Hess Law Group p. 248-585-5555  f. 248-585-5556
Hess Law Group

General Discussion of Tax Matters for Overseas Basketball Players

With regard to the U.S. tax liability of many American basketball players employed overseas, it seems the need runs the gamut from those who don’t file required U.S. tax returns to those who file tax returns but are overly conservative and take positions against their interest.

Such players should be aware of the following:

  • If a player has not filed a required tax return for a year (or if he filed a return which the IRS can prove he knew was wrong), that year remains open to IRS audit forever. Long after his playing days are over, he could be audited and face substantial civil and criminal penalties in addition to back taxes and interest on the income he earned as a player.
  • The payment of a player’s local income tax liability by his team constitutes taxable income which must be included on his tax return. However, these taxes qualify for the foreign tax credit.
  • If a qualifying player has not elected the foreign income exclusion (Eighty Thousand ($80,000.00) Dollars in 2002; increased incrementally since 2002 to current level of Ninety-Seven Thousand Six Hundred ($97,600.00) Dollars in 2013), he can do so retroactively for prior years if electing the exclusion would result in no Federal income tax due. If Federal income tax would be due even after retroactively electing the foreign income exclusion, quite different rules apply in that the player can retroactively elect the exclusion without IRS permission only if: 1.) he does so within three (3) years of timely filing a tax return for that year; 2.) he does so within one (1) year of failing to file a tax return for a year; or, 3.) he does so before the IRS audits him and finds out he failed to make the election. While electing the foreign income exclusion will reduce the benefit of the foreign tax credit, this often results in the lowest net tax liability.
  • The value of the use of an apartment and the value of the use of a vehicle provided to players by their teams constitute taxable income which must be included on their tax returns. In some cases, the tax cost of reporting the value of an apartment may be reduced by electing the foreign housing exclusion.
  • Generally, overseas players are not residents of the U.S. or any state and therefore should owe little or no state or local income taxes. However, some states (for example, the State of New York) are very aggressive in pursuing taxpayers who have relocated overseas, particularly former residents who still maintain ties (for example, bank accounts, apartments, or houses) to the state.
  • In order to have some understanding of a player’s tax position, we need to conduct an interview in a manner which will maximize the ability to assert the attorney-client privilege. Otherwise, the IRS could gain access to admissions, etc. made by the player to us or the CPA who will prepare his return(s) under our direction. That is why the Initial Client Interview form is returned to this firm and reviewed before the CPA is brought in to commence any return preparation.
  • Particularly if the player has not been filing accurate, timely returns, we would, after consulting with the player, direct the CPA with regard to the legal positions taken on the return(s) and would review draft returns before presenting a final return to the player for execution. This maximizes the ability to assert attorney-client privilege with regard to the legal decision making process. We will retain the CPA and bill the client for this cost. This makes it clear the CPA is working for us as we go through the legal decision making process for purposes of attorney-client privilege.
  • After filing returns, there is no guarantee as to how the IRS will react, particularly if the player has not been filing timely, accurate returns, and if late and/or correcting returns are required. Civil and criminal penalties could be assessed even though the player is stepping forward before getting caught (for example, unless reasonable cause is shown, civil penalties totaling up to forty-seven and one-half (47.5%) percent of unpaid taxes could be assessed on each late filed return.) In addition, interest will be assessed on taxes and penalties not paid timely. On the favorable side, those players who have been overly conservative may receive refunds for tax overpayments in prior years.
  • Our firm would also review the player’s situation and make recommendations with regard to other legal and business matters, including health and liability insurance, wills, powers of attorney and investments, in addition to the player’s compliance with Department of Treasury filing requirements pertaining to foreign bank accounts.

Players clearly are doing the right thing in taking action now to clear up their tax affairs. From discussions we have had with players, it is clear that many did not realize, as American citizens, they are subject to U.S. tax on their world-wide income, even if tax has already been paid on that income in the country of their residence and employment. In many cases, players may owe little or nothing for their early years in Europe (when their earnings are typically lower), provided they qualify for the foreign income exclusion. Even with the foreign income exclusion and the foreign tax credit, however, many will owe significant tax (and related interest and civil penalties) for later years. Our firm will aggressively pursue all legal opportunities to minimize each player’s tax liability; however, our most important objective is to minimize the risk that the IRS will erroneously pursue criminal sanctions against a player because of his misunderstanding of the law.