripts and my accountant printed up all thirteen scripts and dropped it on the IRS agent’s desk. And I printed up all 35 rejection letters that I received and all the submissions that I’d made, and the outstanding letters and acknowledgments of receipt.
Gary Garrison: And if anything proves that you’re a playwright, it’s 35 rejections.
Michèle Rittenhouse: I’m very persistent though, and I got letters from both universities stating that these expenses are absolutely non-reimbursable by the universities and they come out of my own pocket and I have to develop my craft in order to teach my craft. Then my agent drafted a letter and sent it. The website where my plays are posted with my agent was sent to the IRS, and their agent said, “I don’t have time to look at websites.” I love this request (this was my favorite): he wanted a photograph of my offices to prove that I was a writer. So I sent him photographs of my offices in Upstate New York and in Manhattan. How intrusive is that?
Gary Garrison: I was asked to do the same thing.
Michèle Rittenhouse: Seri- ously?
Gary Garrison: I was asked to do my office at the Guild, my office at NYU, my office at home, and any other ancillary offices, a portal office if I had one.
Ralph Sevush: Actually, another issue I hope we’ll have time to get to is about the other kinds of expenses, including home/office expenses, and how deductible that is. But how did this resolve?
Michèle Rittenhouse: Well, I missed deadlines for filing for 2013 because I was waiting for a determination which did not occur, and so I went ahead and asked my accountant to file for no deductions whatsoever for teaching or playwriting for 2013. I said, I don’t know what he’s going to say and they’re going to come after me and it’s going to cost me another $11,636.00 for my accountant to deal with all that other stuff. So, no offense, we all have to make money but you know, it was just way over the line. And so how it ended up resolving was this February 2015, I finally got a determination and, out of the $43,000 that was originally asked for, they dropped all the penalty fines, they readjusted some, a few mistakes that were made in there, and I ended up paying for 2011, $2,259.00, and for 2012, $1,673.00.
Ralph Sevush: That’s about 10% of what they originally asked for.
Michèle Rittenhouse: That’s correct, but that was the adjustment for those two years. We’re not there yet. Then I had to pay $5,800 for 2011 and 2012 $6,900 with the adjustments, added to those adjustments, and then it came to a total of $29,000 instead of $42,000 which was originally asked. And then, the State of New York came after me because of the adjustments. We refiled and I ended up having to pay that and then I just received an adjustment for that before I came here of $2,300, so they’re nickel and diming me to death, it’s just horrible.
Gary Garrison: I should tell you that my $1,300 that was disallowed were about my meals and entertainment. You know how if you go to a dinner or something, they disallowed all of them in 2013. I don’t know why they didn’t in 2011, but 2013 looked bad to them for some reason. So that’s what they disallowed.
Ralph Sevush: I’m going to introduce Tom Garvin now. Tom is an attorney from Los Angeles, Beverly Hills. He’s driven down through the rain to be with us today and I appreciate that very much. Tom could you talk to us a little bit about the big picture here, the architecture. Could you describe what that is and how that works?
Thomas Garvin: I will, but first I have great respect and high regard for the written word and for authors and playwrights. So don’t take any of these comments as anything other than just, unfortunately, I happen to be the person on the panel who’s the lawyer. (everyone laughs). It’s a very good question. It goes the other way around which is, we have a voluntary compliance system, and so the cornerstone of the tax system is that everybody self-assesses, reports the amount of their gross income, and the taxpayer has the individual burden of proof to establish their deductions.
It doesn’t matter whether it’s a mortgage deduction, medical, or anything else. Everybody has something that they like, an avocation, a pleasure, a pursuit, something that they find enjoyable. People that have a passion for horses, cars, or wealthy people that like having their own jet aircraft. The tax law says it’s the burden of the taxpayer to establish that if you’re going to claim an expense or deduction that the deduction is permitted under the tax code. So one of the things that they don’t permit under the tax code is deductions for what are, sometimes in shorthand referred to as “hobby loss” deductions. So if you’re going to take a deduction, you have to then say, here is what the activity was that I was engaged in, it was a business undertaking, a commercial undertaking, and then establish how it is that you have the primary purpose of generating a profit, and then establish your entitlement to all the deductions.
The tax authorities have heard every possible thing from the people that like horses or they like private jet aircraft, or they like collecting cars, or they paint and they give their paintings away. If you’re someone who has as your job the auditing and the selection of returns and asking questions, you know, human beings are human beings. I’m sure you’re all absolutely wonderful and would be the best people in the world to get to know. But the statistical odds of 1,000 people coming together in a room and 1,000 people all being 100% scrupulously honest and scrupulous in self-filing is unlikely.
The system of taxation that we have in this country relies on self-assessment, and the tool by which they try to deal with compliance, as it’s often referred to, is random audits or something that triggers an audit, and it does result in the types of experience taxpayers have when they’re audited. As a result there’s this dividing line between, on one hand, establishing that you’re doing something for a business pecuniary profit motive and establish- ing what the scope of that is, and on the other hand what is it that are the deductions attributable that you then are claiming as expenses are legitimate permissible deductions. There is a short one-page handout that gives you a sense of what the factors are that go into determining whether the activity is a trade or business carried on for a profit.