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.

[Rubber Duckie]

Notice the new IRSS symbol-- the vulture.

[anniegetyourgun]

We did #2 (donations too high for their tastes) and triggered an audit last year. I just hope we aren't now on a "list" to return to for years to come.

[A Vast RightWing Conspirator]

This article is as useful as the 'seasonal' advice you always get on your local news such as: 'drink lots of fluids' during a heat wave or 'dress in several layers' on a chilly day. Extremely useful.

[ikka]

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.

Not true. There was a case where a violinist was able to deduct part of her rent while living in a studio apartment.

[freefly]

fyi

[Blood of Tyrants]

#8 is easy to avoid. Just take your refund, divide by the number of pay periods you have in a year, and have $5 less than that taken out of your with holding. That way you get a "pay raise" every paycheck".

[bvw]

Gee, there is a big big difference between a letter about a math error or typo and an audit. My experience with simple errors is they are easily and quickly fixed right over the phone.

[jgorris]

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.

Boy, with a tax "advisor" with this point of view, who needs enemies.

[bvw]

That home office deduction has been an area of IRS changes every year -- I used to take it -- but now avoid it for all the hassle it involves, if not the risk. Damn the income tax code!

[Rubber Duckie]

I've heard reliable estimates that our GNP could beincreased by around 5% just by scrapping most of the IRS code, taking 80% of the people off the filing requirements and using a relatively flat set of tax rates with realistic deductions for personal, children, etc.

F'rinstance, if getting yourself knocked up and having a kid out of wedlock gets you an extra $400 per month in welfare, having a kid legitimately should get you at least as much or more in tax deductions --- yes, even if you make $250,000 per year.

[diefree]

Whenever I hear the stupid nanny advice from the TV, as though we are all 3 years old, I want to kick it in. How about when the weather's bad and they tell you not to go out if you don't have to?

[Cowgirl]

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

[Taxman]

The income tax is a slave tax. As the above article clearly demostrates, as long as we slaves follow the rules, we will not get whipped. And the rules are intentionally obscure -- who among us can possibly file an income tax return and believe they have followed all of the rules?

If you are as mad as I am about the very existence of this evil, Marxist inspired Internal Revenue Code (IRC) and the corrupt agency which selectively enforces it (and enslaves us all), please consider becoming an active supporter of the National Retail Sales Tax (NRST).

The two NRST bills introduced in this Congress(H.R. 2525 and H.R. 2717) will replace the income tax with a NRST and abolish the IRS. Consider carefully what that would mean in terms of restoring a significant measure of your personal and economic FReedom.

There are many other benefits to be realized from the NRST, but gaining the personal FReedom to work, save and invest without the greedy hand of the government "Massa" stealing the fruits of one's labor, IMHO, is the most significant.

Just as Lincoln freed the slave during the Civil War, we are working to free the slaves (US!) in the 21st Century.

We Americans are faced with a stark problem: we either destroy the IRC/IRS monster or the IRC/IRS monster will continue to enslave and eventually destroy us.

“I have sworn upon the altar of God eternal hostility against every form of tyranny over the mind of man.”
[Thomas Jefferson, letter to Benjamin Rush, 1800.]

Click here to help us scrap the Code, scrap the IRS and abolish the VLWC!

We will never be a truly FRee people so long as we have the income tax and the IRS.

[Eric in the Ozarks]

I office out of my home but don't deduct. No audit. Its cheaper in the long run.

[donozark]

I'm not a member of NRST, however, I am a member of the National Taxpayers Union. NTU.org. My understanding is they have endorsed the NRST after a poll of members. It is definetly time for a change!!!!!!

[eno_]

Get a good accountant and don't be afraid, otherwise you are leaving money on the table. "Audits" are 99% of the time "show us a reciept" or "show us a letter from your work requiring you to have a home office." The anal probe audits are randomly selected - you can't do anything to avoid them. The only people really under the microscope are cash businesses.

[sam_paine]

Just take your refund, divide by the number of pay periods you have in a year, and have $5 less than that taken out of your with holding. That way you get a "pay raise" every paycheck".

Unless your a single guy and start a new job after you've already paid the max. FICA tax in a year. You start paying it again on the new job and can end up with a forced huge refund no matter what you submit for exemptions.

[VOA]

bump

[Cultural Jihad]

Can anyone expand on item #1? Most of us got a tax refund last year. Was there something I missed in this year's 1040 about that?

[anniegetyourgun]

TRY THIS.