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Some experts say risk of an audit 'is way up'
By Mark Schwanhausser, McClatchy-Tribune News
Tuesday, February 12, 2008 3:47 PM CST
Based on the amount of income that Americans fail to report every year — $345 billion, according to one government report — millions of Americans have little fear of a government audit.
But tax pros and government reports suggest the Internal Revenue Service is gradually shedding its “kinder and gentler” attitude in favor of more and stricter audits. In short, an audit could be like a truck in your side-view mirror: closer than it appears. In January, the IRS said audits for the fiscal year ended Sept. 30 climbed 7 percent for individuals, 14 percent for taxpayers earning more than $100,000, and 30 percent for those making $200,000 or more. Millionaires had a 1 in 11 chance of losing audit roulette. “I think the risk of audits is way up,” said Daniel D. Morris, a tax partner with Morris plus D’Angelo in San Jose. “The management of the IRS has basically said, ‘Audit harder, audit more rigorously and collect more money.”‘ The auditor’s traditional favorite quarries include the wealthy, the self-employed, the owners of cash-intensive businesses. But evidence suggests federal auditors are seeing ample targets among: Serial refinancers: The combination of low interest rates and aggressive lending practices spurred many homeowners to refinance time and time again — often sucking cash out to pay bills, buy cars or for other personal expenses. But that practice can easily run afoul of rules that limit the amount of interest on home-equity loans that homeowners can deduct. Generally, homeowners can write off interest on up to $1.1 million in loans — including $100,000 in equity loans — to buy or remodel a home. But deductions can get crimped depending upon how much you paid down the original loan, whether you siphoned off cash to remodel or for vacations and personal uses, whether you owe the alternative minimum tax and other factors. “When you see someone pulling something out year after year, either they are making improvements to the Winchester Mystery House or they have non-deductible interest there,” said Claudia Hill, owner of Tax Mam Tax Services Group in Cupertino, Calif. Alimony abusers: California’s Franchise Tax Board conducted a “pilot” audit to test whether divorced couples were correctly reporting alimony. The conclusion: 40 percent of the taxpayers flubbed it, usually over several years. On average, they owed the state an additional $5,800 — and that was just tab before Uncle Sam was notified. Auditors commonly found recipients of alimony and family support failed to report it as income. Meanwhile, the spouses cutting checks often wrote off alimony that the divorce decree stipulated was neither taxable nor deductible, or erroneously deducted child-support payments. Mom-and-pop shops: The General Accounting Office recommended in July that the IRS should boost the number of audits of sole proprietors, citing IRS findings that 61 percent of them failed to report all their business income in 2001. The IRS doesn’t get much bang for the buck when it audits most of those businesses, with half of them understating income by only $900. But 10 percent of such businesses — more than 1 million all told — shaved an average of $6,200. Cell phone users: Anecdotally, tax pros say auditors are increasingly scrutinizing write-offs for business vehicles, computers and cell phones. Typically, auditors look for records such as logs to determine how much such property was used for personal reasons. Last year, taxpayers lost two Tax Court cases involving cell phone deductions. One woman lost because she failed to keep adequate records, while a couple was denied a deduction for their flat monthly fee. Lawrence K.Y. Pon, a certified public accountant in Redwood City, Calif., said a “super strict” auditor “literally took the phone bill apart to figure out what was deductible or not,” Pon said. “Who does that?”
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