Audit: Face-to-Face with the G-Persons

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HOW TO AVOID GETTING PICKED

As we've already mentioned, the methods by which the IRS picks returns for auditing are very secretive, but there are a number of approaches that can lessen your chance of being audited-all of which could be summed up under "keeping a low profile."

Deductions that are out of line with your income level are likely to make the DIF buzzer buzz. Deducting sales tax on a $30,000 car when your income is $12,000 per year is one example of a sure tip-off. If you end up in such a situation, attach an explanation to your return.

The IRS is also set up to single out tax protest-related actions. Deducting the percentage of the military budget is sure to bring the revenuers down on you, as will religious deductions for mail-order churches. The IRS also devotes attention to seeing that members of organized barter groups report income from such activities.

You can also help ward off an audit by preparing your return neatly and accurately and by listing your deductions clearly on separate sheets. All it takes to send the computer into a DIF frenzy is a transposed or misplaced number: Let's say you inadvertently drop a $3,600 employee business expense figure from line 24 (its proper place) to line 25a on Form 1040. As far as the computer is concerned, you've just exceeded the maximum IRA contribution by $1,350.

While you should cooperate fully with the IRS, you needn't volunteer more information than is required. On the other hand, don't force an auditor to prospect. When you're listing deductions, don't round off figures to the nearest $25, $50, or $100. Report the exact amount (to the nearest dollar), so that an auditor doesn't assume that you've just estimated the figure.

Finally, the signature of a qualified tax prepared-as long as that individual hasn't made the IRS list of notorious professionals-may be some assurance to the IRS that the return was prepared competently and honestly. Tax professionals are known to the IRS, just as tax professionals know IRS auditors.

WHAT HAPPENS AT AN AUDIT?

The most common type of audit will not even require you to meet with an IRS agent. The service center computer will spit out your return along with a letter describing the deficiency it has identified, and you'll get a notice by mail of a change in tax due. Or the computer may ask for more information about the deductions you've claimed. Though these form letters aren't nearly as intimidating as a phone call request ing that you appear at the district office, they're not to be ignored. You'll be much better off in the long run if you cooperate and attempt to resolve the discrepancy immediately—before an agent gets hold of your return and decides to look into it more carefully. One CPA friend got such a letter the year after he married a woman with two kids-the IRS wanted to know why his return listed four exemptions, when the previous year's listed only one.

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