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William H. Rosenberg By Lawrence M. Kohn William H. Rosenberg is a Century City tax attorney and C.P.A. He was formerly with the I.R.S. for 11 years as an auditor, revenue agent and appeals officer. Kohn: How are tax returns selected for an audit? Rosenberg: There is a myth that selection is purely by computer. Actually, all returns are screened by experienced auditors after they are selected by the computer. Many are tossed back as not having "audit potential." Proper preparation of your tax return can reduce the chances of an audit or make you come out better during one. Believe it or not, "neatness counts." Auditors assigned to select tax returns for audit must look at stacks of returns with only a couple of minutes for each. Having done this work myself, I feel there is an annoyance factor working against sloppy looking returns. It gets worse if there are obvious math errors. Also, don't spill your guts on a tax return. You may have taken a completely legitimate business trip to Hawaii, but describing it as "Trip to Hawaii" is more a red flag than "Business Travel." Kohn:If someone is audited, what can they expect and how can they prepare? Rosenberg: Your auditor can range form a trainee to an experienced shark. They come in all races and creeds. Some are foreign born with poor English. They are required to probe for unreported income. This means they will ask you a series of questions about hobby income, prizes, consulting income, bartering, etc. Bartering is trading your services or goods for someone else's services or goods and is taxable to both parties. If you have a business, the auditor is likely to go through all your bank statements and add up the deposits. If the deposits are greater than the amount of income reported on the return the burden is on you to prove that the difference is from non-taxable income. In an I.R.S. audit you are guilty until proven innocent. It is up to the taxpayer to substantiate everything. If the difference in deposits is substantial, you can bet the auditor is thinking tax fraud. You should have your records organized as well as possible. Don't despair if you are missing some receipts. The auditors are authorized to sometimes accept oral testimony in place of documentation. How much oral testimony they will allow depends purely on the individual judgement of the auditor. That judgement depends on your personality, your wardrobe and how organized your records are. Ditch the Rolex and gold chains. Corporations and partnerships are audited by Revenue Agents. The bigger the business, the more sophisticated the game becomes. The agents try to do the audit on the business premises. They do this because they can dig up more dirt by observation and interviewing employees. Tell your workers that "Loose lips sink ships". You can disagree with the I.R.S. without being sent to Siberia. If they hit you with an unreasonable tax you can meet with the manager. You can also go to the I.R.S. Appeals Division. Ultimately you can go to court. Kohn:Does the tax payer have to appear before the I.R.S.? Rosenberg: No. By the execution of a power of attorney a tax professional can represent the taxpayer without the taxpayer travelling to the I.R.S. The inside joke among the auditors was that people without representation usually paid a lot more tax. This was not because the auditors were deliberately malicious, but that the average taxpayer did not know how to defend himself. |
