Careful, accurate records limit uncertainties in audit process

3/2/2005

Most Americans blanch when they hear the words "audit" and "IRS" in the same sentence, especially when it relates to their own tax returns.

However, such fear is warranted only if a taxpayer is not following the rules, said Chris Kerns, a spokesman for the Internal Revenue Service. Report all of your income and take only legal deductions, he said.

Still, filers making more than $100,000 a year are more likely to be targeted for an audit, as are companies with more than $10 million in assets.

Close to 200,000 audits of taxpayers making $100,000 annually were conducted in the federal fiscal year that ended in September, a 40 percent increase from the previous year and a 74 percent jump from 2002. That translates into 1 in 68 returns.

Overall, 1 in 129 returns got closer scrutiny by the IRS, with the total number of audits of all taxpayers topping 1 million in the most recent fiscal year for the first time since 1999. The IRS had a 19 percent increase in audits from fiscal year 2003 and almost a 36 percent jump from 2002.

There is no set way to determine which returns will be audited. Electronic filings, Mr. Kerns said, are no more or less likely to be audited than those sent by mail.

After years of declines, audits of the largest businesses, those corporations with assets of at least $10 million, climbed to 9,560, or one of every six such firms, up 34 percent from the year before. Among businesses with less than $10 million in assets, fewer were audited in the last federal fiscal year.

Despite the decline, owners of small businesses and those who work from home need to keep detailed paperwork to track business expenses, said Mr. Kerns.

"An example would be a vacation that might have been written off as a business expense " he said.

Certain patterns of behavior are more likely to trigger an audit, such as excessive charitable donations.

Charles Mira, a partner with the Toledo accounting firm Mira & Kolena, said picks for audits involve "a component of randomness."

He has had to calm nervous clients after they've been notified by the IRS about a pending audit.

He said his firm tries to make a file "audit-ready" from the beginning, including gathering any paperwork that will substantiate an unusual claim, such as a large loss from stocks or a donation that is out of whack with someone's income.

Mr. Mira said IRS representatives tend to be reasonable if a taxpayer has made an honest mistake or has taken a deduction in a gray area. But, he added, if there's any sign that the filer - and the preparer - did something on purpose, "they are known for being unreasonably aggressive."

The IRS reports that for fiscal year 2004, its revenue from enforcement was $43.1 billion, up from $37.6 billion the previous year.

Mr. Kerns warned that taxpayers need to respond to a notice from the IRS about needing more information or contending that more money is owed.

"People who think, 'Oh, they'll get back to me later,' need to remember penalties and interest are accruing when those notices are sent," he said.

Contact Mary-Beth McLaughlin at

mmclaughlin@theblade.com

or 419-724-6199.