Step 3-2

The Second Aspect: Correct Information

The second aspect to the question, "What will the IRS be looking for," relates to rules of law. First you must acknowledge that the Tax Code is thousands of pages long; that the IRS instructions contain millions of words; and, that there are hundreds of thousands of court cases yielding numerous esoteric interpretations for even the most specific and obscure circumstance.

With such a vast universe of laws, rules, regulations, procedures, and court cases, the question is: How does the IRS know where to draw the line? How deeply will they probe to make sure you've applied the law correctly? How do they know what's important enough to look for, and what's not?

Add to that the basic insecurity every taxpayer experiences wondering whether he or she has met all the tests from the laws, rules, regulations, procedures, and court cases. This insecurity is a basic part of every taxpayer's fear of being audited. Sometimes taxpayers aren't even sure of what it is they do know. And with all the civil and criminal penalties that the IRS can throw at taxpayers for not preparing their tax return correctly, it's no wonder that most taxpayers are afraid of being audited.

One Solution

With the help of an obscure portion of the Internal Revenue Manual for auditors, I have prepared a "Checklist of What Rules and Information the IRS Will Be Verifying" in Exhibit 3-2. This checklist is a comprehensive listing of the basic rules of law and other information the IRS expects its tax examiners to check for. It has been edited so that you can use it as you prepare your tax return to see how you will do under the scrutiny of an IRS tax audit.

The checklist is not meant to be the "end-all" perfect solution to a complete 100 percent accurate tax return. But the IRS knows from experience that they don't have to test every law, rule, regulation, procedure, or court case to discover errors on tax returns. They don't have to try and trip up taxpayers on unknown exceptions or qualifying circumstances; there are enough errors made on the basic rules alone to make it worthwhile, at least initially, to only look for the basics.

AUDIT-PROOFER'S STRATEGY RULE

Use the checklist in Exhibit 3-2 after you've prepared your return but before you send it in to the IRS. Use it to determine if you have violated any of the basic items of information or rules of law.

If you prepare your own tax return, you are well aware how easy it is to misread a rule from an IRS publication, or how easy it is to accidentally overlook something, or how easy it is to miss something because of a change in the tax laws. This checklist will help you to avoid those problems.

For example, suppose you deducted your membership dues to a country club as a business expense because your social contacts there sometimes lead to business deals and you frequently discuss business with your golf partners. Perhaps you were told by one of your associates that this was a legitimate deduction. By using the checklist you not only discover that your membership dues are not deductible because you don't use the club more than 50 percent for business purposes, but that this deduction is one of the basic items that the IRS will be looking for. As an audit-proofer you decide to delete the deduction.

By using the checklist to eliminate proven problem areas, you will create a tax return that not only will pass initial scrutiny, but will also impress the tax examiner with the thoroughness of your preparation. An examiner who finds nothing with his initial tests and basic questions, may feel that he is wasting his time by looking for other errors. If you have other potentially troublesome items on your return, that are not on the checklist, but which may be "gray areas" that involve a subjective interpretation of the tax law, you decrease your chances of having the tax examiner find them if you can impress your tax examiner that you know the basics.

AUDIT-PROOFER'S STRATEGY RULE

Use the checklist this year if you have been called in for an audit, to find you problem areas or weaknesses before the tax examiner does.

If you can see, beforehand, that you are going to have a problem with something, then you can focus your energies more constructively on dealing with the problem rather than spending your time in worrying about the audit.

For example, suppose you are a computer programmer and your employer asked you to take a college course in computer architecture, which you subsequently did and paid for yourself. Afterward you are notified by the IRS that your deduction is under question. You review the requirements for deducting educational expenses and discover that the expense must have been ordinary and necessary, and required as a condition of your employment. Now you know that you are going to need a statement from your employer substantiating that he required you to take the course as a condition of your employment.

Also, by knowing the basic errors you have made, later you will be able to explain them in a way that may convince the tax examiner not to assess you additional penalties for your errors. Be careful, though, not to give anything away to the tax examiner. If you come right out and show the examiner what errors you made, he may become suspicious and think you are trying to throw him off track from finding something even bigger. He may even think that if you're dumb enough to confess your sins to him, then you may be dumb enough to try and pull something bigger.

Next Step: Special IRS Audit Targets You Should Know About

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© 1986, 1998 to 2002, Jack Warren Wade, Jr.