Line Items


New IRS Audit Program

Seeking to improve its methods for targeting taxpayers for audits, the IRS will launch a sampling project starting in the fall of 2002 that will select nearly 50,000 individual returns (of the over 130 million returns filed); about 2,000 of them will be line-check audits. The purpose is to measure taxpayer compliance in tax filing, reporting and making payments.

In 1988 the IRS audited 54,000 returns on a line-by-line basis under its taxpayer compliance management program. Tax advisers were not permitted to represent taxpayers audited under the program. Many taxpayers and practitioners criticized the process as draconian.

The new project, the national research program, will use a semirandom check that crosses income and demographic lines. The program will collect a current snapshot of the taxpaying public, allowing the IRS to refine its statistical techniques, as well as better target audits.

For the 2,000 returns slated for line-check audits, the IRS will check each line of the return. The service will select another 30,000 returns for partial audits on a limited (and less-intrusive) basis. It will target about 9,000 returns for “correspondence” audits, asking for selected items or information by mail, with no personal appearance required. The final 8,000 returns selected will be examined simply to see that information in documents (such as forms W-2 and 1099) matches and will require no taxpayer contact.

The IRS expects the new program to be less intrusive and burdensome on taxpayers than its previous compliance studies.

Anti-Terrorism Bonds

A new series of EE savings bonds has been designated as “patriot bonds” after the September 11, 2001, terrorist attacks. The funds raised will contribute to the federal government’s overall effort to fight global terrorism. The bonds are sold through financial institutions and the Bureau of the Public Debt’s Savings Bond Direct Web site ( www.publicdebt.treas.gov ) and are inscribed with the legend “Patriot Bond.”

Series EE savings bonds earn 90% of five-year Treasury securities yields. The rate in effect through April 2002 is 4.07%. The bonds sell at half their face value and are available in denominations of $50, $75, $100, $200, $500, $1,000, $5,000 and $10,000.

The bonds increase in value monthly; interest is compounded semiannually and is exempt from state and local income taxes. Federal tax can be deferred until the bond is redeemed; it stops earning interest at 30 years. Taxpayers can redeem the bonds anytime after six months (a three-month interest penalty applies to bonds redeemed before five years).

False Deductions

The IRS issued an alert on home-based business schemes that purport to offer tax “relief.” Some examples of schemes in which a taxpayer claims nondeductible personal expenses as business expenses include

Deducting all or most of the cost of operating a personal residence. For example, placing a calendar, desk, file cabinet, telephone or other business-related item in each room does not increase the amount that can be deducted.

Deducting a portion of a total house payment when there is no real business.

Paying children a salary for services (answering telephones, washing cars or other tasks), then deducting these costs as a business expense.

Deducting education expenses from a salary wrongfully paid to children as employees.

Deducting excessive car and truck expenses, when the vehicle has been used for both the taxpayer’s business and for personal use.

Deducting personal furniture, home entertainment equipment, children’s toys and similar items.

Deducting personal travel, meals and entertainment because “everyone is a potential client.”

Any tax scheme that claims a person can deduct normally personal expenses is highly suspect. Taxpayers with questions or who wish to report possible schemes can call 866-775-7474 or e-mail irs.tax.shelter.hotline@irs.gov .

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