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SPECIAL REPORT: YOUR TAXES

Entering the Maze? Watch Your Step

Audits have dwindled as the IRS reorganizes, but that doesn't mean it's time to cheat. Using technology, the agency is catching discrepancies more easily, and experts say it is about to reassert its authority.

March 05, 2000|LIZ PULLIAM WESTON | TIMES STAFF WRITER

The threat of being audited has waned dramatically in recent years, as a newly chastened IRS attempts to rehabilitate its image.

Does that mean it's a good time to fudge the numbers on this year's tax return?

Many professional tax preparers say no. Although some errors of tax commission and omission may be easier to hide, new technology and computer matching systems have made it harder than ever for most taxpayers to cheat successfully.

What's more, many tax observers expect the lull in audits to evaporate when the agency finishes its long process of reorganization, which could happen as early as this year. Some taxpayers may be counting on a docile IRS at just the time they should be most worried, said David Flamer, a certified public accountant with Lasher, Flamer & Associates in Woodland Hills.

"The returns being filed now are the returns that are probably going to be subject to examination on a full-court-press basis," Flamer predicted. "People who play the audit lottery will lose and lose big."

Others point out that the risk of an audit has always been relatively remote for most people, making the issue largely one of ethics. How do you decide what is legitimate tax avoidance and what is illegal tax evasion when the IRS is unlikely to review your answers?

"I have clients who are saying, 'I'm going to push the envelope on this' " because the risks of getting audited are slim, said Paul Kuperstein, president of the California Society of Certified Public Accountants and a CPA with Braverman Codron in Beverly Hills. "We'll ask, 'Do you have the documentation to back this [deduction] up?' And they'll say 'yes' with a twinkle in their eye."

The issue worries some in the tax community, who fear a deterioration of taxpayer honesty could undermine the whole tax collection system, which depends in part on voluntary compliance.

"There are always people in society who will push the limit, who only think about what's in it for them," said Mary Beth Armstrong, an accounting professor at Cal Poly San Luis Obispo and chairwoman of the CPA society's committee on professional conduct. "What they don't think about is that by underpaying their taxes, that means eventually somebody else will have to overpay. Tax rates will have to be raised."

Only a tiny minority of taxpayers has ever been audited. That small group has shriveled further in the last generation.

The IRS conducted face-to-face audits on 1.59% of taxpayer returns in 1981. By the 1990s, the rate was down to around 0.60%. In 1998, the last year for which figures are available, it dropped to 0.46%--or just 46 out of every 10,000 filers.

Collections have dropped by 13% in the last three years, and property seizures are almost nonexistent--161 in fiscal 1999, compared with more than 10,000 three years earlier.

Treasury officials say some IRS employees have been confused about how to proceed with collections and seizures in the wake of the 1998 Taxpayer Rights Act, and agency reorganization and education efforts have sapped the audit squad. They predict increased enforcement and collections as agency training continues.

The drop in audits is especially noticeable to professional tax preparers, who handle more than half the nation's returns. CPAs throughout the state and the nation report dramatic declines in their audit caseload.

Noelle Allen, chairwoman of the CPA society's committee on taxation, said many of her Silicon Valley clients would be considered at high risk for audits. They tend to make more than $100,000, some are self-employed, and their taxes are complex--all factors that boost the risk of IRS review even in these low-audit times.

Yet Allen said the IRS started no audits of her clients last year, compared with five or six a year her office fielded during the rest of the 1990s.

"Absolutely, we've seen the difference," Allen said. "We've never had a lot of audits, but we got nothing [in 1999] other than computer-generated matching program notices."

Those notices comprise the bulk of the IRS' enforcement action--and serve as a caution to anyone who thinks the IRS is no longer paying attention to the nation's 127 million taxpayers.

In fact, it's becoming harder for most taxpayers to cheat, thanks to the agency's computerized record-matching efforts. The IRS compares millions of W-2 and 1099 forms provided by employers, banks, brokerages, mortgage lenders and other financial companies with taxpayer returns and issues demands for more taxes when there are discrepancies.

The state Franchise Tax Board piggybacks on this effort, sending its own dunning notices after the IRS has been satisfied. In addition, the FTB uses mortgage lending records, among other documents, to look for taxpayers who try to avoid California taxes by pretending to live in another state.

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