Don't Mess With Taxes

Tax audits from Hell for eternity

While catching up on my tax reading this weekend, I came across a couple of reports from the Treasury office that keeps an eye on IRS activities. Admit it. You wish you had my life.

In defense of my free-time reading choices, the studies by the Treasury Inspector General for Tax Administration (TIGTA) were on a topic that morbidly fascinates every taxpayer: audits.

The first report, released on June 17, has some not so welcome news about those incredibly invasive information examinations, often referred to as audits from Hell.

That nickname originated when these random audits first appeared in the 1980s. Back then, they were part of the Taxpayer Compliance Measurement Program (TCMP). But the demonic name stuck because the "measurement" was a very thorough examination of a return, requiring the taxpayer to substantiate every single entry, line by line, and prove each deduction, regardless of how small.

Adding insult to this injury was the fact that the IRS didn't necessarily think those being audited were guilty of any questionable tax avoidance moves. Rather, the agency randomly selected returns so it could get as complete an understanding as possible of the taxpayer filing process.

I could give the IRS a Cliff Notes version of taxpayer thoughts when filling out Form 1040 et al, but I don't think a string of expletives is what the tax agency is looking for.

Tax Hell returns in 2007: These exams returned in October 2007, this time as the National Research Program (NRP).

That month, around 13,000 individual taxpayers were selected for this dreaded honor, with their 2006 returns getting the extra once over. At that time, the IRS said it would continue this "special audit project" for tax years 2007 and 2008.

Now TIGTA tells us "An Appropriate Methodology Has Been Developed for Conducting the National Research Program Study to Measure the Voluntary Compliance of Individual Income Taxpayers."

Yep, that's the report's unwieldy title, but I guess the cumbersome moniker is a perfect fit for the process. And as it indicates, TIGTA says the audits are doing their job.

These last three years of study should provide the agency with good statistical estimates that will improve the compliance and collection process, notes TIGTA.

So, says TIGTA, expect these random audits of individual income tax returns to continue indefinitely. That way, the IRS can further fine-tune the formulas it uses to select returns for audit. The data also will help with new Tax Gap figures.

Billions left on the tax table: Of course, that collection gap could be closed a bit if the IRS did a better job of going after some high-dollar delinquent accounts.

In the June 22 report "Collection Actions Could Be Accelerated on Some Large Dollar Balance Due Accounts," TIGTA says that by getting more aggressive with some taxpayers who owe $1 million or more, the IRS could potentially collect more than $1 billion in revenue.

Now this isn't to say the IRS is letting all millionaires off the hook.

TIGTA investigators found that as of Dec. 22, 2007, there were 2,454 individual taxpayers in the IRS' "potentially collectible inventory" (government speak for "you're on our list, sucker!"), each owing more than a million dollars in taxes, interest and penalties.

Of these delinquent accounts, the IRS was actively going after 2,006 taxpayers for the overdue money.

But the remaining 448 accounts, which were either not being actively pursued or had been shelved altogether, accounted for approximately $1.2 billion.

TIGTA discovered some programming issues that could be corrected or rejiggered to help get these unpaid accounts off the tax back burner. IRS officials agreed with the recommendations. Ya think?

Here's one more idea that might help. Take some of those auditors from Hell and turn them loose on these millionaire tax delinquents.

Related posts:

• More money for IRS enforcement
• IRS lets rich off audit hook!
• Television, taxes and audits, oh my!
• Uh oh! Audits are up
• Audits from Hell return
• Tax Gap closure suggestions

More money for IRS enforcement

While there's still plenty of political sparring going on in Washington, lawmakers on both sides of Capitol Hill apparently can agree on one thing: The IRS needs more money to help it bring in more money.

The appropriations committees in both the Senate and House this week signed off on a fiscal 2010 budget of $12.15 billion for the IRS.

The House and Senate revenue panels also agreed that the IRS should get $5.5 billion this coming fiscal year to help it enforce our tax laws. That's a $387 million increase from last fiscal year's amount.

House Appropriations Committee Chairman David R. Obey (D-Wis.) noted in the bill's summary that "among other things, the increase is for the administration's initiative to target wealthy individuals and businesses who avoid U.S. taxes by parking money in overseas tax havens."

There are some slight differences in the bills, particularly in connection with the amount of money that would go toward the IRS' business modernization effort. This is a project that the IRS Oversight Board, a nine-member independent body charged to oversee the tax agency, says should be fully funded.

The modernization money, however, shouldn't be a big budget hurdle for House and Senate conferees to overcome. Congress is expected to reconcile the two funding bills before it takes its August recess

Just thought you should know about the added cash for tax examinations (that's the IRS' nicer word for audit) in case you were thinking about pushing the filing envelope a bit.

Some final tax-filing tips and warnings

This last weekend before the tax filing deadline doesn't have to be your return's Lost Weekend..

OK, maybe that 1945 Ray Milland classic film isn't the best metaphor. Then again, after dealing with taxes as the deadline bears down, you might want a drink or two. But I digress

The fact is there is still time to get your 1040 done and into the IRS by Wednesday. Just knuckle down and do it. That's my plan as soon as I get this posted.

I've got everything sorted. My biggest challenge is going through all my self-employment expenses. I try to keep good track, but every year I find notes in my business travel file folder that say "mileage to/from" various locations I've gone to for business meetings, seminars, conferences, etc.

Yes, I know I should be more precise. But in most cases, the amount is a repeat. For example, my freelance group meets once a month at the same place. I just need to find that January 2008 notation with the exact mileage and replicate it for each of the notes I dropped in the file for the subsequent meetings.

Of course, I've also backed up my attendance by noting the meetings in my calendar, as well as with the notes I took at each gathering, just in case the IRS ever asks.

Audit areas: And the tax man might one day ask. Not because I'm such a scofflaw, but because I am self-employed.

We small business folks are attractive audit targets because the IRS depends primarily on just us to accurately report our income and deductions. Aside from 1099-MISC forms indicating payment, and not every client provides those, there's not a lot of third-party verification for the IRS to double check.

In Navigating a Tax Return Minefield, New York Times reporter Tara Siegel Bernard examines areas where filers tend to fudge. Following are her categories and my thoughts on them.

Charity:  Cash donations (this includes actual currency and also contributions by check or charge card) require a receipt or bank record.

Valuing donated goods, which now are supposed to be in good or better condition, is a bit dicier for the IRS to determine.

Get details on donation tax considerations in this post.

Capital gains: The amount you got when you sold is recorded and reported to IRS by your broker or the fund or stock manager, but you get to come up with the basis amount. For tax purposes, that's the figure that counts.

Your sale amount minus your basis equals your profit. A larger basis means less profit and that means a smaller tax bill.

Right now the IRS counts solely on your veracity in calculating your basis, but that will change somewhat next year. Starting in 2011, a new law will require brokers to report investor basis on investments bought after 2010,

Home office: This deduction is not as big an audit red flag as it used to be. However, since more entrepreneurs (including many who were forced into opening their own businesses because of layoffs) are working from home, there are more chances for the IRS to make sure this deduction is correct.

And that also means there are more taxpayers who will mess this up, either intentionally or by legitimate mistake.

At a meeting of freelancers last week (that repetitive mileage reporting event I mentioned earlier), several folks were surprised to learn that a home office doesn't have to be a separate room. Just a portion of a room can count as long as that space is used regularly and exclusively for business. More on the finer points of the home office deduction in this blog post and story.

Quasi-personal expenses: One of the things I advised the freelancers against last week was mixing (or mixing up) business and personal expenses. As the Times' story notes, this gets complicated when you take a spouse on a business trip with you.

Even locally, if you use your personal credit card to pay for a business expense, you've created a tax problem. Sure you can notate the receipt, just as you would if you'd used your business-only piece of plastic, but you're on much more solid tax ground by having separate business bank and charge accounts and using them for their designated purposes.

Cleaning quibble: At the end of the Times' story, a tax pro talks about how people tend to think they can deduct a lot more than they really can. "And no, you can't write off your dry cleaning," he says.

But in some cases, you can deduct your dry cleaning.

Of course, there are limits which tend to make this tax break effectively useless for many folks, but ...

Say you have a job that requires you to wear a special uniform. (Sorry, active duty servicemen and women, this doesn't apply to you.) Dry cleaning costs for your uniforms (or protective clothing your job requires) can be counted as unreimbursed business expenses.

The keys here are that the clothing is a job requirement and it's not suitable for everyday wear.

This eHow article provides a step-by-step guide to deducting work-related dry cleaning.

Of course, that deduction is part of the miscellaneous itemized group on Schedule A. That means the costs must come to more that 2 percent of your adjusted gross income before you can claim them. It's going to take a lot of dirty clothes for most people to get over that deduction hurdle, but technically dry cleaning costs can be deductible.

A few more people might be able to claim dry cleaning as a charitable deduction.

As a high schooler, I was a Candy Striper at our local hospital; the older women who volunteered were Pink Ladies. We bought our own colorful uniforms and were responsible for their upkeep.

When you volunteer for an IRS-qualified organization that requires you to purchase a uniform, you can deduct both the purchase price and any upkeep costs.

As with work apparel, the nonprofit must require that you wear the uniform while performing your volunteer services.

And again, the uniform must be something that's not suitable for everyday use. I know that today a lot of things get worn "out of context," but you and the IRS know what is meant here.

If I'd been filing taxes back then and itemizing, I could have counted my red-and-white jumper cost and upkeep as a charitable deduction.

This deduction is a bit easier to claim, since in most cases there are no income thresholds or percentages to worry about.

Some last-minute filing guidance: If you can count some of your dry cleaning on your 2008 tax return, good for you. For some other possible deductions and more helpful last-minute tax hints, check out:

• 10 overlooked tax breaks

• Oft-forgotten deductions, credits and rules

• Meeting your tax-filing deadlines (an excerpt from my book, The Truth About Paying Fewer Taxes)

• 10 common tax-filing mistakes you can avoid

• Tempting the tax auditor

• Tax savings with self-employment retirement accounts

And don't forget, if you just can't complete all the paperwork by Wednesday, get an extension. Just send in Form 4868, either via snail mail postmarked by midnight April 15 or electronically by 11:59 p.m. on Wednesday.

That will give you six more months to get your Form 1040 and all associated schedules and other forms filled out and to the IRS.

Remember, though, you still have to send in any tax you owe (or a good approximation thereof) with your extension request or the IRS will start tacking on interest and penalty charges.

IRS lets rich off audit hook!

That's the assessment of the Transactional Record Access Clearinghouse (TRAC). Using IRS data, the Syracuse, N.Y.-based group calculated a drop of at least 19 percent in the audit rate of people with incomes of $1 million or more between 2008 and 2007.

The IRS says TRAC is wrong.

It's not the numbers that the IRS has an issue with; they are, after all, from the agency itself. But the IRS says that TRAC misinterpreted them.

Let's go to the "he said/she said."

TRAC's tracking: In the face of growing federal deficits and public calls to lower the tax gap (the amount of taxes due but not reported and paid), the drop in millionaire audits is surprising, says report author Susan Long.

TRAC notes that in January 2008, the IRS "was boasting that its drive to focus increased attention on those reporting at least a million dollars in income was in high gear." But when the agency's Data Book was recently released, its figures confirmed that both 2006 and 2007 IRS audit numbers had to be revised sharply downward because of "misreporting" discovered in the agency's books.

"As it turns out, it now appears that the 2006 audit numbers had been inflated by 20 percent while the 2007 audit number that the IRS had boasted about had been inflated by 35 percent over actual levels," says TRAC, referring to the "millionaire audits" table (below) that it created to compare the examination numbers from 2004 through 2008.

IRS explanations: OK, maybe the 2008 numbers are down a little. But there are good reasons for that says the IRS, such as the fact that the agency spent much of last year focusing on the issuance of stimulus rebate checks. Then there was the matter of a reduced budget, which led to staffing issues.

Plus, contends the IRS, TRAC's finding was "misleading" because it compares the statistical equivalent of "apples to oranges."

IRS spokesman Bruce Friedland told Tax Analysts that the data from 2007 that TRAC used to show 2008's decline in audits of wealthy taxpayers are based on returns reporting $1 million or more from so-called positive income. These returns do not not include losses.

"It's a slightly different slice, but they are not really comparable because of the underlying definitions," Friedland said. He also pointed out that 2008 was the first year the IRS began collecting data based on adjusted gross income.

As for the revisions indicated in the Data Book, the IRS said the 2006 and 2007 audit figure adjustments were the result of a "regrettable" coding error that affected its published reports but not its operations. The agency maintains it still holds the scrutiny of millionaire tax returns as a high priority.

What catches the IRS' eye? Regardless of whose side you take in the "rich aren't getting audited enough" argument, when push comes to shove all most of us care about is whether we personally will have to answer IRS examiner questions.

There are some things that do cause the IRS to take a closer look at returns.

"There are several ways a return can be selected for audit, and the first way is what we call computer-scoring-termed DIF, or Discriminate Information Function," says Nancy Como, small-business/self-employed examination policy senior program manager for the IRS, during the March 10 IRS Tax Talk Today program. "It's sort of a random selection. The IRS evaluates tax returns based on IRS formulas, and this is based on deductions, credits, exemptions with norms for taxpayers in each of the income brackets."

Tax publisher CCH has put together some DIF data and has produced this table of average itemized deductions of which Como spoke:

Average Itemized Deductions
(based on preliminary 2006 IRS statistics)

Adjusted Gross Income	Medical Expenses	Taxes Paid	Interest Paid	Charitable Contributions
$15,000 to $30,000	$6,720	$2,837	$8,362	$1,897
$30,000 to $50,000	$5,791	$3,665	$8,451	$2,123
$50,000 to $100,000	$6,354	$5,815	$9,812	$2,673
$100,000 to $200,000	$9,302	$10,445	$12,892	$3,860
$200,000 or more	$29,509	$39,234	$23,274	$18,539

These figures are, of course, for illustration (and entertainment!) purposes only. Do not think for a minute that just because your deduction amounts are similar to or less than these figures that you won't be audited.

But, as CCH notes, you can use them as a guideline and if your amounts are grossly over these amounts, be sure you can document and otherwise justify the claim to an IRS examiner.

And remember: Don't let the fear of an audit ever stop you from taking a legitimate tax break to which you are entitled.

Related posts:

• Uh oh! Audits are up!
• The softer side of IRS collections
• Audits from Hell return

Tax Gap closure suggestions

The IRS is trying a new "soft notice" approach (blogged here) to get more people to voluntarily correct underreported income. But some folks say more needs to be done to close the tax gap.

That's the money the IRS says it is owed but which hasn't been paid.

The IRS' last estimate of the tax gap was back in 2001. The figures then set the unpaid amount at $345 billion, or $290 billion after subtracting enforcement efforts and late payments. It's a safe bet that in the last seven years, the gap has widened.

A group of tax experts convened this week to explore ways to collect owed taxes. The tax gap forum was organized by Sen. Thomas R. Carper (D-Del.), chair of the Senate Homeland Security and Governmental Affairs Subcommittee on Federal Financial Management, Government Information, Federal Services, and International Security. The Homeland Security panel, while having no official tax oversight, has gotten more involved lately in tax matters, such as the offshore account issue blogged about here.

This time, Carper wanted to hear what Treasury Department and IRS officials thought could be done to close the tax gap.

Third-party reporting favored: A favorite way to close the tax gap is increased third-party reporting of income. A 2006 study on the tax gap concluded that $197 billion of the owed money was due to underreporting on individual income tax returns; another $88 billion was from underreporting by corporations and self-employed individuals.

Earlier this year, the Housing and Economic Recovery Act of 2008 was signed into law and it contains a provision requiring merchants to report information on credit and debit card and third-party network transactions. This is estimated to raise $9.5 billion over 10 years.

Under the just-enacted Emergency Economic Stabilization Act (aka the bailout bill), securities brokers now must report cost basis information for stock and other securities transactions. It's estimated that this will produce around $6.7 billion over 10 years.

James White, director of tax issues at the Government Accountability Office's Strategic Issues Team, acknowledged that third-party reporting has a lot of potential, but cautioned that "the trick is finding third-party segments we have not tapped."

Lots of ideas: Some other tax gap revenue raising suggestions raised at the forum include:

• Withhold payments to federal contractors who don't pay their taxes.
• Require financial institutions to report information about non-interest-bearing accounts.
• Match federal and state tax data.
• Clarify tip reporting requirements by the restaurant industry and employees.
• Better regulate paid tax preparers.

The need for more efficient and effective tax collections was underscored by the recent financial services bailout bill and tax breaks that were added to the package.

"We're going to have to be smart and look at different ways to close this gap because no single approach will work," said Carper, who added that he will work closely with the Senate Finance Committee to find solutions.

You can read more on the forum in this Associated Press story and this statement from Sen. Carper.

The 'softer' side of IRS collections

Remember the kinder, gentler IRS? That tax collector persona appeared following the agency's 1998 reorganization that was mandated by Congress following public outrage over collection tactics.

As the deficit has grown, and Congress can seem to make itself pay for projects, the IRS has been given more leeway to get tough again. Capitol Hill  has instructed the agency to find ways to close the tax gap, the billions of dollars the IRS says it is owed but that hasn't been paid.

To this end, private debt collectors have been hired. The IRS also has ramped up audits.

But it looks like the agency thinks there's still a place for less aggressive ways to get money it is owed.

"Soft notice" pilot program: This month, the IRS is testing a pilot program that will alert taxpayers that they may be underreporting income on their returns and give them a chance to make good on the owed tax by filing amended 1040s. The IRS believes there are around 15 million cases of underreported income each year.

The so-called "soft notice," officially known as CP 2057, will start going out mid-October to about 31,000 taxpayers.

This notice doesn't propose changes to taxpayer returns. It will simply "encourage" notice recipients to "double check" the tax filing information in question and, if they find errors, "self-correct" by filing Form 1040X.

"We believe this approach will allow taxpayers to correct underreporting issues without having to extensively correspond with the IRS, thus benefiting both taxpayer and the Service," according to IRS spokesman Bruce Friedland in a statement about the program.

Computer checking: The CP 2057 notices are automatically generated by the IRS' computerized document matching system. The technology compares information on a taxpayer's tax return with third-party tax documents, such W-2s and investment statements.

If you get a CP 2057, you don't have to respond to the agency. Rather, the notice instructs you to contact the third party who issued the tax data in question if you believe there's been a reporting mistake.

If, however, you realize you did indeed forget to include that part-time job's income or the interest from that savings account, you'll need to file an amended return to straighten out your tax liability.

You always can ignore the notice. The IRS says it won't take any action. I'm not sure I believe this.

But if reporting discrepancies are found on your next tax return, you can be sure that the subsequent questionable return will be bumped to the top of the tougher CP 2000 notice list.

CP 2000's tougher line: With the CP 2000, the IRS actually proposes changes to your return based on the third-party data. This includes the amount of unpaid tax calculated by the IRS, along with penalty and interest charges.

With a CP 2000, the agency assumes that its changes to your Form 1040 entries are correct. You do, however, have 30 days from receipt of the proposed changes to tell the IRS why your original numbers were correct.

Low-hanging tax fruit: The IRS says the new CP 2057 notice was developed to deal with at least some of the more than 10 million cases each year that the agency doesn't follow up on because the amount due might not be worth the cost to pursue under the current notice and collection process.

These returns are part of what the IRS has referred to as "low-hanging" fruit that it handed off to private debt collectors. However, since that program seems in jeopardy because of continued Congressional opposition, the CP 2057 could help bring in that missing tax money.

The IRS says the CP 2057 pilot program will require only "a very small portion" of staff to administer. But if these CP 2057 mailings prove successful in bringing the U.S. Treasury some extra cash, expect the IRS to expand the notice's use.

The IRS informed tax preparers about the CP 2057 via this presentation delivered at the agency's Nationwide Tax Forums this summer. The acronym "AUR" in the slide show stands for automated underreporting."

Avoiding IRS attention: The IRS also gives good advice in that presentation's last slide that should be followed every filing season:

• Keep good records of all your income.
• Report all your income and pay attention to your tax form as to exactly where to list it.
• Review your return before filing it to make sure it includes all your income.
• Make sure that payers (employers, investment companies, etc.) have your most current address so you get the same statements that are sent to the IRS.

You also might want to check out the "Living too large alerts the auditor" section of this post for tips on dealing with an audit.

Other ways to keep you from becoming an audit target can be found at:

• Tempting the tax auditor, an article I wrote for Bankrate.com,
• The Entrepreneur's Guide to Avoiding a Tax Audit, a blog entry from The Digerati Life, and
• Audit Avoidance 101, tips courtesy AccountingWeb.com.

And here's hoping you never meet an auditor and never get a CP 2057 or CP 2000 notice!

08.08.08: Looking for good tax luck

It's no accident that this round of the Summer Olympics kicked off in Beijing at 8:08 p.m. local time today, 08-08-08. For the Chinese, eight is a lucky number.

To commemorate this fortunate day on the other side of our planet, The New York Times takes a look at that Chinese numerical perspective, as well as seven other notable octads. They include:

• Roman Emperor Elagabalus' fixation on eights
• Ponticus' eight evil thoughts
• Eight causes of anger

Click on over to the feature Crazy Eights for more on these four groupings of eight, as well on the remaining four segments of the eight-part feature.

Avoiding audit back luck: Here in the United States, our numerical and calendar superstitions tend to align themselves with other numbers, such as Friday the 13th.

But eight still has a place in our society. For us, though, it's typically an unwelcome connotation, as in the the phrase "behind the 8 ball."

Eight also has a money connection. Pieces of eight, the ancient Spanish coin, actually was legal U.S. tender until the mid-1800s. The term is still used euphemistically (typically followed by "aaarrrgh!") to refer to currency in general.

You definitely don't want these two things -- your money and a difficult situation -- to coincide. Unfortunately, a lot of folks keep seeing that happen these days as the stock market continues its chaotic course.

The pairing also could be problematic if the IRS decides it needs to look more closely at your return. (You knew I'd get here eventually, didn't you?)

That's happening more of late, as blogged about in Uh oh! Audits are up.

To keep you from being one of the new audit targets, especially if you're among the millions of taxpayers who put off filing until 10.15.08 and now are desperately looking for ways to trim your IRS bill, check out these stories:

• Tempting the tax auditor, an article I wrote for Bankrate.com,
• The Entrepreneur's Guide to Avoiding a Tax Audit, a blog entry from The Digerati Life, and
• Audit Avoidance 101, courtesy AccountingWeb.com.

Good luck with your return. And enjoy the Olympics.

Auditor + Hitman = Arrest

It  sounded like a good idea. Pay $20,000 to get out of a $300,000 tax bill.

Unfortunately, it wasn't an offer in compromise arrangement from Florida construction company owner Randy Nowak.

Rather, it was the amount Nowak allegedly offered a hitman to kill the IRS agent who was auditing him. However, the guy Nowak thought was a gun for hire was an undercover FBI agent.

In addition to trying to avoid the $300,000 that the audit indicated he owed, Nowak allegedly was worried that the examination process would reveal the $4 million he had stashed in offshore accounts.

Now Nowak gets to add attorney's fees to his financial and tax troubles.

He's due in court Friday to face the formal charge of attempting to murder an employee of the United States, specifically the IRS, related to the performance of her official duties. If convicted, Nowak could face a maximum of 20 years in prison and a fine of $250,000.

Read more about the case and arrest at Tampa Bay Online, Accounting Web and Associated Press,

Capone tax investigation info now public

All this talk about IRS investigations brings to mind the most notorious tax evasion case of all time: the conviction of legendary gangster Al Capone.

The Chicago mobster, reputed to have ordered hundreds of hits, was felled in 1931 not by traditional lawmen or criminal rivals, but by the tax man. And now the IRS has released some of its records from that historic case.

As it was complying with a Freedom of Information Act request for a copy of Special Agent Frank Wilson's report on the 1931 case, the IRS discovered additional documents related to the three-year Capone investigation. And it decided to give them not only to the FOIA requester, but to everyone.

"All Federal tax records are confidential by law," noted IRS officials in announcing the decision to release the new-found material. "However, the records of the criminal investigation of Al Capone … are of historical significance and of interest to the public. Therefore, they are being made available…. No other IRS records meet the unique set of circumstances that make the Capone records publicly available."

Also helping nudge the IRS toward revealing the Capone material was the fact that the former Public Enemy Number One never filed a tax return. So technically, there was no tax record that the IRS was required by law to keep confidential.

Extra, extra! Read all about it: Among the now-public material are copies of reports and letters from the actual file which summarize the events and activities of the three year investigation of Capone. They inlcude:

• A July 8, 1931, letter from Internal Revenue Agents to the Chicago-based Internal Revenue Agent in charge.
• A summary report dated Dec. 21, 1933, prepared by Special Agent Frank J. Wilson.
• A March 27, 1931, letter from Wilson updating the status of the Capone investigation.
• Another investigation update letter from Wilson dated April 8, 1931.
• An excerpt referencing Al Capone from "A Narrative Briefly Descriptive of the Period 1919 to 1936." This was a report prepared on the organization, functions and activities during that time period by Elmer Irey, Chief, Intelligence Unit.

On the Sunday version of NBC's Today Show, Capone's great-niece spoke about life with her infamous uncle. You can watch the video here.

If you prefer a little more drama with your Capone documents, I recommend The Untouchables. The 1987 film starred Kevin Costner as G-man Eliot Ness and Sean Connery as Chicago police lieutenant Jim Malone. But the real hero was Charles Martin Smith, whose IRS agent character realized that the government could nail Capone for tax evasion.

Living too large alerts the auditor: The IRS wanted to know how come Capone's lavish spending habits didn't match with his reported income, which was none. And since even illegal income is taxable, Capone was brought down by the IRS.

That investigative tactic is still being used today by the IRS. It's known financial status audit, or more popularly as a lifestyle audit.

Those average deduction numbers, or DIF, discussed in previous blogs (here and here) come into play in a lifestyle audit. But it's much more than that. Essentially, the IRS wants to know how come you're driving a Mercedes and have a Miami Beach winter getaway on reported income of only $50,000.

When it enounters such seeming gaps, the IRS tends to suspect that off-the-books cash is involved, and its auditors are charged with finding it and collecting the due tax.

If you're audited by the IRS and you find the session turning a bit personal -- the examiner asks questions like just how much square footage is your house, where did you go on your last vacation or what school do your kids attend -- then a lifestyle audit is underway. Essentially, the agent is trying to unearth any inconsistencies between how you live and your reported income.

That's why experts say never meet an auditor at your home, where agent observations and chitchat could lead to questions about how you could afford all those original artworks adorning your walls.

In fact, don't talk to an auditor at all. Leave that to your CPA, tax attorney or enrolled agent, all of who are licensed to represent individuals before the IRS. If you use another type of tax pro, consider giving him or her legal power of attorney and tell the IRS to send that person all questions about your return.

Also, while under the tax code the burden of proof is on taxpayers, you can ask the IRS to show data that raises suspicions you're hiding income. On request, the IRS must release records gathered in an audit, except for reports from confidential informants.

Television, taxes and audits, oh my!

Vidiots like me are so relieved that the writers are settled in and new, post-strike programming is finally appearing on our television screens.

I doubt that many of the new story lines will focus on taxes, but not to worry tax fans. AccountingWeb has gone through the classic TV vault and found a couple of tax-related episodes.

There's the George Burns and Gracie Allen Show episode in which they work with their tax accountant. While sorting through the couple's records, the tax pro wonders why Gracie has included a receipt for a $50 full-length mirror in the couple's medical expenses material.

"I bought it so my dad wouldn't catch pneumonia," explains the ditzy Gracie. "Without a full length mirror, he forgets to put on his pants."

See, television sitcoms have always been full of corny, bad jokes.

And then we have legendary TV skinflint Jack Benny, who in a 1964 episode of his program, is investigated by the IRS. With his reputation for cheapness, a natural assumption would be that Jack underpaid his taxes.

But rather, the IRS sent an agent to Jack's home to interview him because he claimed an entertainment expense of only $3.90 on an income of $375,000.

In today's dollars, says AccountingWeb, that's a deduction of less than $26 on an income of over $2.5 million.

Audit red flags: Yeah, there are lots of holes in the Burns and Allen and Jack Benny tax story lines. So what else is new?

TV writers use IRS situations for entertainment purposes only and rarely bother to make sure the story lines make actual tax sense.

But when it comes to real life, we taxpayers don't have that luxury. As blogged about previously, IRS audits have been steadily increasing.

That earlier post on increasing audits also looked at average deduction amounts. Stray too far from what the IRS considers a normal deduction range (per the agency's discriminant function, or DIF, system) and you could cause the tax collector to ask additional questions.

Some other audit red flags, according to Smart Money (via AOL), include not reporting all your income, claiming a loss from your small business, not having proper documentation for charitable donations and deducting a home office, although experts differ on this red flag, as noted in my earlier blog on the tax pros and cons of a home office.

More audit red flag warnings come from fellow bloggers:

• The Honest Dollar lists 11 ways to trigger an audit,
• Debt Prison has some ways to avoid a tax audit,
• Andrew Ewalt's Law Blog has eight tips to avoid an audit,
• Virtual Executive Coach reminds us of small businesses audit flags,
• IRS Problem Solver suggests ways not to draw attention to your tax return, and
• The Frugal Duchess offers us 7 tips if you do end up being audited.

You'll find many of the same warnings in these postings, but that just reinforces which areas to be especially careful about when you file.