Table Of Contents

THE IRS . . . . . . . . . . . . . . . . . . . . 3

WHAT THE IRS REALLY WANTS . . . . . . . . . . . 6

VOLUNTARY COMPLIANCE . . . . . . . . . . . . . . 8

THE DREADED TCMP . . . . . . . . . . . . . . . .11

THE PROBLEM PREPARER’S PROGRAM . . . . . . . . .14

CHECKING ACCOUNTS, SAFE DEPOSIT BOXES. . . . . .16

PAID INFORMERS . . . . . . . . . . . . . . . . .18

PLAYING LEGAL GAMES . . . . . . . . . . . . . .20

JAIL TIME? . . . . . . . . . . . . . . . . . . .21

THE PROCESS . . . . . . . . . . . . . . . . . .23

Are you crazy? A total paranoid to think that they really do know everything about you? That given half a chance, the IRS will wipe you out and send you to jail?

No, I can assure you, there's nothing paranoid, even neurotic, about feeling that way. Mental instability in no way creates that state of fear and loathing. What you feel exists for good reason: the IRS has worked hard to put it there.

Nothing is more central to the IRS strategy of tax collection than scaring you, the taxpayer, and keeping you that way. Only then, they maintain, is there any chance that you, the t/p, as IRS calls the taxpayer, will be honest with them. Or, to see it the way they see it, even the slightest bit honest. Their campaign to spread fear operates on several levels. Take the relatively simple matter of public image. General Motors, Mobil, ITT, and other big corporations spend millions of dollars trying to get you to like them. It's as if it were not enough that you buy whatever they make and sell. They also want you to think of them as a friend, concerned about your First Amendment rights the air you breathe, the water you drink--warm folks you can depend on and trust.

The IRS strives for just the opposite public image and response. The more they can get you to despise and hate them, to curse and dread them, the happier they are.

Like the large corporations, the IRS also uses the press in their public relations campaign. But they don't spend millions advertising on television. Neither do they take out those low key ads, disguised as editorials, in newspapers around the country-those chatty observations on the shared American experience. The IRS doesn't spend a penny this way, but their message still comes over loud and clear.

Have you ever noticed, for example, that each year, from January through April 15, there are stories in your local paper about people being sent to prison by the IRS?

It is the policy of the Public Affairs Office of the IRS to issue stories of that sort at the time when they know you are doing your taxes, and thinking about what you might be able to hide.

That sort of thing is child's play for the IRS. They know that prison stories make good copy, and reporters love to write them.

Most of the time there isn't much of a contest between reporter and IRS, since there are only a few reporters covering the Service who understand the law. For most people, the National Office is a beat like covering City Hall.

The IRS, of course, is only too happy to educate a confused reporter who is trying to sort his way through a press release on a complicated ruling. The reporter goes to a friendly IRS Public Affairs Officer and asks him to explain it. The PAO does, and the reporter writes it down. What he has written in his notebook is tax law as the IRS sees it, and wants everyone in America to interpret it. The reporter usually doesn't even know enough to ask the right questions. He just writes it down and perhaps pretends to be skeptical: "Yeah, but how important is all this anyway?"

When the IRS official assures him it's important the reporter nods solemnly, goes off in ignorance and writes his story, which advertises the IRS's position at no cost.

So it is that, unlike any other government agency, the IRS sees themselves at war with it’s constituency, with all of the citizen taxpayers of the United States. They believe, and not without reason, that you lie and cheat on your tax returns. So, for the purpose of tax strategy, they start from the position that you, the enemy, are guilty until you prove yourself innocent. Nothing personal of course, nothing is ever personal with the IRS. It's all just a matter of interpreting, applying the law, and collecting the money.

But it is also war. Us against them. When I was with the Service, that's how I used to look at the world: Us against you. In this war, we were outnumbered. There are only 70,000 full-time, permanent IRS employees pitted against some 130 million taxpayers. So we had to be not only smarter than you, but also possess a sense of zeal and mission about what we were doing. And we did, we really did. We were convinced that our work was enormously important, absolutely crucial. Because if we didn't keep you in line and collect the revenue, there wouldn't be any money for the federal government. Nothing would work. Chaos. Catastrophe.

That was the feeling we shared, and it's still there. Outnumbered, we can still do the job. We are, after all, the full-time savvy professionals, and you people out there are the part-time dumb, often crooked amateurs.

Beyond spirit and competence, the IRS has a sophisticated arsenal of weapons. Manipulating the press is easy. They have other, much more painful ways of hurting you which you have never heard of and will never hear about from the IRS. Their position is sensible: you don't tell the enemy your secrets. You also don't tell him how to fight back, or what his rights are, or who we really are, or what we can and cannot do.

We've all heard about the audit, and dread it in a special way. The worry and anxiety produced by the audit is ever-present; the thing could strike at any time, zap you right out of the past.

Surely, they have hit a colleague or friend. And he or she has

told you all about it--the agony, the fear lasting for weeks that he might be ruined.

Well, that conversation with your friend is worth more to the IRS than the money they may have actually retrieved. Most people assume that if they get audited, it's because the IRS wants to pull more money out of them. Perfectly reasonable assumption. But wrong.

The primary reason the IRS selects your return to audit is because they want to put the fear of the IRS into you. They will certainly take more tax dollars from you if they can, but what means much more to them is to frighten you so much that from then on you will never again lie and cheat on your returns. You will decide it just isn’t worth the anxiety.

Also part of their strategy is that you will talk just as your friend did to you. They expect you to cry and moan to all your friends and everyone at the office. "Jesus Christ, what they did to me."

The IRS figures you will also unnerve them. You will cause them as well, to pause and take a very deep breath the next time they are tempted to write off half the vacation trip to London, or pretend that their kid's tuition was a contribution to the school's scholarship fund.

The policy of creating fear among the citizenry was never proclaimed at the Service. In fact, we never talked about it. It was assumed. One of our many shared secrets. I was quite surprised, then, to hear a Commissioner admit it in a most public way. Shortly after I left the Service I was covering a hearing of the House Ways and Means Committee for one of the Washington tax newsletters I had begun to write for. That committee, which originates all tax legislation is one of the two most powerful bodies in Congress so far as the IRS is concerned. Senate Finance is the other.

And speaking of them, a piece of advice: if you ever have a problem with the IRS, don’t waste time with letters and calls to IRS bureaucrats. If you have a congressman on the House Ways and Means Committee, or a senator on Senate Finance, you are especially fortunate. Write to him or her. If you lack direct representation on either, still write your senator or congressman. They'll forward the letter to the IRS and you will get immediate and courteous service.

The purpose of the audit program is not to produce the greatest revenue but to produce the greatest level of "voluntary compliance". "Voluntary compliance" means telling the truth on your return voluntarily. In other words, they could use the "maximization of yield approach," i.e., audit only those returns where the amounts they can recoup are substantial, and their chances for taking it, high. The IRS spends about 35 percent of it’s whole budget for the audit program, so being cost efficient there is important.

Nevertheless, that is not their primary objective. It is instead "to produce the greatest level of voluntary compliance." Which means that more than a third of the IRS's entire budget goes to trying to get people to tell the truth. The audit is the most powerful weapon the IRS possesses in that effort, and the Service uses it carefully, skillfully, very deliberately.

If all they wanted was to rake in more money, the whole process would be relatively simple, and very cost effective. The computers could almost do that by themselves. They are programmed to kick out returns with the "highest audit potential." which means, among other things, returns with the most questionable deductions, write-offs, and other soft areas. They could kick out only the fattest, most likely candidates.

But since the IRS is balancing dollars with "voluntary compliance" they operate differently. They want "visibility." This means the IRS carefully plans a statistical strategy that shows them how to reach all across America; across all income levels and classes, and into as many pockets of society as they can.

The strategy also means that they go after some kinds of people who are more "visible" than others, hence more useful. If they can cause problems for movie stars, sports heroes and celebrities in general, the IRS knows the media will play it up, and their implicit warnings will spread wide. When I was in the IRS, I remember writing several interpretive memos on cases affecting Jack Benny and Groucho Marx, Olivia De Havilland, and Sugar Ray Robinson, all very complicated cases. And I recall Skitch Henderson's being sent to jail, and all the headlines that went with it.

We joked about the best publicity the IRS could possibly

receive. Put Johnny Carson through the wringer and have him tell a few scary, funny stories on late-night TV.

There are other occupational groups that are somewhat less in the public eye, but still furnish very popular audit candidates. Airline pilots, for example, are carefully checked. They're always traveling, have heavy deductions related to it, and lots of questions about primary and other residences. They earn good money, too, and tend to be fairly sophisticated when it comes to taxes. The IRS doesn't like the sophisticated t/p.

The IRS doesn't trust car dealers any more than most people, nor real estate developers. Both are high audit groups.

Doctors and dentists are heavily audited not so much because they are distrusted as an occupational group but because they tend to be careless and stupid when it comes to taxes. Agents are continually surprised that so many of them do not realize that they are one-man and one-woman businesses. We were always getting agents' stories from audits about how incredibly sloppy-or even nonexistent-records were for people earning $100,000 or more.

In its quest for visibility, the IRS must plot strategy and tactics with it’s available and limited manpower. There are only a finite number of auditor-soldiers to be deployed, and so only a limited number of returns can be audited. Which necessitates surprise attacks.

That means the IRS will deliberately select a steelworker living in Youngstown, Ohio. They know he has very few deductions and there's going to be scarcely any money to be squeezed out of him. But they also know that he will tell everyone in his plant, in his neighborhood, and half of Youngstown, Ohio, just like you and your friend: bitch, moan, complain. The steelworker will also feel a bit special, proud that he was selected. He will brag.

Same strategy holds for the coal miner in Parkersburg, West Virginia, and the aerospace engineer in Burbank, California.

The truck driver, meanwhile, might actually have a number of real deductions to claim, traveling as he does up and down the East Coast all year. What appeals to the IRS about the man with the CB, however, is a rolling, talking advertisement for the long arm of the Internal Revenue Service, spreading audit fear in every truck stop, diner, and roadside tavern for 1500 miles.

My friends and former colleagues at the IRS can be quite arbitrary and unfair about a lot of things, but when it comes to their attitude toward you as a cheater, they have real evidence to confirm their deep suspicions.

You might protest that "cheating" and "lying" are unduly harsh descriptions. That all you are trying to do is make "broad interpretations" or merely take a few chances on your return in the name of saving a few dollars for yourself and your family.

The IRS doesn't care what you call it. They know what you're doing, and the way they know is through the Taxpayer Compliance Measurement Program.

The TCMP is the single most valuable source of taxpayer information the IRS has. It shows them exactly where people are cheating (and telling the truth) on their returns and I mean on exactly which items. It also gives them the highest and lowest levels of "voluntary compliance" according to income levels and other categories, important in establishing their audit strategy.

Though you probably have never even heard of it, I have to

tell you that if you are chosen to undergo a TCMP audit, it is

the single worst thing the IRS can inflict on you short of sending you to jail. The TCMP is every nightmare you have ever had about an IRS audit come true. And there is nothing you can do to stop one from happening.

TCMP returns are selected by a statistical sampling technique. You could be chosen and be the most honest person in the United States of America. Doesn't matter.

Every two years, the IRS selects returns for TCMP audits. The last time they used a sample of 40,000-42,000. My friends in the Statistics Division decide how many returns will be needed from each income class to make the sample valid, then they pick them. They take the last digits from social security numbers or employee identification numbers and select returns. This is not a garden variety audit experience by any means In the TCMP, the agent checks every single line of your return. Every single item.

And he requires you to prove every single line, and every single deduction.

"You say you're married, Mr. Goodale? Could you prove that, please?"

"Prove I'm married?" Mr. Goodale replies incredulously. "I've been married for ... 19 years." The agent shake his head.

"Well here, I’m wearing a wedding ring."

"Sorry, Mr. Goodale, that might be evidence, but it is not really proof. How about a marriage license?"

"You've got to be kidding."

"No I'm not, Mr. Goodale" he replies "Why don't you

bring that in tomorrow. Perhaps it would be a good idea if you

started a little list of things to bring in."

"What about my kids? Should I bring them in tomorrow as

well? Pull the kid out of Stanford and fly him in here so you

can see for yourself he's alive?"

"That's really not necessary, Mr. Goodale. A birth certificate

will do."

And so it goes, for days. Maybe, even weeks or months. Every single item questioned. Proof for all sources of income and every single deduction-major, minor, big and little, demanded, examined and verified.

And all by chance. The odds are only one in 2085, Only .048 percent that you'll be selected, which are better than the odds that you'll be hit by a bus, and about as comforting if it happens.

But even if you don't have to suffer an actual TCMP audit,

you are deeply affected by the program. All taxpayers are.

We earlier considered the question of whether they really knew everything about you and where and for how much you were lying to them.

The IRS is not, of course, omniscient. But the TCMP data allows them to act as if they were, and with considerable confidence.

The TCMP reveals to the IRS where you are likely to be coming from, where your head is, as the expression has it. Imagine a scientific sampling of 40,000 taxpayers, grilled face to face for days. Gallup, Roper, and other pollsters claim they can tell us what to expect, who will win a national election through telephone interviews with a sample of only 1500 people. Predicting voter behavior, it's called. Paltry compared with the IRS effort.

From the TCMP data, the IRS not only anticipates where you're likely to cheat, they can also decide how much to let you get away with. Relatively small amounts are not worth their time. The TCMP data shows them what is a "normal"--normal being the number that constitutes a verified statistical "truth" and therefore an acceptable deduction for, say, business entertaining, according to various income levels, occupational groups, and geographic area. If you violate your "norm" a bit, they'll let you steal a few dollars. All you get is some points against you from the computer, which has been programmed with all of the TCMP information. The computer, in other words, knows what is "normal" in the TCMP statistical category for your specific business entertainment item, and if you are too greedy, the computer might just spit out your return and recommend an audit.

So the TCMP is a powerful IRS weapon. It can paralyze you, if you have to suffer through one of the Program's audits. And the results of the TCMP survey, digested by the computer, will anticipate your tax behavior with so much precision that the IRS can almost read your mind. It is the closest thing to I984 market research our country has.

Believe it or not, the IRS for its own reasons prefers you to have a tax pro doing your return. This is partly because they think you are stupid and don't know tax law. Also they realize that most of you have all kinds of problems when it comes to money matters, psychological and others. These can lead to errors and complications, which can be a waste of precious IRS time and manpower.

So they want you to have a professional who will know enough to protect you from yourself and avoid obvious mistakes.

But they don't want your professional to be too clever or devious, not to mention dishonest. To that end, the IRS has a "Problem Preparer's Program," or as we used to call it, "Unscrupulous Preparer's Program."

It is a list the IRS quietly keeps of the names of tax preparers

it does not like. Some are people they've caught doing something illegal. Others, they haven't caught yet, but suspect are helping their clients to steal. Still others are preparers who they think quite simply are incompetent, people who don't know what they're doing and continually make mistakes on returns they prepare.

Every paid preparer must sign each return he does, and enter his IRS identification number, or his social security number.

The IRS then puts together a list of all the returns done by each preparer simply by running the preparer's I.D. through the computer and retrieving a list of his clients.

If a preparer gets on the Problem List, the Service can quickly check every return he has prepared and signed. Sometimes there is the same error on each return.

But far more ominous is what they will do if they really want to get him. They can hound him out of business. I have heard IRS people brag of several cases in which they took the list of a problem preparer's clients and audited every single one of them. Year after year. They figured that eventually the word would get around that if Mr. X does your return, expect to be audited. Not a very good recommendation for Mr. X, and before long he has no more clients.

Sadly, there is no way of knowing whether your preparer is on the List or not. The IRS is not going to tell you. All you will know is you are called in for an audit.

You are the enemy, guilty until you prove yourself innocent, and you greatly outnumber us. Talk about paranoia, the IRS is paranoid about all taxpayers. We used to speculate on what would happen if only 10 percent of the t/p’s didn't cough up, or even requested time extensions for filing returns. If even 10 percent asked for those perfectly legal extensions, which are almost automatically granted for 60 days from April 15, that would mean billions of dollars the Federal government wouldn't have. We used to make up lists of who wouldn't be paid, and then imagine what the effect would be on the country.

As protectors of the national cash flow, we were most definitely the good guys, the white hats. It isn't a very great leap from there to a few tactics and procedures that are actually above the law. Of course, we never looked at it then as doing anything wrong. They were simply ways of letting us do the important job we had to do efficiently.

For example, getting hold of your bank records.

You think of them as private and secret, but they are not. If the IRS is investigating you and has reason to believe that you are hiding income from them, or trying to defraud them in some other way, an IRS Agent will go to your bank. Like it or not, banks cooperate with the IRS.

Even without a court order, which would take time and a lot of paperwork; the Agent can usually find out what he wants to know simply by showing his badge and having a brief, private conversation with the bank manager.

It was, and still is standard practice to pull out the microfilm records of your checking and savings accounts. To an agent, your checking account, especially, is a real economic biography of you. It not only reveals how you spend your money, and therefore how much money you really have to spend, but it can show how much you are hiding. I recall one Agent's telling me in my early years about such a search.

"The man had a balance of $135,000 in his checking account," he told me.

I was puzzled. "In his personal account?" "Of course personal. That's the point."

"But that's stupid," I said, this being in the days before banks paid any interest on checking accounts. "Look at the interest he's losing."

The Agent looked at me as if I were as dumb as a taxpayer. "Yeah. But if he put it in a savings account, the bank would be sending us a 1099 to let us know just how much interest it paid to that fellow. He may not be collecting any interest, but we're not collecting any 1099s and he's not paying any taxes on all that income."

The other thing the Agent can do at the bank is to go into your safe-deposit box, a notorious hiding place used by bookmakers, gamblers, illegal operators of all kinds, as well as less exotic citizens who work for cash: cab drivers, waiters, independent contractors of all sorts.

I hear you saying calmly that breaking open your safe deposit box is a violation of your privacy and your contract with the bank.

A number of courts are beginning to agree with you. Several cases have been heard on the issue in recent years, and different states now have different laws and levels of protection for you.

The IRS currently says that they won't go into your bank box unless they have a court order to do so. And that if they get the order, you will be informed and have an opportunity to go to court to try to stop them.

I really don’t know if Agents are following those procedures. I know they never used to. Their attitude is, as I said, "We are on the side of the law. You are the criminal"

I have been told by agents recently that they still go after other records the way they always did, by shooting the badge and talking with the bank manager.

This practice is particularly common in smaller towns. There, as you can imagine, the appearance of an IRS Agent is especially menacing.

One of the darker IRS techniques is the use of paid informers. Though here, I think, more has been made than the facts warrant

True, there are people whom the IRS pays for information. Bank employees, for example, who are able to tell them when your personal checking account does rise to $135,000. The IRS pays them very little, and our feeling in the Service was that they turned up very little.

There are many more people who contact the IRS claiming to have information and asking for a percentage of what the IRS picks up from that information.

In fact, in I977 more than 5200 people tried to make such deals. The IRS ended up actually paying 483 of them a total of $360,000. From those tips, the IRS picked up $15 million.

A large number of the informers are angry people. An ex-wife or husband, who knows where undeclared income is hidden. A partner who has been cut out of his firm. An employee who had access to some of the corporation's secret boats and who got fired.

There are also crazies and semicrazies, neighbors who have had enough of your late parties and who have nothing more than suspicions about how you really earn your living and what you earn.

All of these leads are checked out, quickly and quietly. Only a handful stand up.

Frankly, this is an IRS weapon that I don't think is worth worrying over. You might say you simply don't like the idea of paid informers in a democracy, and you question the legal authority of the IRS to have them. To my knowledge, the courts have never ruled against the Service on this one.

When I’ve talked with friends about IRS informants, they have thrown the specter of Hitler's Germany at me. But that clouds the point, which quite simply is that if you have a nasty break with a loved one or a business associate, and you have some money to hide, don't be surprised if, in addition to hearing from the lawyers of the wounded parties, you also get a call from the IRS.

The IRS is, in fact, awful about the way it uses any informer's charges. It has to be. There are, after all, laws that even the IRS must respect.

The IRS loves to go to court to get the rulings it wants. And when it comes to court battles, once again, they have a strategy uniquely their own.

IRS policy has long been to go from one court district to another, until they finally get the decision they think is the right one.

If they lose in New York over limited partnerships, they’ll order agents in Atlanta to crack down and make very tough interpretations on that aspect of the law. Sooner or later, they figure, someone will say, "You have no right to disallow us our losses. We're going to take you to court". Which of course is just what the IRS wants.

If the judge in Atlanta says more or less the same thing as the judge in New York did, well, there is always Houston, Chicago, Denver, all kinds of fine places.

They won't stop until they get what they want, or until the Supreme Court speaks.

So, you can take on the IRS in the courts, but you had better be prepared for an extremely long, extremely expensive legal fight. They are.

The big question is, of course, whether they can send you to jail.

The answer is, only if they can prove in court a criminal act on your part.

That means fraud, or willfully hiding income from them, evading the payment of taxes, concealing property from them, falsifying or destroying records, perjury, that kind of thing.

They cannot send you to jail if you make a mistake and misinterpret the law about medical deductions, and take more than you are legally entitled to. In that case, or where you have deductions that don't hold up when an agent audits you, what they do is recalculate your taxes and add some kind of penalty, plus interest.

Let me tell you something that is basic to their strategy, and important to your peace of mind: the IRS would rather get your money than send you to prison. Normally.

If you are a member of the Mafia that does not hold. Or if the IRS has substantial evidence that you are willfully trying to defraud the government-if they find the $250,000 you stashed away in the bank in the Bahamas-and they also think that making a public example of you will scare other high rollers, then they will try to put you away.

Otherwise, the Service makes assessments and penalties. They might hit you for 5 percent of your taxes as a penalty, if you haven't paid what you are supposed to. Or, if you are supposed to pay estimated taxes and don't, 12 percent on the amount of underpayment. Or, if you don't file your tax return when it's due, 5 percent of the amount of tax owed, plus an additional 5 percent for each month or fraction of a month, up to a maximum of 25 percent.

They are not in any way eager to get into criminal litigation. You see, in criminal court, for the first time in the whole tax process, the rules of the game shift. In criminal court, the burden is on them to prove that you are guilty. In other words, the law works just the way you always thought it was supposed to--presumed innocent until proven guilty.

Beyond all the information and advice I'1l give you in this book, I want to take you inside where I was, and where part of me still is. Any time I hear or read about a new tax matter, a ruling, a regulation, a case, whatever, part of me automatically thinks about IRS strategy. What are they after? Who are they trying to get? Why are they doing it? And what can I do for myself and how can I do it?

I want you to begin to develop those kinds of instincts. By showing you how they think, who Harry the Auditor really is, what his training is, how his tax mind is shaped, you ought to get some practical insight on how to cope with Harry.

I especially hope you get something else, something a bit less tangible perhaps, but more important. I hope you are finally able to shake that nameless fear of the unknown. That you are able to regard the IRS clearly, even coolly, and say: "Okay, if I push my accountant to let me take that damn trip as a business deduction, I'm going to be kind of heavy in 'Travel and Entertainment.'... Is it worth it? Yeah, I think so. After all, I'm not really out of line much anywhere else". At that point, you are finally taking charge of your tax life, which is after all, a major part of your personal finances. And if you can have a real measure of control over that, life should become a bit more beautiful.

Depending on where you live, the postman will deliver your return to one of ten regional service centers--Atlanta, Kansas City, Austin, Holtsville (N.Y.), Fresno (Cal.), Memphis, Ogden (Utah), Andover (Mass.), Philadelphia or Cincinnati. Once there, your return enters what is known at the IRS as "the pipeline".

A Service Center is a complex that looks like a standard industrial park: office buildings, storage areas, and computers, lots of computers.

There an people here too, but at this stage of things people are not very important. They really are servants to the computers, keeping them fed and healthy.

A human being does, however, receive your envelope, open it, stamp it "received" with a date, and sort it according to type: individual return, corporate, partnership, etc.

A human being also makes the first inspection of your return, looking to set if, according to Line 66 on your return, you owe money

If you owe, say, $212.19 he makes sure the check you've enclosed is made out for that amount.

If it is not, your name is immediately sent to "verification," and other human beings in that department will send you a letter, quickly, informing you of the error and telling you to send another check for the required amount, plus interest. Just a form letter with the blanks filled in.

Many people make innocent errors when writing checks to the IRS and many more make not such innocent ones, and at the Service we thought we could always tell the difference. We collected a whole catalogue of stalling tactics created by people who owed taxes, but didn't have the money on hand to pay. Some might send their check, but date it for the wrong year. Others forgot to sign the check.

Some people blamed us. They would pretend to be irritated with IRS bureaucratic inefficiency: "If you would please search your files," they would write, "I am sure that you will find my check. I certainly sent it to you, along with my return. If, however, after a thorough search you are unable to locate said check, please inform me, and I will, of course, issue a new one to you".

One of the most common stalling tactics is to pay with a check--all properly signed and dated--but for the wrong amount.

I had a client not long ago who owed $2144.65 in taxes. He had made a minor killing in the market on a tip, and I'd warned him that his normal withholdings were not going to be enough. But rather than put anything aside, he played another tip. When it came time to file his return, he didn't have the cash. So instead of attaching a check for $2144, he sent one in for $144.65--an innocent and clever mistake, he thought.

As it turned out, my client was very lucky. His ploy did give him a couple of extra weeks. During that time, his stock rose a full point-better than dropping ten. At least my client had the money then to pay the taxes and the interest charges. But he might have found himself short of funds, with the IRS knocking on his door, perhaps slapping him with negligence charges, or even fraud.

When I learned about his charade and questioned him, he applied what I call the familiar Titanic Defense: Women and Children First. "I have to think of my kids," he replied. "Know what colleges cost today?"

But let’s assume that you are strong enough to resist such temptations and have enclosed your check for the right amount.

These checks used to sit around awhile, but now they are deposited quickly into a U. S Treasury account.

Your return, meanwhile, moves along to another human being. This one edits it and codes it for the computer. Then it is punched into the machine.

This is where the IRS starts looking at what you've sent them and what you've told them very closely.

For our purpose, it's best to think of the computer operating on two levels.

On the first level it will examine your return for simple, honest mistakes.

On the second level it will pass judgment on how good an audit prospect you are.

Here we get into important matters, the sophisticated and top secret TCMP data on how the computer selects returns to be audited, or at least recommends that human beings consider them audit potential. Let's take it 1 stage at a time.

First, the computer is going to check your return to find out if all the addition, subtraction, multiplication, and division is correct. Every single return in the United States is checked for plain old math, and if there are mistakes, the computer discards the return "Spits it out" or "kicks it out" are the common terms.

If that happens, your return will be adjusted, and you'll get a letter with a refund check, a bill, and an explanation of what went wrong. Here's one place not to worry. You will not be thrown into jail for sloppy arithmetic.

The computer will also decide if you owe an estimated tax penalty, and if so how much. Perhaps you should have been making quarterly payments and didn't. If that was the case, the computer will figure a penalty and a bill will be sent to you within a couple of weeks.

Or perhaps you didn't have enough withheld from your regular paychecks. Or a large capital gain on which you did not pay any tax at the time may have the same penalty. Here's another instance that the IRS wants to make tax preparers into part-time IRS employees. The Service has asked tax preparers to figure out what the estimated tax penalties should be and then in effect collect the money for them. The IRS actually tries to force tax preparers, by decree, to perform that service for them, on your time and money. But the matter received such attention in the trade, and the preparers of the tax world resisted and screamed so loudly that the Service backed down. For now, at least.

The computer also checks for other errors, honest or reasonably honest mistakes that the IRS knows are especially widespread--the kind the Service has instructed the computer to catch and sort out before going any further. These vary from time to time, but, currently, they include the following:

The computer is programmed to check that what you declare on Line 8 for wage and salary agrees with the W-2 forms you've attached to your returns.

The computer will check to see if you've remembered to use the 3 percent deductible when figuring your medical expenses. People still overlook that.

The computer will look for returns that take "partial exemptions" Many people claim they provide, say, 40 percent of their mother's support and so they take only 40 percent of the $1000 exemption allowed for a dependent. The problem is, neither the IRS nor its computer recognizes or allows "partial dependency exemptions."

The computer will inform taxpayers that, contrary to common understanding, taking deductions for nonbusiness utility taxes or driver's license and automobile fees, are not allowed. T/p's often think these are like state, local, or sales taxes, and they are wrong.

The computer is also programmed to catch the mistakes that crop up on many returns simply because people use the wrong table when they figure their final tax bill. Up at the top of the return, the taxpayer has marked, correctly, "Single" But when he or she is trying to figure out the tax on the tables the IRS provides, the person looks at the wrong table and pays according to the tax scale for 'Married, filing joint return."

For any of these and other similar errors, the computer kicks out the return, an adjustment is made, a letter goes out. When I was with the IRS there used to be a staggering number of sloppy errors on returns. But now, with pocket calculators costing $10 and the payment tables from the IRS expanded to show how much you owe for up to $40,000 of taxable income, these mistakes are less common. What does the first level of checking by the computer tell us? In fiscal 1978 the IRS received 136.7 million tax returns of all types.

Of those, 87.6 million were returns for individuals.

2 million returns had mistakes in which people cheated themselves. An average of $152 per return. Out went the checks.

On the other hand, the computers found that 3-4 million returns had erred against the government. An average of $235 per return. Out went the letters.

Surprisingly, of the 87.6 million individual returns, the computer cited 69 million for refunds, not for any of the errors mentioned above, but because people had withheld too much from salary wages, or overpaid in similar ways. The average refund was $495.

At the IRS, we liked those millions of t/p’s, some three quarters of all the individual taxpayers in America, who had more money withheld from their paychecks than the law required of them. They kept our cash flow moving nicely.

Of course, the overwitheld also provided us with further proof that taxpayers are stupid. But if they wanted to lend us their money interest-free, that was their problem.

Actually, what people are doing is forcing themselves to save. They don't miss the extra $10 a week. And then, in the spring, after filing their return, they get a check from the government; a lump sum they wouldn't otherwise have and which can help pay for a nicer summer vacation.

In any case, if you claim a refund, the IRS will mail you a check once the computer has completed its first level of examination and it's sure you haven't made any of the simple errors. They are mailed on Fridays. If you receive a refund check and it is not for the amount you expected, there should be a form letter of explanation on its way. Check and letter are mailed separately, so give the letter about two weeks to arrive. If you still haven't received it by then, call your local IRS office. They can immediately trace it by plugging into the computer. If you're still not satisfied, write your congressman.

Don't forget that even though you receive a refund check, an IRS auditor may come after you months, or even years later. In most cases the law allows them three years from April 15 of the year you filed to complete an audit. The audit might, in fact probably will, result in your having to give back some of the refund. But at least you will not have had to wait for your money, which can be no small consolation.

When you are to receive a refund and your tax preparer does anticipate an audit, he should try to give you some estimate of how much you'll have to return.

Obviously, your tax preparer will advise you to put that money aside. Obviously, you will not do what he says.

Once the computer in the Service Center is finished reviewing your return for basic information, checking all the items I mentioned, it records all the information on your return on computer tapes.

These tapes, from the 10 Service Centers, are then sent to Martinsburg, West Virginia, the electronic nerve center of the IRS.

In this heavily guarded computer complex, where even IRS employees require special passes to get in, all the tax returns in the nation are rated, evaluated, and graded, according to secret formulas. The grades derived from the formulas show the IRS who has the "highest audit potential"

The IRS programs the computers to tell them who is telling the truth, who is stretching it, who is cheating the most and where, and on which items. Which deductions are the most distorted, and by how much. Who is taking deductions or claiming losses that we think are fishy. Who has structured business deals that we ought to look at closely. In short, the computers are programmed according to the Discriminant Functions System, the DIF. Which in turn is based on all of the detailed, revealing information gathered in the Taxpayer Compliance Measurement Program, those monstrous TCMP audits out of 1984, in which every single item on your return is questioned and verified.

There are other data, what the IRS calls "statistical experience" that helps the Service program the computer-the information gathered from tax returns over the years from all over the country, all over the world.

They know for example, that in I974 Napa County, California produced 9218 joint returns filed by people earning $15,000 or more. These people averaged deductions from just under 4 dependents—themselves plus two children. They also reported average adjusted gross incomes of $23,746. And they declared on the average $20,045 in wages, another $3122 from dividends, and $1481 in interest.

From the TCMP data, the IRS decides what is "normal," not

only for each important item on the return, but how it varies

according to income classes, as well as geographic location. It costs more to live in San Francisco than Little Rock, and the "norms" are designed to reflect the difference. Which means the computer is going to be quite finely tuned indeed.

The TCMP is also invaluable to the IRS in planning general audit strategy. From the sample, the IRS learns which income classes are the most honest, and which cheat the most.

A piece of advice that will cut down your chances of getting audited: the later you file your return, the lower your chances of being called in.

I know this is precisely the opposite of what the IRS asks of you. A good citizen and a nice little t/p files early. The people at the Service push the idea that if you file early, you'll get your refund early.

It does make life easier for them to have the flow of returns spread out- but I have learned that, because of the way the DIF works, the later the better would make life easier for you. You see, as the tapes with the information from the returns reach Martinsburg, they are fed to the computer in batches. The IRS doesn't wait until April 15 to do it all at once.

The DIF "cutoff scores" are on a kind of sliding scale. Let's say it takes a basic 240 points to kick out your return. But that is relative to income category, as well as the number of returns in each category the IRS wants to audit. Remember, the IRS has a national audit strategy, and it has limited resources.

So, if they are going to audit only 2 percent in the category of "Individuals, $10,000 to under $50,000", the computer will be programmed to select the top 2 percent, providing they have at least the required 240 DIF.

Which means that statistically your chances of not being selected are better if your return is being processed when there are more returns for it to be compared with.

File in February, and your 240 DIF might just be close to the head of the thin class.

File in April, when the great bulk of returns come in, and your 240 might not be enough. In that batch, it might be necessary to have 260 DIF points to be selected.

Though human beings do make the final decisions regarding audits, the selection and sifting process obviously is structured around DIF. About 75 percent of all the returns from individuals that are selected for audits are spit out by the computer after it has totaled the DIF points.

With the information you now know, you have a better chance of avoiding an audit, and learning how the system works. Keep this in mind, and you may be able to avoid an unpleasant experience with the IRS. Good luck!