In October, the Internal Revenue Service will begin taking a closer look at your income tax returns for 1984, sifting out the ones that seem ripe for audit. At present, the agency is shuffling through 1983 returns, which means some readers still can expect audit notices for that year as well.
And because the government has three years to challenge your tax accounting, you're not clear for 1982, either. But at this point, your chance of being audited for an '82 return is pretty small, says IRS spokesman Rod Young. Such an audit is likely only if one of your more recent returns is questioned, and the agency begins excavating for older errors; or if a long audit finally is concluded on a tax-shelter partnership and each of the partners is found to owe taxes.
If a recent letter from a reader is any indication, a lot of Americans have good reason to worry about being called for an audit. According to the reader, who has worked for the H&R Block tax preparation service, "a surprising number of clients sought vigorously to claim illegal deductions and exemptions." More than a few exploded in anger when they were shown the actual government wording that disallowed such deductions.
"Several stormed out," he went on, "taking their papers with them when I would not: (1) take as a dependent a son whose whereabouts or full name the client didn't know; (2) pretend the client had made a maximum Individual Retirement Account contribution; (3) deduct a child's college and clothing expenses; (4) write off racetrack losses (a shoebox full of pari-mutuel stubs) as a business expense.
"I assume each of these people departed to complete his forms in his own way," he concluded, more in sorrow than in anger.
If your number does come up for audit, and you have little support for some of your deductions, you'll probably decide to pay up quietly. With moderate support, you can hope that some of your figures will be accepted, even if others are denied.
But if you're sure of your ground, there's no reason to give an inch, even if the IRS auditor thinks you haven't supplied sufficient proof. "Don't allow yourself to be intimidated," Gerald Portney, a former IRS official and now a principal in Peat Marwick's national tax practice in Washington, told my associate, Virginia Wilson. Taxpayers who have good arguments have a fair chance of winning on appeal. (Note, however, that the government has prevailed in every Tax Court decision so far involving abusive tax shelters in such areas as coal, research and development, movies and books.)
Any audit starts with a letter from the IRS, telling you what it wants to check. "Make sure you get that exact information," Portney advises. "If you're unsure, call the IRS person who sent the letter." The better prepared you are, the more confident you'll feel and the easier the audit will be on you.
The simplest questions are handled by mail. A face-to-face meeting at an IRS office usually means a narrow audit, centered on just one or two points. A meeting at your home or office usually means a more extensive audit, in which the IRS may be searching for hidden income as well as questioning deductions.
It's no admission of guilt to show up with a lawyer or accountant. But it might be expensive because full-scale audits can take hours. Usually you can handle a simple return yourself. If an accountant prepared your return, he or she might give you some free assistance, so ask about it.
You will grind your teeth through many evenings as you get records in order and obtain copies of records you've lost. Once you've been through one of these ordeals, you become a lot more careful about keeping entertainment diaries and receipts, and about noting the source of all deposits into your bank accounts.
Most cases are settled between auditor and auditee. If the agency assesses extra taxes and you disagree, you can appeal, first to a higher-up at the IRS, then to one of three courts, the most popular of which is the Tax Court. Make sure you follow the appeals process to the letter (your auditor will give you written instructions), so that you don't miss any important deadlines. You must file a notice of appeal within 30 days.
Congress altered the laws last year to enable more taxpayers to argue their cases at small expense. Now, you can use the Tax Court's special small-claims procedure if the tax in dispute is under $10,000, up from $5,000. The filing fee is only $10 (compared with $60 in regular Tax Court). You won't need a lawyer because you'll be arguing only issues of fact rather than issues of tax law. And the court will convene in your own city or in one nearby. However, the decision of the judge will be final. You cannot appeal his finding to a higher court.