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Taxes: How to Cheat Like a Pro
The former Senate majority leader seems to have something in common with his fellow citizens—or at least those who contribute to the $345 billion annual gap (as of 2001) between what the Internal Revenue Service estimates taxpayers owe and what they voluntarily cough up. Tax filers own up to nearly all the income the IRS can double-check against documents sent to it by employers, brokers and banks. But people are for some reason very neglectful when it comes to income and deductions that the IRS can't easily cross-check. They pay only 45% of the taxes owed in their noncheckable lives.
"I run into it with clients all the time. The current system has built a mentality that if there is no W-2 or 1099, it's not reportable income," says Phoenix CPA Edward Zollars.
Daschle should have known better, but maybe it's understandable if ordinary folks think this way. Over the past two decades the number of 1099s and other information returns sent to the Internal Revenue Service has doubled—to a projected 1.95 billion this year. IRS computers match most against individual returns and spit out 3 million-plus CP 2000 notices to taxpayers a year demanding an explanation for discrepancies.
Meanwhile, the ranks of IRS revenue agents (who perform the "field" audits that might find, say, unreported cash income) have shrunk 25% and the IRS has been busy battling dicey tax shelters, wacky tax protesters and hidden offshore accounts. The result: The IRS conducted field audits of only one in 440 taxpayers last year, half the rate in 1998. "The IRS doesn't have the resources now to do anything besides document matching for the bulk of the population," observes attorney Lawrence B. Gibbs, a Miller & Chevalier partner who was IRS commissioner in the late 1980s.
Yes, but don't get too cocky. As the table shows, the IRS is now using its shrunken field force to go after the better off. And it has ramped up use of a low-cost technique to attack deductions and credits claimed by ordinary folks: "correspondence," or by-mail, audits. Last year the IRS sent 1.1 million letters declaring deductions of some kind would be denied unless taxpayers mailed back acceptable documentation. "This paper tiger can make people's lives miserable," says Claudia Hill, a Cupertino, Calif. tax pro who edits CCH's Journal of Tax Practice & Procedure.
Here are some ways for the law-abiding (and the less so) to minimize IRS grief.
Study the charity rules. Congress has tightened rules on charitable deductions, making this a prime area for mail audits, says Hill. Gone are the days when Bill and Hillary Clinton could deduct $75 for giving a suit with ripped pants to the Salvation Army. You can't write off donations of small items in less than good condition and need receipts or canceled checks for any cash gift, even $10 put in the church collection plate. For donations of $250 or more, you must have a letter from the charity before filing your tax return. Last year a Tax Court judge ruled that Ruth M. and Daniel Gomez of El Paso, Tex. couldn't deduct $6,100 they tithed in 2005 to their church, even though they had canceled checks and a 2008 letter acknowledging the donations. "We didn't know the law," admits Ruth, 33. "We know so many people do cheat the system. We were doing the right thing and we got red-flagged."
Who files nanny returns? The forms are quite popular among residents of Washington, D.C., where the filing rate is six times the national average. That tells you two things: (1) Every other person in the capital is hoping for an appointment to a position that requires Senate confirmation. (2) Elsewhere, a lot of cheating is going on.The Audit Is In The Mail
If you're not well-off or involved in a shelter or scam, your odds of facing an IRS agent in a field audit are slim. But taking big deductions could invite a mail audit.