seen on "Hard Copy"
as a tax expert
from Century City News
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
Kohn: How are tax returns selected for an
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
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
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
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
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.