- The Washington Times - Monday, February 23, 2009

NEW YORK | You don’t have a nanny or any other household help, nor are you chauffered around in a limo with a personal driver supplied by a friend.

That may make you eligible for a political appointment, but it doesn’t shield your tax return from an audit.

Yet if the fear of an audit has you paralyzed as you are preparing this year’s 1040, you can take comfort in the fact that such reviews are relatively rare, and most often involve only the exchange of a few pieces of mail.

Nearly 1.4 million individual returns were audited in 2008, or “examined” in Internal Revenue service parlance, up about a half percent from the prior year. That represents just over 1 percent of federal returns filed in 2007.

The likelihood of an audit increases for higher-income earners. While less than 1 percent of all returns for incomes under $200,000 are examined, IRS data shows that nearly 3 percent of returns for incomes over $200,000 were reviewed last year. The figure climbs to almost 5.6 percent of returns for incomes of $1 million or more.

Still, the majority of examinations, almost 78 percent, involved only letters sent to taxpayers seeking more information.

Known as correspondence audits, such queries, said Bob D. Scharin, senior tax analyst from the Tax & Accounting business of Thomson Reuters, are generally easy to handle. “Some people don’t think of it as an audit, because they’re not physically seeing the IRS representative in an office.”

Steps to take to avoid being audited

Mr. Scharin said taxpayers receive such letters when something doesn’t match up in IRS records, or when a deduction seems out of line. “The computer could kick out the letter because something didn’t match up,” he explained, for instance the amount of income listed on a 1099 form received by the IRS doesn’t match the amount you claimed. Or the IRS might want documentation to back up a deduction, for example, for a large in-kind donation to charity.

Jay Safier, a principal in the New York accounting firm of Rosen, Seymour, Shapss, Martin & Co., said one way to avoid such a letter is to include documentation supporting a claim such as a big deduction with your return. “If you attach it, it reduces the chance that the return will be audited,” he said, noting that returns are looked at by an individual before it’s determined they will be audited.

If you get an IRS letter, it’s important to read it carefully to make sure you understand what the agency is asking for and that you can provide the information. Any time you’re sending such paperwork to the IRS, you should keep the original and send a copy. “It could get lost somewhere along the way,” Mr. Scharin said, “or you may need to produce it if this proceeds to an in-person kind of audit.”

There are two types of in-person audits, those that take place in an IRS office and those that take place in the home or office of the taxpayer. Like the chances of an audit overall, in-person audits are more common for higher-income earners. In 2008, 41 percent of the examinations for returns with incomes over $200,000 were handled in person, as were 56 percent of examinations for returns showing incomes over $1 million. This compares with about 20 percent of the audited returns showing income under $200,000.

Mr. Safier said he typically will handle an in-person audit for a client.

“I don’t have my clients come to tax audits, that’s why we have powers of attorney,” he said. “When clients have to sit in front of the IRS and directly answer questions, they get very unnerved and they don’t necessarily focus on the question, but more on the fact that they’re sitting in front of an agent,” he said. “It’s much better to have someone who is an advocate.”

People whose taxes are prepared by H&R Block, Jackson Hewitt, Liberty Tax Services or other chains can get help from those companies if they are audited. This can include having a representative accompany them to an in-person audit.

Do-it-yourselfers who use Intuit’s TurboTax, H&R Block’s TaxCut or most online software products can find sample letters to use when replying to a correspondence audit, or can contact the software provider for additional help.

In general, experts say the best way to avoid problems is to make sure you can back up everything on your return. “You can panic in any of these situations if you cannot substantiate what you claim,” Mr. Scharin said. “The fear factor helps to keep people honest.”

“In any event, recognize the IRS is more interested in your money than in putting you in jail,” he said, “unless you do something really egregious.”

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