An Ex-I.R.S. Official Gives Some Practical Tax Advice: E.G., Be Especially Careful This Year
How should taxpayers approach their 1979 returns?
This is the year to be squeaky-clean. The IRS is taking a new look at a cross section of taxpayers. They will randomly select about 53,000 returns for 1979 and put them through stringent, line-byline audits. They do this every two or three years.
Why do you say the IRS wants to scare us into being honest?
The service has only 85,000 employees processing about 137 million returns. They just don't have the physical manpower to audit more than about 2.4 percent. So the whole system would fall apart if it wasn't for voluntary compliance. The public has to feel that everyone is paying his share. If you perceive that somebody is not, you aren't going to either.
How do they keep taxpayers honest?
They'll audit a celebrity, such as Johnny Carson, for high visibility. Johnny Carson joking on the air about his tax audit is better than a feature on 60 Minutes. Or the service will go after a steelworker in Pittsburgh for word-of-mouth exposure. He tells his coworkers, and they think, "My God! What is the government doing—going after all the steelworkers?" This ploy is effective. Between 90 and 95 percent of the American public are honest.
Who has the worst record of voluntary compliance?
Small businessmen. They work so hard trying to make ends meet that they don't have time to manipulate and develop a tax strategy. A lot of the time they need their tax dollars to keep up their cash flow.
Which group has the best record?
The big corporations. They have about a 96 percent voluntary compliance rate. But if Exxon makes a half-of-one-percent error in computation, that's millions of dollars. Some 1,300 of the largest businesses get audited every year, including all the big banks.
Which profession is audited most?
Right now it's doctors and dentists. They make a lot of money, are self-employed and then find out they are paying at least 50 cents on the dollar in taxes. As a result they end up in questionable tax shelters.
What rule does every IRS agent live by?
A taxpayer is guilty until he can prove himself innocent.
Why is the burden of proof on the taxpayer? Isn't that un-American?
Because Congress says it is. United States Code Title 26 requires that the taxpayer prove to the satisfaction of the IRS everything that is claimed.
What is the Taxpayer Compliance Measurement Program?
This is the statistical method the IRS uses to find out how a cross section of people may be cheating or making errors. The service will dissect more than 50,000 returns of people with a great variety of jobs and incomes. Then they program their computers with this information to determine the normal ranges and to look for problem areas in the great mass of returns—for example, travel and business entertainment. If a return comes through that seems excessive in a problem area, it gets flagged for an audit. The computer is also programmed to kick out certain items automatically for closer scrutiny—like a home office.
Why should taxpayers file as close to April 15 as possible?
There will be more returns for comparison, so statistically you stand a better chance of not being audited.
What are the safest deductions?
Energy tax credits, charitable contributions, casualty losses, professional journals, home phone (10 to 15 percent of all local calls), medical expenses, sales tax, mortgage interest, political contributions, capital gains and losses, personal retirement plans, alimony, real estate taxes.
Which deductions will the computer most likely kick out?
Tax shelters, office in your home, business-related travel and entertainment, income-splitting techniques to deflect some of your income onto your dependents, interest-free loans to relatives, among others.
What is the statute of limitations?
Normally three years. Most people don't know this, but individual income tax returns are audited on a 26-month cycle from the time they're filed. So chances are taxpayers' 1977 returns are now safe from audit.
What should one look for in a tax man ?
You should never rate him by the amount of refund he gets you, because I can get you a terrific refund just by having you over-withheld. And don't trust an accountant who says, "I have never had a client audited," because that might show he never takes risks. You should really match your philosophy with your accountant's. If you would rather not have any anxiety, choose a conservative tax man. I like to take a few chances.
What about using banks and companies like H & R Block that do mass returns?
If your return is that uncomplicated, I would advise doing it yourself. If it is complicated, I would go to someone with greater sophistication. All the promises such companies make about paying penalties and interest are not very important, because it has been my experience that when they err it is normally on the side of the IRS. So chances are they owe you money.
If a taxpayer does decide to do his own return, what should he read?
Every taxpayer should have IRS Publication 17. It will tell generally everything you need to know. Just call up your local office. They'll send it free.
Do most people have too much withheld from their paychecks?
Yes. For 1978 returns, the IRS refunded $33 billion. If you took the amount of your refund money and stuck it in a bank you'd earn interest.
How can a taxpayer correct this?
You can change your withholding at any time. Just go to your employer and fill out a new W-4. I have four people in my family and I claim seven exemptions, because the interest payments on my mortgage reduce my taxable income significantly.
If a taxpayer gets audited, what is the best strategy?
Find out what the IRS wants. Then go back over your records with your accountant, if you have one. See how strong you are, and set out a pre-audit strategy. Reduce the question to a dollar amount. Say, I'm a little shaky here; I'm very strong there; I can prove that. Well, I kind of hedged on that a little bit. He's going to get me there. It may translate into $300. That isn't so bad. It takes all the fear out of it.
Do you have any other auditing tips?
One of the most important is to be honest with the tax auditor. If you are uptight, tell him. He'll probably put you at ease. Most people are very intimidated by the IRS. One last word: Don't ever, ever let an agent come to your home. They are trained to judge your surroundings in relation to what you are claiming. The best place is in your accountant's office.
What can a taxpayer who takes the IRS to court expect?
The court system is highly complex when it comes to taxes. And you have to sue, which means you have to pay all your legal costs even if you win. So the first thing to do is make sure the suit is worth it. If the IRS takes you to court, they cannot send you to jail for making a mistake—only for evading payment, concealing property, falsifying records, that kind of thing. For your peace of mind, remember the IRS would rather get your money than send you to prison.
Have you ever been audited?
Once. The IRS has routinely audited its own employees.
Do you expect to be audited again after this book?
Oh, you bet.