By: A.J. Cook


Tax return preparer Arthur G. Venie's reputation for guaranteeing refunds to married couples intrigued Clyde Cooper. When Cooper questioned Venie about the guarantee, Venie asked if he wanted to owe money or get money back? The accountant said the tax system discriminates against married couples, and he could correct this injustice.

When Cooper picked up the tax returns showing refunds to him and his wife, he identified himself as Internal Revenue Service Special Agent Cooper and said he intended to audit Venie's clients. This case shows one method the IRS uses to determine which taxpayers to examine. It also uses statistics, state-of-the-art technology, informers and other methods. In fact, in pursuing cheaters, it can even stand back and throw darts at a telephone book to select audit victims.

In Venie's ruse to equalize the tax system, he prepared separate returns for husband and wife erroneously using head-of-household rates instead of separate return rates or one joint return. He would throw in some false child care deductions for good measure.

The IRS figured clients of the Harrisburg, Pa., accountant owed $3 million because of 3,000 incorrect returns he prepared over three years. To save more victims from Venie's flawed sense of justice, the IRS asked a court to enjoin him from preparing returns.

The judge told the accountant, "you do not have the authority to adjust the law to fit your view." He allowed Venie to continue filing returns but ordered him to stop filing fraudulent ones.

The Moral: Do what you think is right and fear no man -- except an IRS agent.

Is the IRS restricted in selecting audit victims? In a case involving a Pasadena, Calif., couple, the judge explained the limitations.

Psychiatrist Alan Karme and his wife, Laila, invested in a scheme cooked up by attorney Harry Margolis. It involved a number of corporations, including two in the Netherlands Antilles and one in the Bahamas.

The IRS said these were sham companies, so it investigated Margolis's clients and assessed additional taxes.

Outraged that the investigation of their attorney uncovered their deception, the Karmes went to court. They claimed the agency unconstitutionally singled them out for audit just because Margolis was their attorney.

The courts prohibit the IRS from selecting based upon grounds such as race or religion. They also prohibit singling out one taxpayer while not auditing any others for the same conduct. Since such grounds did not apply in this case, the court ruled for the IRS.

The Moral: If you can't pay the fine, don't go with a finagler.

Self-employed persons and those receiving tips, pensions, interest or dividends are increasingly delinquent on their taxes. The General Accounting Office, the Congressional watch dog, voiced its concern in a recent report, but without making specific recommendations.

The Internal Revenue Service knows that without tax withholding, the method used for wage earners, policing these scofflaws the usual way doesn't work. Matching the huge volume of Form 1099s from income payors to income tax returns and auditing those with discrepancies is expensive. Moreover it has not adequately improved the overall picture. So now the agency increasingly looks elsewhere for information and help in compliance. It gets lists from state governments, gives incentives to some businesses and gives threats to others.

• The tax man collects lists from government agencies of people who should file and compares them to lists of those who do file. These lists include many self-employed folks, such as doctors, architects, liquor store owners and other license holders.
  
  
• For years the IRS has tried to get workers who receive tips to report all of their tip income. Studies show they report only 57 percent or less of gratuities compared to general taxpayer compliance of 85 percent. The IRS is pushing employers of those receiving tips for assistance. Its present targets are members of the restaurant industry. The challenge to them: Participate in our program of forcing tip receiving employees to pay up or expect an audit.
  
  
• The IRS is also threatening tax consulting firms. If it discovers that a firm member hasn't filed returns, it will prohibit all members from representing taxpayers. To encourage firms to police its members, the IRS agrees to notify them of nonfilers. The firm must send in IRS Form 8821, signed by the partners and the employees being checked.
  
  
• In another program, the IRS confirms to lenders the accuracy of income amounts shown on loan applications. The lender files Forms 4506 or 8821 after it is signed by the borrower. The program allows banks, savings and loan institutions and others to obtain a prospective borrower's tax return information. Borrowers sometimes fudge on the amount of their income when they seek a loan. If the IRS discovers they sugarcoated the numbers, or if it can't find a return, then it audits the person. The IRS is testing an automated version of this program in Fresno, Calif., which should speed up response time to the lender from seven weeks or longer to two days.
  

The IRS continues to pursue alternate methods for decreasing delinquents, sometimes using its new powerful computers, other times shifting tax collections to businesses. With continuing budget cuts, this trend will persist.