Avoiding Those Nasty Tax Audits

Monitor the math, watch the write-offs--or take a low-pay job

A specter is haunting the tens of millions of Americans who are now sitting down to figure out their income taxes for 1977. Of the 88 million people who file income tax returns, more than 2 million will eventually receive a deceptively amiable form letter from the Internal Revenue Service that reads in part: "We are examining your federal income tax return for the above year(s) and find we need additional information." Translation: these taxpayers' returns for 1977--or perhaps as far back as 1975 --will be audited. Two out of three of those chosen will be assessed higher taxes, raising a total of $1.5 billion in otherwise lost Treasury revenues.

Now, while there is still time, can anything be done to avoid winding up as one of the unlucky 2 million? Yes: check the math on your tax return carefully; make sure you sign form 1040; attach missives to your return explaining any unusual items; and if you turn to a professional for advice, assure yourself that he or she is in good repute with the IRS. Beyond that, make peace with former lovers and other potential enemies, and stay away from Mafia connections that could be reported, to the IRS by the FBI. Further, advises IRS Commissioner Jerome Kurtz with a smile, "take a lower-paying job, and use standard deductions."

The IRS computer will select for audit at least 5 million tax returns this year, but the agency lacks the money and manpower to scrutinize all of these. So, as any business would, the IRS concentrates on the 2 million or so returns that seem to offer the greatest potential for "profit." To start, it listens to informers, and if their tips prove to be accurate, can reward them with up to 10% of the extra taxes seized. "Thousands of tips are received every year, and quite a few are generated by a get-even motive," says IRS Spokesman Wilson Fadely. Jilted lovers, jealous spouses, aggrieved employees, angry (or envious) neighbors and other informants last year collected rewards totaling more than $360,000 for snitches that produced $14.9 million in extra taxes. What is more, the IRS always tries to audit the returns of those people fingered by law-enforcement authorities as suspected organized-crime figures.

The taxmen also keep a close eye on press reports of people who have been promoted to high-paying jobs, won lotteries or otherwise struck it rich. A lush lode for the tax examiners was provided, for example, by a Washington, B.C., newspaper feature on Virginia's new coal millionaires.

Those found guilty of overdeducting in previous years can expect audits, as can those whose returns were prepared by tax advisers suspected of bending the law. Even simple math mistakes or failure to sign the form can trigger an audit, since agents scanning these "problem" returns may spot irregularities.

In addition to all that, the IRS computers this year will select for audit, purely at random, 42,000 returns, or about one in 2,000, in order to develop a statistical profile of all taxpayers. The incomes of these audited taxpayers will range from the lowest to the highest; anyone is vulnerable. These audits will give the IRS the top-secret norms for deductions against which all returns will be judged.

Computers will then scan every single one of the total 88 million tax returns filed, comparing them all with the norms defined by the random audits. A highly complex computer program, which allows for all sorts of different variables will spot deductions that are above these national norms for each income group and award a series of "points" in a secret grading system. The higher the deductions, relative to income and family size, the larger the number of points; a big score will win an audit. The machine will ping and red-flag a return for audit if, say, it finds a middle-income earner claiming deductions for charity or medical expenses that are way above those of others in the same income bracket. The IRS refuses to reveal the exact norms that it will use this year, but it has given out the figures for 1975. People who go substantially above them, particularly in more than one category of deductions, are courting an audit.

Out of the 88 million returns, the computers will spit out 5 million with "audit potential." At this stage, IRS "screeners" step in to narrow the list to the 2 million that will finally be examined. Returns picked because of large deductions will probably be passed over if the taxpayers have justified similar deductions in previous years' audits. Taxpayers with legitimately large deductions can often avert an audit by attaching supporting documents, such as bills for medical expenses or property losses, and before and after photos. (Warning: send copies because originals can be lost.)

The more one earns, the greater the chance of being audited. Doctors, dentists and lawyers are prime targets, because their incomes are high and not, the IRS insists, because they are suspected of dishonesty. Self-employed people are more MARVIN MATTELSON likely to come under scrutiny than wage earners, most of whose income is accounted for by employers. The IRS has a special fondness for auditing people who deal in cash, including waiters, taxi drivers and owners of small stores.

Last year, looking at returns for 1976, the IRS audited fewer than one in 100 persons who reported wage incomes of less than $10,000 and took standard deductions. But it audited more than seven in 100 self-employed persons who reported incomes of $30,000 and more and who itemized their deductions, and examined more than one in ten self-employed persons with incomes of more than $50,000.

Even if your number comes up, don't worry. Says Kurtz: "There is no stigma attached to being audited." Anyway, a taxpayer who disagrees with an auditor's findings can appeal; first to the IRS group supervisor, then to the agency's appellate division and, higher still, to a U.S. tax court. No figures are available on how many win or lose through appeals; but the costs to appeal are low, and the tax-saving rewards can be great. On the other hand, if you know you have cheated, shut up and pay: if the IRS finds deliberate fraud, it can and will assess heavy criminal fines as well as back taxes.

In the end, however, just about anybody can be audited--including IRS Commissioner Kurtz. His own returns, in fact, have been examined six or seven times (he has lost exact count); he became commissioner last June and his latest audit was completed a few months earlier. After one he got a $40 refund, four or five times there was no change, and once he was hit for an extra $100. Says he: "I still think I was right on that occasion."

This file is automatically generated by a robot program, so viewer discretion is required.