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Julian Block

Julian Block

Posted: March 24, 2011 05:24 PM

Filing-Time Fantasies


Most myths are fairly short lived. Some, though, just refuse to die.

Take, for example, the one that makes the rounds every filing season about how to lessen the likelihood of an audit. According to that fable, the IRS programs its computers to go after late filers, not early filers.

Why does the IRS pay less attention to early returns? Supposedly, the agency expects people whose 1040s can't stand a close look to delay submission of their forms until the last minute.

The companion myth is to go the reverse route. The computers are less likely to kick out the 1040s of late filers because the feds are overwhelmed with all kind of returns around April 15.

Actually, says the IRS, and knowledgeable tax professionals agree, it makes absolutely no difference whether returns reach the agency early, in between or barely make the due date. That's because it's not until much later in the year that all returns go through computers that look them over for arithmetic errors and also single out those most ripe for audit on the basis of top-secret computations that assign scores to various items--charitable contributions and interest expenses, for instance. High-scoring returns, along with some chosen purely at random, are then closely scrutinized by IRS agents to determine which ones should actually be examined.

The odds against any return being audited are reassuringly long--better than 100 to one. Put another way, the IRS examines about one percent of all individual returns. That said, it should come as no surprise that those odds can shorten considerably, depending on such factors as the amount and type of income you declare and what you do for a living.

Overall odds may not mean that much anyway. Some years, the tax enforcers zero in certain occupations--doctors, dentists, attorneys and accountants, to cite several of the high-visibility groups that are routinely favored for audits. Why is that? Because, among other reasons, these folks file returns that show high incomes, hefty personal deductions in relation to their incomes, and sizable gray-area write-offs for business, as well as losses on investments in questionable tax shelters or in sideline ventures that turn out to be "hobbies," defined by the IRS as activities pursued without expectations of profits.

Hobbyists in IRS cross hairs include persons who offset their full-time salaries and other sources of income with losses they incurred in breeding horses or dogs, collecting and selling coins and stamps, or painting, photography and writing, to note just a few of the many possibilities. But hobby expenses are allowable only up to the extent of hobby income.

Moreover, as the IRS learned long ago, many professionals are persistently poor record keepers who are unable to substantiate their spending for business expenditures, mainly because of the strict record-keeping requirements for entertainment and travel expenses.

HOW NOT TO DO BATTLE WITH THE IRS. An Illinois taxpayer charged the IRS with violating his civil rights by picking his return for audit, thereby requiring more supporting data from him than from the millions who escaped examination. The Tax Court was cold to his complaint.

Then there was Dean M. Hicks, a Costa Mesa, Calif., engineer. Dean was successfully prosecuted by the feds on charges that he fired 13 mortar shells at an IRS Service Center in Fresno, and placed a truck bomb--discovered before it exploded--at the agency's West Los Angeles office. His motive? Dean told of a telephone conversation, during which IRS staffers made rude remarks and joked about the disallowance of a contribution deduction.

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Julian Block is an attorney and author based in Larchmont, N.Y. He has been cited as "a leading tax professional" (New York Times), "an accomplished writer on taxes" (Wall Street Journal) and "an authority on tax planning" (Financial Planning Magazine). His books include Julian Block's Easy Tax Guide for Writers, Photographers, and Other Freelancers: Trim Taxes to the Legal Minimum.