If only Richard hatch had spent some of his Survivor winnings getting financial advice.

09:49 AM EST on Monday, January 31, 2005

Richard Hatch may be the best contestant to ever have taken part in a TV reality show. But when it comes to taxes, he couldn't survive the scrutiny of the IRS.

Journal photo / Gretchen Ertl

Richard Hatch leaves a parking gargae earlier this month after appearing in U.S. District Court in Providence for his arraignment on tax evasion charges. Hatch won $1 million in TV's Survivor show. But he did not report that amount as income on his tax return, the government has alleged.

Hatch won $1 million in TV's Survivor show. But he did not report that amount as income on his tax return, the government has alleged.

So there he was last week, far from the sandy shores of the TV program's paradise island, walking past the snowdrifts and up the steps into U.S. District Court in Providence, to be arraigned on charges of tax evasion.

From the government's standpoint, it couldn't have happened at a better time. This is, after all, the start of tax-filing season. So Richard Hatch becomes a poster boy for the IRS. Thinking about cheating on your taxes? Hey, look what happened to him.

And Hatch, 43, of Newport, couldn't have made the government's job much easier:

* When you make money, you must report it, and perhaps pay tax on it, too. It's the law, and there's no way around it.

* Hatch left a paper trail that anyone could follow.

* He didn't make his bundle in a quiet way, down some dark and seedy alley, far from prying eyes. He won it on national TV.

"Everybody knew he made the money," said Gregory A. Porcaro, president of the Rhode Island Society of Certified Public Accountants. "How was he ever smart enough or clever enough to outwit all the people on that island," but still fail to properly report his income and pay taxes on it?, Porcaro asked.

"What in God's name was he thinking?" said John E. Barrett Jr., a member of the board of directors of the Rhode Island Society of CPAs. "He had no shot at getting away with it."

Here's a look at some of the key factors:

The Power of Congress: While passing time on the island of Pulau Tiga, off the coast of Borneo, awaiting the next TV shoot, Hatch could have helped himself by flipping through the pages of the U.S. Constitution.

Yes, the rumors are rife that the U.S. income tax is unconstitutional. But read for yourself the Constitution's 16th Amendment, ratified in 1913:

"The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."

The Law: Peer into that body of federal tax laws known as the Internal Revenue Code, and you needn't burrow too far to find that the kind of money Hatch received counts as income for tax purposes:

"Gross income includes amounts received as prizes and awards," the law says. What about prizes and awards from TV shows? "Prizes and awards which are includible in gross income include [but are not limited to] amounts received from radio and television giveaway shows, door prizes, and awards in contests of all types . . .," U.S. Treasury regulations say.

"There's no ambiguity in the Tax Code on this," said Barrett, who owns and operates Barrett Valuation Services Inc. of Cranston. "A prize or award is taxable."

True, certain prizes and awards escape tax, but only those made "primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement," and, even then, only if certain conditions are met, the Internal Revenue Code says. TV's Survivor, despite its popularity, doesn't qualify.

"There is no question that he had a responsibility to file a tax return and report that income," Porcaro said in an interview last week at Otrando, Porcaro, Pascarella & Gill Ltd., a CPA firm in Warwick, where he is tax partner. "A U.S. person is subject to tax on all income earned worldwide. . . . It's the law."

Getting Away With It: What if you know darned well what the law says, but you try to get away with breaking it anyway? In other words, suppose you don't try to legally avoid tax; you try to illegally evade tax?

If that's what Hatch was thinking, he went about it in the wrong way. Here's why:

A flurry of forms has probably been falling into your mailbox these past few weeks. Maybe you've received a Form W-2 wage statement, for instance, or a Form 1099 interest statement.

They're handy tools to help you do your tax returns. But you're not the only one who gets them -- copies go to the IRS, too.

When Survivor Entertainment Group issued checks to Hatch in August 2000 -- $1 million for winning the contest, and another $10,000 for appearing on the show's finale -- he deposited them into his personal bank account, at Newport Federal Savings Bank, court records show.

But that wasn't the end of it. The following year, Survivor Entertainment Group sent Hatch -- and the IRS -- copies of Form 1099-MISC, listing the sum it paid Hatch in 2000.

In November 2002, Hatch filed a tax return, on Form U.S. 1040, but didn't include that money.

The IRS doesn't need an army of agents to tackle such cases. It uses computers, in a process called document matching. In effect, the computer takes a look at the copy of your Form 1099 it receives, and compares it with what you've reported on your Form 1040. If the numbers don't match, you're in trouble.

And that's what happened to Hatch. "His chances of being caught were very high. The matching program is pretty efficient," Porcaro said.

In filing a false and fraudulent tax return for 2000, the government says, Hatch "knowingly and willfully [attempted] to evade and defeat a substantial part of the income tax due and owing to the United States."

He was charged with two counts of filing a false income tax return. (He had also failed to report about $321,000 that his company received in 2001, and that was eventually received by him, for working as a talk-show host on The Wilde Show on radio station WQSX-FM in Boston, the government says.) For each count, he faces up to five years in prison and a $250,000 fine.

What He Should Have Done: Instead of hanging around frigid Rhode Island, out on bail and awaiting his next court appearance, Hatch could be strolling about in a skimpy swimsuit on some South Sea island right now -- had he only made the right choices.

When he received the payments from the TV show, for instance, he should have reported them and paid tax on them.

Yes, the tax bill would have been high -- perhaps as much as $500,000 (including about $400,000 to Uncle Sam, and another $100,000 or so to Rhode Island), Porcaro estimated.

But Hatch still would have been left with about $500,000. And with proper planning, and the right professional advice, he might have been left with even more.

For instance, he might have been able to treat his earnings and winnings as self-employment income, listing it on Schedule C of his Form 1040, Porcaro said.

Thus, Hatch might have been able to reduce the tax bite by offsetting some of that income, maybe by putting some aside in a retirement-savings account, for instance, and by deducting legal, home-office and other "legitimate business expenses related to his newfound fame," Porcaro said.

Altogether, Hatch might have been able to claim maybe $100,000 or so in such expenses, saving about $50,000 in taxes (not including the impact of self-employment taxes), Porcaro said.

Instead, he'll probably now have to pay -- to the federal government alone, for his TV show income -- about $400,000 in income tax, at least $200,000 more in related penalties, plus a hefty bill for interest, Porcaro estimated.

Then there are the complexities involving the payments from the radio station in 2001. Early that year, Hatch received some of the money himself.

A few months into the show, he established Tri-Whale Enterprises, under subchapter S of federal tax law, with Hatch as its sole shareholder. He arranged to have the radio station make the rest of the payments to Tri-Whale, court documents show.

Because of the nature of the company Hatch set up -- a so-called pass-through entity -- the money flowed directly to him. But he didn't report it on his 2001 return, the government says.

Here, too, Hatch would still have owed tax if he followed the rules. But he could have reduced the tax impact in a variety of ways -- by having the corporation treat him as an employee, pay him a salary and provide him with health insurance, a retirement plan and other benefits, Porcaro said.

In other words, by obtaining sound professional advice, Hatch could have saved himself some money -- and a lot of grief. "If you get $1 million, why not spend a couple of hundred dollars to sit down with a CPA?," Barrett asked.

True, Hatch would have had to pay at least a chunk of his earnings and winnings in tax. "No one likes to part with that kind of money," Porcaro said. But it's the law.

"The bottom line was, what was he thinking?," Porcaro asked.

It's a question that Hatch has yet to answer.

Maybe we'll find out in the next episode -- in court.

Neil Downing is a Journal staff writer and author of The New IRAs and How to Make Them Work for You. Questions about your money matters? Call us at 1-401-277-7484 and leave a message, or e-mail:

moneyline [at] projo.com

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