Let's take a look at those deductions.... IRS to audit fewer '85 returns, but it's making greater use of income data
You have filed your tax return and tried to be honest. Now, how likely it is that you'll be audited? The answer depends on what you mean by audited.
If you are referring to a sweaty-palms session where you sit opposite an employee of the Internal Revenue Service (IRS) and explain your creative bookkeeping, the chances are slim.
This year the IRS plans to audit only 12 out of every 1,000 returns. That compares with 20 audits per 1,000 returns in 1980.
``Audit coverage has dropped down, in my judgment, too far,'' says IRS Commissioner Roscoe L. Egger Jr., who will leave the top tax job April 30.
To remedy the situation, the IRS plans to add 2,500 enforcement workers in each of the next three budget years. When the new staff gets on board, the IRS will be auditing at least 18 out of 1,000 returns, Mr. Egger says.
In the meantime, the IRS has beefed up other ways of tracking down tax cheats. The most sweeping is the service's information-returns program. An information return is one of those little slips of paper you get from your employer, bank, brokerage house, or mortgage lender. The slip warns you that the IRS has been informed of some interesting detail of your financial life.
In the mid-1970s, the IRS got 300 million such slips and processed ``almost none,'' Egger says. But now, due to improved computer equipment, the IRS has has become ``much more effective'' in using those documents. This year the IRS will receive nearly a billion information returns and match ``well over 90 percent'' against individual tax returns, Egger says. ``By next year there is no reason not to process all of them.''
The IRS expects to send out 6.5 million notices this year telling taxpayers that what they reported does not match with other information the IRS received. In the mid-'70s, only a relative handful of such notices went out.
``What we are doing is monitoring the system in other ways in addition to the traditional audit of the returns,'' Egger told reporters at a recent breakfast meeting. ``So you cannot simply accept the drop off in auditing [as] meaning our compliance monitoring has gone down that far.''
Still, the cost of tax cheating appears to be growing. The IRS estimates that in 1973, the gap between what individuals and corporations owed and what they paid was $29 billion. This year the IRS projects the so-called ``tax gap'' to widen to $100 billion and hit $159 billion by 1990. If the tax-gap estimates are accurate, only 81.8 percent of taxes owed this year will be paid. That is down from 90 percent in the 1960s.
There are several ways to be selected for an audit. The most common begins when an IRS computer plugs the numbers in each return into a secret formula that grades each return on its audit potential. IRS district offices then audit returns with the highest scores. Some returns are chosen for a detailed audit as part of a program the IRS runs every three years to check on compliance. Such a program will be run on 1985 returns. The IRS also targets people in certain categories, including those participating in tax shelters the IRS considers abusive.
And district IRS offices may examine those in a particular occupation when it suspects that local members of that group constitute a ``pocket of noncompliance.''