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Recent news that celebrity Nicolas Cage (real name Nicolas Coppola) cut a deal with the Internal Revenue Service to pay $666,000 plus interest has taxpayers scratching their heads. The IRS initially determined that Cage improperly deducted $3.3 million in personal expenses from 2002 to 2004.

The laundry list of things deducted by Cage included limo rides, meals, gifts, and travel in his jet. The result: $1.8 million in taxes and penalties plus interest, although some experts say the real figure was about $1 million. The issue is finally settled, and the $666,000 settlement includes $99,000 for an accuracy related penalty, but no penalties related to fraud.

Do you think this is a case of a taxpayer successfully challenging assertions made by the IRS or an example of a wealthy taxpayer getting a better deal than the average American could? It's difficult to say without knowing the details of the case, but I will say this: Often the IRS makes huge assessments against taxpayers to "persuade" them to respond to contentious issues. This could be a case in which the IRS slapped a big number onto Cage in the hope of "encouraging" him to cooperate in sorting out the issues.

Do you think that Cage purposely deducted things he knew weren't really deductible in order to cheat the tax man? I wouldn't necessarily say that's the case either. Taxpayers often choose to deduct items that fall into a "gray area," in which certain items may or may not be deductible depending on how the IRS interprets the tax code and the actual expenses. The taxpayer hopes that the IRS doesn't audit his return, or that if he is audited, the issues are decided in his favor. So rolling the dice on some deductions isn't all that uncommon, and that may be what Cage and his accountant did in his case.

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.

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