If you're audited
Most Kentuckians have their federal income-tax returns filed and like to think that their worries are past for another year.
But such thoughts may be premature, because the Internal Revenue Service could pinpoint a return for closer examination.
The mailed notice could be a simple request for additional information, but the mere notification gives most people a bad case of the jitters.
Don't panic. Your chances of an in-depth audit are slim, as only 1.19 million returns, or slightly less than 1 percent of the total filed in 1998, were selected for a face-to-face meeting with the IRS.
Your return may be one of only a few thousand selected randomly nationwide to be subjected to an arduous, line-by-line examination.
First of all, don't throw away the IRS notice unanswered; the problem won't go away. Second, check your records for the year being challenged to answer the IRS' questions, which have to be spelled out specifically in the notice. You do not have to respond to the questions through the mail; you can request a personal interview. Although the IRS makes the final determination of how, when, and where the interview will take place, the agency must work with you in scheduling it at a reasonable time and place.
The IRS closely guards its guidelines for determining which returns to audit. But most experts agree that one sure way to trigger an audit is to under-report income, such as from wages or interest on savings accounts.
Taking substantial deductions for unreimbursed medical expenses or business expenses, for charitable deductions, or the cost of doing business from your home is also likely to set off warning bells at the IRS. Tax experts say you shouldn't scale back legitimate large deductions in these areas. Claim what you're entitled to, they say, but make certain you have documentation and keep it in a safe place.
An interview with the IRS may not help resolve your differences. The IRS still may propose changes in your tax return, including an increase in the tax liability.
Taxpayers who disagree with the auditor's findings have the right to have their case reviewed by the IRS appeals division, without first paying the tax the government says is owed. Statistics show that taxpayers who go to appeals stand an excellent chance of settling for less tax than what the government originally sought. Still, based on statistics, those audited can expect to pay anywhere from $3,000 to $19,000.
If you can't reach an agreement with the appeals division, you can take your case to U.S. Tax Court, or, if the tax at issue is less than $10,000, to the Tax Court's Small Case division, where procedures are simplified.
The key to winning a successful settlement is to present a strong, factual case. Point out how your facts differ from the government's. Give citations of court cases or IRS rulings that are in your favor.
Be aware of IRS procedures. If the IRS doesn't follow its own procedures, you can cite that in your protest. For example, the IRS manual gives a number of situations-such as illness- that are to be considered cause for the abatement of penalties.
You should go into the appeal with the intention of winning everything, but have an idea of points you're willing to negotiate. Make a list of the issues that are in dispute and rank them. What are your strongest ones and what are your weakest? Which ones can you concede so as to give the government a face-saving victory?
If you lose all appeals and face seizure of property to pay back taxes, the IRS must properly notify you. The IRS may not take any enforcement action, such as record a tax lien or seize property, until after it has tried to contact you and has given you the opportunity to pay any taxes due.
You must be given 30 days' notice before the IRS can place a levy on your property. In most cases, you have the legal right to keep certain property, including your home, a limited amount of personal belongings, furniture, and professional books and tools.
If you get audited, expect to pay
Of those audited in 1997 (the last year for which figures are available), 96.2 percent had to reach for their wallets. Here's how much Uncle Sam was due:
· Average audit conducted by correspondence $2,963
· Average audit held at a local IRS office $3,460
· Average field audit (done at your place of business or home)