Catch Them if You Can: Fraud in the Film Industry|
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At a glance:
- The main takeaway: The film industry creates an environment that is uniquely vulnerable to fraud – especially tax-related fraud schemes like tax evasion and payroll fraud.
- Be aware: Know the signs of fraud in the film industry so you can protect yourself. Knowing what to look for means you can implement controls that stop fraud before it happens – or at least identify it early.
- Next steps: Production companies and film executives should build a network of knowledgeable advisors that can help navigate the complexities of tax and fraud concerns in the film industry.
The full story:
The film industry often evokes visions of Hollywood grandeur, enticing many to pursue a career in acting, directing, or producing. However, the glittering and glamorous lifestyles of the rich and famous often overshadow the seedy underbelly of an industry that can be rife with fraud.
While the film industry outwardly presents alluring investment opportunities and potential for fast and sizeable profits, it also creates an environment uniquely vulnerable to various fraud schemes.
Tax fraud is the star of the show
Fraud in the film industry can be just as varied as the films it produces, but many of the most frequent schemes tie back to some form of tax fraud. These are the three most commonly occurring types:
- Tax Evasion – What do Stephen Baldwin, Nicolas Cage, and Judy Garland have in common? They all faced consequences for tax evasion charges. They made their riches from blockbuster films and then consciously avoided paying their full taxes. By definition, tax evasion involves purposeful and illegal methods of avoiding taxes – that constitutes fraud.
- Film tax credit fraud – Many U.S. states offer specific tax incentives to film production companies, allowing qualifying companies to offset filming costs while encouraging the economic boon that film production brings to local economies. However, some taxpayers use calculated strategies to deploy these film tax credits as a loophole to aid in tax avoidance, which is fraud.
- Payroll Fraud – Film projects often require a large and varied payroll, from the cast and crew to producers and executives. The larger the payroll, the easier it can be to create and camouflage “ghost employees.” This is a form of payroll fraud, which individuals perpetrate as a means of embezzling funds. The film industry is particularly susceptible to payroll fraud because it can be easier to falsify employee records that go unnoticed – particularly on big-budget films. Payroll frauds are most often detected through periodic audits of payroll records. What to look for: employees with the same address, employees with the same banking information, employees with PO Box address, and unusual pay rate increases.
Impact behind the scenes
The high proportion of tax fraud schemes within the film industry puts both the IRS and lawmakers on high alert. Georgia’s generous film and tv tax credits helped turn the state into a booming film production hub. However, a recent state audit found a significant presence of fraud, costing the state millions in valuable tax dollars and motivating state legislators to make substantial procedural changes.
Passing stringent legislation is a popular tactic for curtailing film industry fraud, as is targeting high-profile convictions. Many often theorize that the IRS specifically targets famous actors to remind the general public that no one is above the law. While some may see tax fraud as a victimless crime, the reality is that these schemes take the money out of the pockets of critical government-funded programs and the people who utilize them.
The bottom line:
Whether you’re an aspiring actor, an executive producer, a film executive, or a potential investor, you need to be vigilant against fraud in the film industry. Tax evasion and other tax-related fraud are the most common, but embezzlement and investment scams are also highly prevalent and victimize even more innocent parties. Know the signs of fraud and have a response plan.
Aprio’s Litigation Support and Forensic Accounting services are equipped to help investigate and identify the many types of fraud possible within the film industry, and we stand ready to testify on our findings. Aprio also has a team specializing in Georgia’s
Protect yourself against fraud by building a diverse team of advisors who can help you navigate all the risks and rewards that come with working in the film industry. Contact us today to learn how Aprio can help.