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Mistakes, questionable information could lead to an audit by the IRS On the Money
BY EILEEN ALT POWELL The Associated Press

    NEW YORK — The odds of any individual taxpayer being audited are low, but who wants to go through explaining to the IRS why you took this particular deduction or you didn’t report that particular bit of income?
    Tax experts say there are things taxpayers should do — or not do — to stay out of trouble with the nation’s top tax collection agency.
    “Basically, if you’ve included all your income, have documentation for your deductions and your computations are correct, you should be fine,” said Edward Smith, a Boston-based tax partner with BDO Seidman LLP.
    That said, Smith points out that there are some groups more likely to get caught up in IRS audits than others, such as selfemployed business people who may have extensive expense write-offs or wealthy families with complex investments.
    The IRS said that in 2007, it audited nearly 1.4 million individual tax returns, or about 1 in 100 of total returns. But wealthier taxpayers, specifically those with $1 million or more in income, had a 1-in-11 chance of being audited, and audits of businesses and partnerships have been increased, it said.
    The IRS emphasizes that selecting a return for audit doesn’t necessarily suggest that the taxpayer made an error or has been dishonest, since some audits are done to establish benchmarks for judging other returns.
    Still, the IRS has tools to help it identify taxpayers who are underreporting income or claiming excessive credits and deductions, including special computer programs that give each return a numeric “score” that allows comparison to national norms.
    John W. Roth, a senior tax analyst at CCH Inc., a division of Wolters Kluwer, said “there are a significant number of people out there who play audit roulette.” That is, they’ll claim a deduction they can’t document and figure that if it’s under a certain amount, it won’t trigger an audit.
    “In fact, that IRS scoring system that determines whether your return is pulled for an audit,” he said. “It looks at the whole return, not necessarily one particular item.”
    He added that the IRS doesn’t disclose the scoring system formula to make it harder for tax scofflaws to game the system.
    Smith of BDO Seidman said taxpayers need to be especially careful to report all income. That’s because the IRS has substantially increased the use of another tool — computer matching of data from W-2 wage reports and Form 1099 interest and dividend statements with numbers reported on individual tax returns.
    “You want to make sure all relevant income information is on the return,” Smith said. “That includes dividend and interest, proceeds from stock transactions, proceeds from the sale of a house, gross income for self-employed persons, all rent received.”
    And, he added, individuals can stay below the IRS radar by not making simple errors that call attention to their return.
    “Check and double check to make sure the math is correct,” he said. “Also make sure personal information, like your Social Security number, is correct and that the form is signed.”
    Attorney Barbara Weltman, a contributing editor for J.K. Lasser’s “Your Income Tax 2008,” said that among the “red flags” that can trigger IRS audits are: A sudden change in income. Excessively large deductions compared to income. Certain business deductions, such as meals and entertainment “because of susceptibility to fudging.” Home-office deductions that encompass the bulk of the residence. Minimal tip income for people whose occupation is working in a restaurant, beauty parlor or building management. Failure to do the alternative minimum tax calculation. Regardless of the infraction, the experts say taxpayers should not ignore IRS queries because the IRS is persistent and won’t go away. “There are honest mistakes which are easily resolved” with the IRS, Weltman said. “Say you transposed the figures on a Form 1099, writing down $690 instead of $960. They’ll send you a notice and a bill. If they’re right, you just pay up and that’s the end of it.”
    Then there are the more serious mistakes, or as the CCH’s Roth put it: “There are the ones when they say, ‘Come to our office’ and there are the ones where they come to your office.”
    His advice: “It’s better to resolve it before things get ratcheted up.”