The Irs Is On To Tricks Of Your Trade

Watch out: The IRS is getting its act together. It has launched a program to help agents ferret out tax cheats in specific businesses. So if you're audited, the agent may be hip to the tax tricks of your trade.

As part of its Market Segment Specialization Program (MSSP), the IRS is training agents to identify problems unique to some 90 businesses. In the past, it randomly chose audits by type of return, such as 1040s or Schedule Cs, instead of type of business. "MSSP makes the [IRS] experts in the business," says Ron Friedman, a former IRS lawyer, now a tax director for Ernst & Young. "The theory is the agent will know where the chance of making a mistake might be." Thus, the lawyer's guide tells auditors to look for fees hidden as trust or escrow funds.

Although the IRS is drafting guides for most jobs, it hopes to target groups with low compliance. Compliance is 80% to 90% for salaried employees who have taxes withheld or have income from investments and other sources that--though not withheld--is reported. But for many small businesses, which often deal with cash, compliance falls to about 53%, says Cornelius Coleman, a former IRS regional director now consulting for Coopers & Lybrand. Examples include auto repair shops, beauty parlors, child care, and restaurants. Big businesses are on the list too, including jewelry dealers, garment makers, banks, entertainers, and real estate developers.

NO SHOW. So far, guides for only seven segments are complete: lawyers, bed and breakfasts, taxis, mortuaries, gas stations, air charters, and trucking. If an agent audits a mortuary, say, the guide will instruct him to ask about prepaid funerals, says Coleman. "Such income wasn't being captured because there was no funeral to indicate there should be income." Likewise, the IRS found that some gas stations rigged pumps to record less gas than was sold. If the owner is claiming a lot less income than rivals, the guide would direct the IRS to look at his lifestyle and get invoices from suppliers.

The IRS hopes to boost overall compliance from 83% to 90% by 2001, says spokesman Henry Holmes, with each 1% equaling $7 billion to $10 billion in revenues. If you're in one of the seven groups and worried about an audit, get a guide by writing to IRS Freedom of Information Reading Room, P.O. Box 388, Ben Franklin Station, Washington, D.C. 20044. Will the program work? If you heard the IRS was setting its sights on your type of business, wouldn't you be more inclined to toe the line?

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