YOUR TAXES: A SPECIAL REPORT : SURVIVING AUDITS : By Following Basic Guidelines, Taxpayers Can Ease Pain of Being Called by IRS
There’s a tale in the Internal Revenue Service about a frightened old woman who showed up for her tax audit with suitcase packed. But it wasn’t weighted with records to defend herself. The hapless taxpayer had carted along the belongings she thought she’d need when the IRS tossed her in the slammer.
“That’s happened,” IRS spokesman Robert L. Giannangeli said of the woman’s undue fear. “It has. But we’re not here to put anybody in jail. We just want to enforce the law and make sure the correct tax is paid.”
While IRS officials deem such terror unwarranted, most taxpayers are probably sympathetic with the woman in the tale. The byzantine U.S. tax code is daunting enough: Few Americans savor the prospect of having to defend their tax returns before hard-eyed government auditors.
But according to accountants who have dealt extensively with the IRS, taxpayers can survive the experience as painlessly as possible by following a few basic guidelines:
- Be organized. Bring along the receipts and checks needed to justify any claims that the IRS cited when it informed you of the audit. “You’re better off rescheduling the meeting than going in there in a disorderly fashion,” counsels Dick B. Poladian, a partner with Arthur Andersen & Co. in Los Angeles.
- Don’t talk too much. Chances are the examiner will question only a portion of your return. There’s no need to bring up areas not under discussion. Otherwise, warns Poladian: “You may be expanding the scope of the audit, needlessly.”
- Be nice. More precisely, be businesslike. Acting belligerent or purposely making things a hassle for the examiner reaps few dividends in a tax audit. The idea is to cooperate as much as possible with the examiner. Harvey A. Bookstein, a Los Angeles accountant, advises: “Try to work as a team to support your claim.”
One thing to realize: The odds of getting audited are pretty low. Less than 2% of the roughly 102 million tax returns filed this year will get such special scrutiny. Of those, the largest number will occur in IRS offices. Others will be handled simply through the mail. In some cases, generally where a business is involved, the IRS will choose to come out for a visit.
The IRS tries to target only those returns that stand out for one reason or another. The strategy is simple enough: to capture as much revenue as possible with limited resources. For example, it considers whether the amount of income a person reports is generally in line with the occupation reported on the same return, and whether the amount of deductions a person claims seems within reason for his or her income.
“Say a milkman claimed entertainment expenses,” observed Giannangeli. “That kind of thing would raise a red flag.”
One generous Los Angeles taxpayer got hauled in because he reported donating a much larger than average amount of his income to his church and civic organizations. Fortunately for him, Poladian recalled, he kept good records: “He went down to the IRS, showed the canceled checks and receipts--and they accepted the return as filed.”
Alas, the government doesn’t always have a long memory. Auditors honed in on the same altruistic taxpayer the very next year. (He escaped a second official audit, however, after reminding the IRS that it had just found in his favor on the same question.)
Another way the government seeks to capture the biggest share of unpaid taxes is by paying more attention to the affluent than to the poor. “There are more issues that can be of controversy with income of $50,000 than with income of $10,000,” Giannangeli explained. If a return shows adjusted gross income of more than $200,000, he promised: “It may not be audited, but it will be looked at.”
Just as certain rules of behavior apply once an audit is under way, experts say that by following certain guidelines, a taxpayer can minimize the chances of being examined in the first place. (One exception: The government randomly pulls about 40,000 returns each year for an exhaustive review; these findings help the IRS decide which returns to inspect in its larger, routine audit program. “If you get one of those, just brace yourself,” Poladian warns. “It’s generally a horrible experience.”)
For the vast majority of taxpayers, however, the probability of an audit will be influenced by their own financial strategies and how carefully they fill out their returns.
Richard G. Heller, a partner with Peat Marwick Main & Co. in Los Angeles, points out that “aggressive” taxpayers--for example, those who make use of special tax shelters--are far more likely to end up looking into the eyes of an IRS examiner (or perhaps avoiding them) than those who do not take part in such schemes.
The odds of getting called in also can be reduced simply by being careful. “I have a taxpayer with adjusted gross income of close to $1 million and he got audited,” Heller recalled. “Why? Because his wife forgot to report some interest income from a passbook savings account.”
That brings up an important point. More and more, the IRS is using its computers to match aspects of an individual return with the other information it receives. This includes reports from banks, investment brokers, other financial service firms and employers. If this information does not jibe with the information on a tax return, questions likely will be raised. As Poladian put it: “Be sensitive to what information the IRS already has about you.”
And the IRS has more and more information about you. For instance, it is increasingly checking whether divorced spouses both claim the same child as their dependent--by running a computer check on the child’s Social Security number. “Both parents may honestly feel entitled to claim the child,” Bookstein observed. “What the IRS cares about is that they both don’t.”
But if worse comes to worse and the IRS calls, don’t despair. While government figures show that 70% of those audited do indeed owe money, 24% leave the office no poorer than they entered--and 6% actually get a refund.
Consider the client of Heller who was audited over an interest deduction involving real estate. The IRS wanted him to pay another $2 million. But by following the basic guidelines of dealing with a government audit, things turned out, well, a lot better than they started. “By the time we got done, he only owed $200,000,” recalled Heller. “And we settled out of court.”
