IRS: Random audits ahead

Tips may help avoid trouble

GARY KLOTT, GANNETT NEWS SERVICE

Originally published Sunday, April 14, 2002

The numerous tax law changes enacted by Congress the past few years have resulted in important tax savings for individuals. But the changes also have added to the complexity of tax returns and increased the odds of taxpayers making costly mistakes that result in delayed refund checks, bothersome IRS discrepancy notices and higher tax bills than necessary.

The recently announced IRS plan to resurrect its random audit program provides extra reason for taxpayers to be careful when filling out their tax returns this filing season.

Normally, individuals are picked for audits because of something suspicious in their return.

But for the first time since 1988, the IRS plans to randomly select nearly 50,000 of this tax season's returns for special examination, which makes everyone a potential candidate. And any item on your return is a potential target for examination.

The random audits will be used to identify the most common mistakes and indiscretions made by taxpayers. That will help the IRS update the secret criteria it uses to select tax returns for regular audits.

There is nothing you can do to avoid getting picked for a random audit. But you can take precautions by ensuring that whatever you do report on your return is correct, that you double-check the eligibility requirements for any tax benefits you claim and that you have documentation to back up your deductions.

Rate-reduction credit

One new source of confusion and errors this season is the new line on tax forms for the "rate-reduction credit," which can be claimed by some people who didn't receive a tax rebate check last year or received only a partial rebate. The IRS said some taxpayers are listing the amount of their tax rebate check on the line, when they should be leaving the line blank. And some people who are eligible for the credit are leaving the line blank, when they should be inserting an amount from the special "rate-reduction credit" worksheet inside the tax form instructions.

Dependents weren't eligible for the tax rebates. Nor can they can claim the rate reduction credit. But they may be able to get an equivalent benefit by completing the "Tax Computation Worksheet for Certain Dependents" in the tax form instructions.

Child tax credit

Another common source of errors is the child tax credit. The IRS has found hundreds of thousands of mistakes made in calculating the credit since the break made its debut several years ago. Be sure to follow the IRS tax form instructions carefully. To figure the credit, most taxpayers only need to fill out a five-line worksheet inside the IRS instruction booklet. But some parents, including higher-income taxpayers, are directed to use Publication 972, "Child Tax Credit." And lower-income parents need to fill out both a worksheet and Form 8812, "Additional Child Tax Credit."

New law provisions

Don't be confused by the various effective dates of the new tax law. While some provisions of the Tax Relief Act of 2001 took effect in 2001, most of the provisions didn't take effect until Jan. 1, 2002 and won't apply until next year's filing season when you fill out your 2002 tax-year return. For example, while some of the rules relating to the child tax credit have been liberalized for 2001 returns, the liberalized eligibility requirements for the student loan deduction and the earned income tax credit will first start to apply on 2002 tax-year returns.

Third party designee

If you'd prefer to let your tax preparer, a family member or friend field IRS queries about your 2001 return, you can now give the IRS authority on your return to contact that person directly.

The authorization is limited to routine processing matters and doesn't extend to audit or collection issues. To make the authorization, all you need do is complete the "Third Party Designee" section, which is just above where you sign your return.

David Rhine, regional director of family wealth planning at Sagemark Consulting in Rochelle Park, N.J., recommends taxpayers think twice before designating a friend or family member to answer questions over the phone. Even if the person is someone you implicitly trust, as might be the case for an adult son or daughter of an elderly parent, "it's not always easy to think on your feet when you're asked a quick question," Rhine said.

Many people may prefer getting the IRS queries the traditional way -- by mail -- so that you have the time to carefully prepare your thoughts or find the information requested, he said.

IRS address changes

Be aware that the IRS has been reorganizing its regional service center operations. So don't automatically assume the address you sent your tax return to last year is the same this year. Some taxpayers will need to send their returns to a different address than last year.

In addition, some taxpayers will be required to send their personal tax returns to a different service center than their business returns.

The IRS said the correct addresses will be printed on the envelopes in tax-return packages. They will also be listed in the instructions for each type of return and in tax-preparation software.

Double-check your math

Math errors are always among the most common mistakes. Besides going through each form to make sure the totals are correct, recalculate all items on your return that involved adding multiple receipts, such as business travel expenses. Such internal math errors won't be caught by IRS computers. But if you get audited, the examiner will likely ask to see your receipts. If he finds an error, you'll not only be subject to penalties for any tax deficiency, but the agent is likely to view the rest of your calculations with suspicion.

Social Security numbers and names

The IRS has been cracking down on missing and invalid Social Security numbers on tax returns and names that don't match Social Security records.

If you don't have a Social Security number for a member of your household, apply for an ID at your local Social Security Administration office before you file your tax return.

You'll need to list on your 2001 return the Social Security number of yourself, your spouse and every dependent, including infants born on or before Dec. 31, 2001.

If you changed your name for some reason, such as marriage or divorce, be sure to update the information with the Social Security Administration before you file.

Tax series

This is the last in a seven-part series on taxes.

Previously

- March 3: Changes for 2001 will make filing more complicated

- March 10: Benefits, wrinkles of new law

- March 17: Tax season tricks

- March 24: Tax bite eased on some investment income

- March 31: Maximizing personal deductions

- April 7: Your job, your business

Extra hours

The U.S. Postal Service Main Post Office at 900 Jefferson St. S.E. will be open Monday until midnight.

The counter line will stay open, and employees will be outside picking up mail in the parking lot. All tax forms received by midnight will get an April 15 postmark.

Post offices in Lacey, Tumwater and Olympia's west side will have mail in the outside boxes only picked up at midnight to receive the April 15 postmark.

On the Web:

- Filing 2001 tax returns: seven-part series on taxes

The Olympian Copyright 2002

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