A fearsome wide receiver in the NFL, Keyshawn Johnson learned a bitter lesson last year: he was no match for the taxman. His legal battle dogged him for much of his adult life and serves now as a cautionary tale for others.
In 1996, Johnson signed a $15 million contract with the New York Jets. At age 24, basking in newfound fame, Johnson may not have paid as much attention as he should have to his tax returns that year. It was a costly error.
Johnson claimed he was a part-time resident of California and paid state taxes on earnings of only $35,564. But his tax reporting was riddled with sloppy errors. For one, he claimed a mortgage interest deduction on a home in Los Angeles.
Eager to feast on the $4.9 million he actually earned in 1996, California’s tax authority pounced on Johnson. For 25 years, the two waged legal war. A judge finally ended it in mid-2021, slamming the former football star with $905,000 in state income tax, penalties and interest.
Johnson’s battle offers plenty of lessons. The federal Tax Code with its intricate web of deductions, exemptions and credits is mindbogglingly complex. State and local tax laws further complicate matters. No wonder it is so easy to run afoul of tax law without knowing it, only to discover the discrepancy – and a punishing tax bill – years later.
Estate planning is even more of a minefield. It requires a depth of knowledge about estate tax law, federal income tax, gift and generation-skipping taxes, and state income taxes. More danger lurks in the complexities of family law, environmental law, securities law and real estate law.
Meanwhile, state and federal taxing authorities grow ever more aggressive. The IRS employs nearly 200 auditors to scrutinize the 4,000 or so estate tax returns filed each year. Scuttlebutt holds that the agency raises about $30,000 per audit hour.
The bottom line? Keyshawn Johnson was a nimble, focused, intelligent football player. But while he was concentrating on his area of expertise, he fumbled the job of managing his wealth. He picked a foolish fight that cost him dearly.
All of which is plentiful evidence for my favorite adage: the best fight is the one avoided. When it comes to paying taxes or planning your estate, respect the importance of knowledge and experience. Retain professionals who will keep you out of court. Yes, like Johnson, you can learn from mistakes. The wiser course? Hire someone who helps you avoid costly fumbles.