From now on, if you get audited by the IRS, they won’t just scrutinize your 1040 form, your pay stubs and your charity receipts.
They might take a look at what kind of car you drive, ask how you catered your child’s wedding or find out how much your rich uncle left you in his will.
Beginning this year, all individuals selected for Internal Revenue Service audits will find their personal lives as well as their returns scrutinized for evidence of unreported income.
“It wants to know how someone with a $30,000 income can afford a $400,000 house or drive around in a new Lincoln,” said Joseph F. Lane, a former IRS supervisor from Menlo Park, Calif., who now represents clients in tax disputes.
The IRS is quietly instituting the changes as part of a strategy to get more people to pay their taxes. Uncollected taxes total at least $127 billion a year, IRS figures show. The agency’s goal is to raise the compliance rate from the current 83 percent to 90 percent by 2001.
Some tax experts who have seen the training manuals the IRS is preparing for its 15,500 auditors contend some of the new procedures are too invasive.
“They’re trying to turn these auditors, who are basically accountants, into detectives,” said Frederick W. Daily, a San Francisco tax attorney and author of “Stand Up to the IRS.”
“They are supposed to look for body language. … They want to know what kind of car you drive … whether you have relatives with money. The IRS is getting away from your return and now it’s you being put under a microscope.”
One section of the new manuals lists some highly personal areas for auditors to check, Lane said. Among them: weddings of children, cultural background, vacations and home furnishings.
Steve Pyrek, an IRS spokesman, said that instead of merely comparing returns with documents such as W-2 wage statements and 1099 interest forms, the agency will try to determine “economic reality” - that is, whether your reported income is consistent with the way you live.
The agency has taken this approach before in going after unreported income, but this is the first year it is standard procedure for all audits.
For individuals, it means IRS examiners may poke into public records, such as state motor vehicle information, to see what kind of car they drive or if they own a boat, or examine county property tax rolls to see what kind of homes they own and in what neighborhoods. Computerized credit reports and court records are also up for grabs.
Auditors will also compare smallbusiness owners and professionals against their peers to spot discrepancies.
Pyrek said the IRS has compiled auditing guidelines for 13 industry groups, including lawyers, bed and breakfast proprietors, entertainers, mortuary owners, taxi drivers and truckers.
The IRS generally audits around 1 percent of the more than 110 million individual returns it receives each year. The returns are chosen largely through a complex computerized method based on their complexity.
People with higher incomes run a higher risk of an audit.
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