"We selected your federal income tax return for the year shown below to examine . . . "
Except for "Greetings" from the draft board, no message from Uncle Sam strikes terror into the average American heart like that one.Examination of tax returns by the Internal Revenue Service has become a battle between taxpayers and machines - and you can guess who's winning.
Here's an outline of the IRS' winning form:
- The government gets forms from employers for salaries and wages, forms from companies for dividends and interest, forms for bingo winnings and on and on - 900 million forms.
- The computer goes through the forms and compares them with individual tax returns. In 1984 it compared 48 percent of the returns; last year 99 percent.
This ability to find discrepancies between returns and forms got a boost when KIDS came on the scene. This computer program, Kickout-Increases-in-Dependents-Screening, looks at the number of dependents on a person's return and compares it with the number reported the year before. Unless an increase can be readily explained by marriage or some other ordinary reason, KIDS sends the taxpayer a letter asking for more information.
The biggest secret in the IRS audit arsenal is DIF, or the discrimination function system. Only a select few at the IRS know how this computer program operates and what makes the computer spit out a tax return.
One taxpayer sued under the Freedom of Information Act for an explanation of the DIF system. The court ruled the information was privileged and not available to ordinary taxpayers.
Certain tax return items seem to guarantee a high score in the DIF program - possibly an audit by an IRS agent.
The factors include high income, hobby losses, bad debt deductions, interest paid to an individual, large charitable deductions for gifts other than cash, and deductions higher than usual in certain income brackets.
If your return gets a high score on the computer quiz, it doesn't necessarily mean you'll hear from an IRS agent. Even returns the computer indicates should be audited sometime pass through without attention. The IRS simply doesn't have enough agents.
In 1987, the IRS audited 1 percent of individual returns filed, down from 2 percent in 1980 and 6 percent in 1963.
Although some deadbeats slip through the sticky fingers of the IRS, this sophisticated selection method allows the agency to collect from more of the taxpayers audited. Only two of every 10 taxpayers audited escape paying additional taxes.
Using DIF to pinpoint a return that should be audited is so common that one couple, Bhagwan and Krishna Raheja of Lombard, Ill., claimed the IRS had no right to select them for audit using any other means.
But the tax court disagreed, ruling it was logical for the IRS to investigate the Rahejas who had not filed a return in two years.
More taxpayers may soon be feeling the effect of KIDS and DIF.
This is especially true now that the IRS is nearly finished with tax shelter investigations and more agents will be free to help the electronic brains.
THE MORAL: More and more, it does not compute to cheat Uncle Sam.