VIEWPOINTS : Shattering Some Myths on Trying to Cheat the IRS

Any way you look at it--and I’ve looked at it from both the inside and the outside--cheating on your taxes is a dumb idea.

There are plenty of well-meaning--if slightly larcenous--people who will tell you that the Internal Revenue Service tolerates a sort of “acceptable fraud level” as it examines taxpayers’ filings each year and that “cheating a little” is viewed by the agency with some amusement.

Nonsense. The plain and simple fact is that if you take deductions to which you aren’t entitled, present false information or just generally scam it up, you can get caught. And if you do, no matter how large or small the ruse you almost managed to pull off, you’ll pay for it.

There also are other myths commonly associated with the federal government’s tax-collecting arm. So, with April 15 coming soon, I thought I might shatter a few of these for you.

Myth No. 1: If I get audited, I’ll have to accept whatever the auditor tells me I owe. And if the auditor doesn’t like me, it’s all over.

As is the case with any large organization, the IRS employs dedicated professionals and lazy clock-watchers and people somewhere in-between. But your encounter needn’t consist of “one-step shopping” if you truly feel you are being discriminated against on a personal level, or if your case is what lawyers call a matter over which reasonable people can differ.

For the individual, the first point of contact is usually with a tax technician (the IRS changed this title from “office auditor” to make it sound less confrontational) at a local IRS office. If you feel you’re in an “abuse” situation--that the technician is sneering at you or ignoring you or making you suffer other personal slights--you can ask to speak with the tax technician’s group manager, or supervisor.

Most of these situations are resolved at the group manager level. If not, the case can be referred upward. Above the group manager are a branch chief, the chief of the examination division and the district director, the highest IRS official in each of the more than 60 districts nationally.

When the IRS and an individual continue to have a professional difference over a filing--based not on rancor or personality but on an intelligent parting of the ways--the matter can go to the IRS’ Appeals Division and, finally, to court.

One route through the court system begins by filing a petition with U.S. Tax Court. To get to tax court, you must receive a “statutory notice of deficiency” from the IRS, which the IRS is obligated to send in almost all income tax cases. The biggest advantage of litigating in tax court is that you can contest the IRS’ position before paying what the IRS says you owe.

Another option is to pay the tax you’ve been assessed, then sue for a refund in your local federal district court or the U.S. Claims Court in Washington. But litigation can prove dicey: You’ll be taking on court costs, legal costs, psychic costs--who doesn’t sweat out a lawsuit?--and running the risk of losing.

If you cheat and get caught, you could be penalized for negligence. The “addition to tax,” or penalty, for negligence is 5% of the total tax deficiency, plus 50% of the interest on the portion of the deficiency attributable to negligence.

If your cheating is deemed blatant (for example, skimming gross receipts from your business), you could be assessed a fraud penalty, in which case you’ll owe the government a penalty equal to 75% of the portion of the deficiency attributable to fraud, plus 50% of the interest due on that portion of the deficiency. Another possibility is that you could be charged a “substantial underpayment penalty,” which amounts to 25% of the deficiency.

And these are only the civil penalties. If you willfully violate the Internal Revenue Code, you could be criminally prosecuted for tax evasion--the same thing the federal government got Al Capone for. If you get convicted of evasion, you could be fined $100,000 and imprisoned for five years.

Myth No. 2: Rich guys never get audited; only little guys do.

I hate to bore you with statistics--or make you reconsider a comfortable belief--but according to the most recent calculations, here’s how your chances of being audited really shape up:

- Individuals who earn $50,000 and up stand a 4.1% chance of having their return looked at. Those earning $25,000 to $50,000 have a 2.6% chance. The odds continue to fall from there, with those earning less than $10,000 who file a Form 1040-A having less than a 1% chance of being audited.

- Corporations with assets of $100 million and more are nearly 87% assured of an audit; those with assets in the $50-million to $100-million range have a 48.3% chance.

Myth No. 3: Once I get audited by the IRS, I’ll be audited every year for the rest of my natural life.

It actually works this way: If you get audited for a one-shot deal, you won’t necessarily get audited again. But if you are engaged in an ongoing activity--such as a syndicated tax shelter for which you claim annual deductions--you will no doubt be audited repeatedly.

Myth No. 4: If I file a return reflecting a refund and I get the refund, I’m home free for that year.

Nothing could be further from the truth. If you file your return by April 15 and it reflects an overpayment, the IRS must refund the overpayment to you by May 30 or it must pay you interest on the refund. To avoid paying millions in interest, the IRS does everything possible to get the refund checks out by May 10.

But just because you get your refund doesn’t mean that the IRS has given you a pass on your return. In fact, it hasn’t even been looked at. Normally, the IRS has three years from when a return was filed, or from the due date, to assess it. So, if you file your 1986 return on time, you can’t really celebrate until April 15, 1990.

The key to all of this is to remember that if you act reasonably, more often than not you’re going to be accorded the benefit of the doubt by the government. And, if you keep trying to pull “fast ones” every year, you’ll more than likely become a hobby for a tax technician or revenue agent.