10 ways to trigger IRS attention

CBS Market Watch ^ | 8:03 AM ET Feb. 19, 2002 | By Tracy Byrnes

[Rubber Duckie]

10 ways to trigger IRS attention

Red flags could make you more likely to face an audit

By Tracy Byrnes, CBS MarketWatch.com
Last Update: 8:03 AM ET Feb. 19, 2002

NEW YORK (CBS.MW) -- Like the Easter bunny at a Christmas parade, some things just stand out in a crowd.

That's certainly true of some items on your tax return. They just call attention to themselves. But that doesn't mean you shouldn't report them. What it does mean is that you must keep diligent records to back up your numbers in case the Internal Revenue Service instigates a potentially laborious examination.

Know that it's not just blatant disregard that'll get your tax return examined.

"Your return can be selected for examination on the basis of computer scoring. A computer program called the Discriminant Function System (DiF) assigns a numeric score to each individual tax return," according to IRS Publication 556, Examination of Returns, Appeal Rights, and Claims for Refund. "If your tax return is selected from DiF, it has received a high score. This means that there is a high potential for an examination of your return to result in change to your income tax liability." That's comforting.

Also be aware that Uncle Sam has three years from the due date of your return or the day you file it to come and get you. Unless of course you've omitted more than 25 percent of the reportable income on your return, then he can take up to six years, says Martin Nissenbaum, national director of personal income tax planning at Ernst & Young.

And if you've committed fraud, the sky's the limit. The IRS can take a lifetime to hunt you down.

10 ways to trouble
That said, we've asked our pros what items make the IRS perk up. The following is by no means an exhaustive list.

1. These days the silly rate reduction credit may very well bring Uncle Sam into your home -- at least via snail mail. The IRS announced on Valentine's Day that it has already found more than 1 million tax returns with rate reduction credit errors. Even worse, all these flub-ups may delay refunds by a week or more those taxpayers, according to the release.We knew this was going to be a big problem back in January when we reported on what was new for your 2001 tax return. See story. As a refresher, you may have gotten a rebate check thanks to President Bush's new tax act back in the fall. If you didn't, you still may be eligible for the rate reduction credit. There's a big worksheet in the Form 1040 instructions to help you figure it out. So do the silly worksheet and avoid all this nonsense.If you know that you are one of the guilty who completed the rate reduction credit section incorrectly, the IRS asks that you don't file an amended return until after it processes the original return.

2. If you report big numbers that are way out of line with the averages or your history, expect an inquiry. For instance, if you've always donated around 5 percent of your adjusted gross income to charity but bumped that amount to 10 percent this year, Uncle Sam may question your philanthropy.The same goes for itemized deductions. Be aware that the IRS is cracking down hard on the donation of cars. If the charitable deduction you're claiming for your old clunker looks way out of line, expect Uncle Sam to come knocking.

3. The IRS receives copies of all your W-2s, 1099s, 1098s etc. So not only does it match its copies against the ones you attach to your tax return, it ensures that the numbers reported on your return correspond as well."This is the area where we see the most action," says Bill Fleming, director of personal financial services of PricewaterhouseCoopers. If they don't match or the forms are not included, expect to get a notice from Uncle Sam.

4. Schedule C always seems to get people, says Fleming. That's especially true if you have a cash business such as a tavern, since the potential to fudge numbers is pretty high. So the IRS will be looking for receipts. If you are in a cash business, it will expect to see deposit slips corresponding to the amount of income you report.With a home business, the lines between personal and business expenses sometimes get blurred, leading to a raised IRS eyebrow. As an example, a contractor who is building a house for a customer may opt to use some of the materials for his own home remodeling. In this case, the costs of the materials used on his own home should not be included as part of his business expenses.

5. Taking the home office deduction may entice the IRS only because some taxpayers claim it erroneously. We've discussed this issue before see story, but as a recap, to claim a home office deduction your home office must be used solely for work purposes. That means the room can't double as the kids' playroom.Also, you can't have an office anywhere else. So if you're a workaholic who likes to bring work home, you can't claim the home office deduction.

6. Not filing on time inevitably will make your return stick out. So if you're trying to keep a low profile, be sure to file an extension if you can't get your return in on time.

7. In many instances, your income level may trigger an audit. While the overall audit rate has gone down from 1989 to 1999, the IRS has been mandated to audit low-income items, most especially the earned income credit, says Jackie Perlman, a senior tax research analyst from H&R Block.So taxpayers with income that's less than $25,000 have seen an increase in audit rates over the years while the folks in the $100,000-plus group have seen their audit frequency drop.

8. If you happen to be getting an exceptionally large refund, don't expect Uncle Sam to freely give up his money. He's going to check and double check to make sure you really deserve all that cash back.

9. If you have a history of noncompliance, or someone tips the IRS to your shenanigans, you most likely can expect your return to be examined.

10. Math errors, incorrect or missing Social Security numbers for you and your dependents and the lack of required information inevitably will trigger correspondence from the IRS as well.

Granted, there are worse things than an IRS inquiry. But it could turn out to be a paperwork headache. So do yourself a favor and get it right the first time. Be scrupulous and attentive to the details and hopefully you'll never have to hear from Uncle Sam.

Tracy Byrnes, former senior tax writer at TheStreet.com, has her MBA and spent four years as a tax accountant for Ernst & Young. This column provides general tax information; it cannot and does not attempt to provide individual tax advice. All readers are urged to consult with a tax professional as needed regarding individual circumstances.

[Dick Bachert]

We'd better get to work reforming CONGRESS before we get serious tax reform, because THIS is the current situation:

[bullseye1911]

#11. Be an owner or employee of a retail firearms enterprise

[ancient_geezer]

They forgot the big one:

#11 File a Return.

And the really big one:

#12 Don't File a Tax Return

I got a better idea:

The individual's tax form under the NRST amounts to:

 

 

 

 

With the NRST Every household receives Tax Slave Reparations (aka Family Consumption Allowence), based on family size, not income, as well as 100% of their paycheck:

Fedup Smith makes $39K per year...once the FairTax is the law of the land he will receive an instant increase in pay of $200.00 per week. Since he has a family of four, he will receive a FCA of $445 per month, for a total of $1,305.00 additional income per month that he can do with as he sees fit.

It is long past time to end the Income Tax once and for all,and support the enactment of the only bills before congress that would actually achieve that.

H.R.2525
SPONSOR: Rep Linder, John (introduced 07/17/2001)
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.
Refer: http://www.fairtax.org

the modification then enactment and ratification of:

H.J.RES.45
Sponsor: (introduced 4/25/2001)
Latest Major Action: 5/9/2001 Referred to House subcommitte.
Title: Proposing an amendment to the Constitution of the United States relative to abolishing personal income, estate, and gift taxes and prohibiting the Untied States Government from engaging in the business in competition with its citizens.

(Modified to prohibit all income, payroll, gift estate taxes as HR2525 calls for, or we will see European VAT style hidden taxes along with payroll excises to take over in the place of the of the current individual income tax(i.e. personal income tax) that Ron Paul amendment prohibits.)

And to keep em reminded that there is indeed a Constitution to pay attention to:

H.R.175
Sponsor: (introduced 1/3/2001)
Latest Major Action: 2/12/2001 Referred to House subcommittee
Title: To require Congress to specify the source of authority under the United States Constitution for the enactment of laws, and for other purposes.

[Bigun]

The income tax is a slave tax.

INDEED it is and I, for one, will not rest until it is consigned to it's proper resting place on THE ASH HEAP OF HISTORY!

The National Retail Sales Tax is the ONLY way to go because it is ultimately all about FREEDOM!!!

[Bigun]

We'd better get to work reforming CONGRESS before we get serious tax reform,

AMEN Dick! We currently have at least 240 members of the U.S. House who have displayed udder contempt for both their oaths of office AND the Constitution by voting for this assault on the 1st ammendment disguised as campaign finance reform!

If we stand for that we will stand for ANYTHING they want to shove down our throats!

[Protagoras]

Yes, we should have a whole thread on nanny government's info commercials.

You mean like the one during the Superbowl which said that if you used non-approved substances, you were a terrorist?

[Protagoras]

The National Retail Sales Tax is the ONLY way to go because it is ultimately all about FREEDOM!!!

Sorry, but soon you won't be allowed to talk about it within 60 days of an election, so you better talk about it now before your congressman and President take away your 1st amendment right.

[Lion's Cub]

Bump for later read

[Taxman]

Thass right!

Neither will I.

[Taxman]

Good for you. NTU is a good organization.

But you really should join NRSTA. It will be good for your soul.

[Taxman]

Geeaer, we can always depend on you to show up with the facts and the figures. Good job, my man.

[Taxman]

Well, the Tree of Liberty needs refreshing with the blood of Tyrants and Patriots every so often, does it not?

I did not "preserve, protect and defend the Constitution of this country against enemies foreign and domestic" for 28 1/2 years as a Commissioned Officer in the Naval Service to let a bunch of wimpy, pasty faced, chairwarming REMFs in Congress take away my right to FRee speech!

I will choose the where, the when, and the subject of my right to exercise that FReedom!

If they want it, they are going to have to come and get it!

[Taxman]

Whoops! That is "Geezer," not "Geeaer."

[lawgirl]

Iwannabeataxattorney bump ;-D

[sistergoldenhair]

a learn from your mistakes read.

[mtngrl@vrwc]

BUMP for later reading

[pigdog]

Yes, the NTU has endorsed the FairTax, one of the NRST bills.

And you're surely right ... it IS time; way past it.

Little Willie was "The Worst President In American History".

[ancient_geezer]

Here's an FR article covering their endorsement, and what the NTU has to say about the FairTax and the need for taxreform in general:

National Taxpayer Union Endorses FairTax - Testimony before Ways & Means