ACORN, the community organizing group and Republican cause célèbre, lost its federal funding last week after some of its employees were captured on video telling people they thought were prostitutes how to manipulate tax laws. How do real prostitutes go about paying their taxes?
They report their income on IRS Form 1040 Schedule C (PDF) and pay self-employment tax in addition to ordinary income taxes. Sex-worker advocacy organizations regularly receive requests for tax advice. Some prostitutes, for example, might need help with the first line on the form—which asks the filer to identify her profession and service offered. It turns out that the Fifth Amendment privilege against self-incrimination permits a prostitute to leave this line blank or provide a vague answer like “sale of leisure services.” The form also requires the filer to select a code for line of business. The ACORN employee recommended 711510 (“independent artists, writers, and performers”), but 713900 (“other amusement and recreation services”) and 812990 ("all other personal services”) would have been equally appropriate.
Successful prostitutes may claim to be working in a related field, like nursing or psychology. There are some powerful incentives for these women to file: If a high-earning prostitute wants to buy a house or a car or sign up for a credit card, she’ll need to report some income. One way to do that is to get a degree or license of some kind and then claim income for a related service—for example, therapy. For high-end prostitutes, the fear of being caught evading taxes has more to do with reputational damage and harm to their business than legal penalties.
The IRS also receives tax forms from sex workers with no interest in houses or AmEx cards. That’s because the penalty for tax evasion is stiffer than most states’ sentences for prostitution. In Maryland, where the first ACORN video was filmed, the maximum sentence for prostitution is one year in prison and a $500 fine. (Maryland is relatively heavy-handed. Arizona’s prison term for first-time prostitutes is just 15 days.) Tax evasion, on the other hand, can get you five years in jail and a $100,000 fine, plus unpaid taxes and interest. A prostitute who never files can also be prosecuted for evasion by a state government.
Congress has established something of a safe harbor for people reporting income from illegal activities. The IRS may not disclose tax returns to law enforcement authorities unless the individual in question is already under investigation for wrongdoing. In other words, police can use a tax return in their investigation, but it can’t be the initial tip. The opposite is not true: Local police can, and do, notify the IRS that they have uncovered a prostitute or ring of prostitutes who may have violated the tax laws.
Many prostitutes who have been prosecuted for tax evasion have argued that the payment was, in fact, a nontaxable gift unconnected to the sexual relationship. In legal terms, a gift from a lover is made out of “affection, respect, admiration, charity or like impulses,” while taxable income is the direct exchange of money for sex in a quid pro quo relationship. This argument rarely succeeds in court (PDF).
Prostitution has raised a number of peripheral tax issues as well. Last week, for example, the U.S. Tax Court ruled against a tax attorney who tried to write off $100,000 in payments to prostitutes as deductible health care expenses.
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Explainer thanks Sienna Baskin of the Urban Justice Center and Sudhir Venkatesh, author of Gang Leader for a Day: A Rogue Sociologist Takes to the Streets.