Topics covered in tax bulletin articles:

1 Deductions

WHAT IS THE INTERNAL REVENUE SERVICE (I.R.S.) DOING (2/2)

      This is the second of two articles on changes in the I.R.S. taxpayer compliance programs.  The first article covered the office audit program, the C.P. 2000 income matching program, and decreased deductibility of itemized deductions and passive losses. 

Increased Reporting in the Charitable Arena 

     To guarantee that only legitimate charitable deductions are claimed, several changes were made in how you report charitable deductions.  Starting in 1986, there were three changes:

     * If you made a contribution to one charity by cash or check of more than $3,000, that must be listed separately.

     * If you made non-cash contributions of more than $500 in total, e.g. to Goodwill, Salvation Army, etc., you must list the description of the gift, and other particulars for each gift.

     * If you made a non-cash contribution of more that $5,000, you can not deduct any amount in excess of $4,999 without having a signed appraisal by a qualified appraiser.

     Since January 1, 1994, there have been two more changes:

     * In order to deduct any contribution in excess of $250, you need a statement from the charity substantiating the amount of the deduction. This is to keep people from taking a charitable contribution for payments made in charity auctions for condo weekends and Hawaiian vacations.  

     * When taxpayers make any payment of more than $75 to a charity which is only partly deductible, because of significant personal benefit (e.g., a ticket to a dinner), the charity must provide to the contributor a statement indicating how much of that payment is deductible. 

I.R.S. Wants You to Change How You File Your Tax Return 

     The I.R.S. has indicated that as soon as possible it wants all taxpayers to use Electronic Filing, telephone filing or at least, a summary form of tax return called a Form 1040-PC.  The major reason is that all of these methods of filing drastically reduce the amount of work that the I.R.S. has to do when it receives your tax return at the service center.

      Except for taxpayers that have refunds coming, especially those that can take advantage of Refund Anticipation Loans (R.A.L.'s), Electronic Filing only complicates filing.  If the I.R.S. manages to affect a change along these lines, then we may need to go to 1040-PC's sometime in the future. We will keep you posted.

Change in I.R.S. Audit Procedures 

     The major new program, which in my experience has been underway for two to three years, might be called a life-style analysis program.  This new program was discussed in an article in the April 11, 1994 issue of Forbes Magazine, and this  article draws on the Forbes article as well as my own experience and discussions with I.R.S. personnel and with other C.P.A's. 

     The I.R.S., based on the taxpayer's address on the return, as well as other factors, develops a profile of the taxpayer, which is compared to the taxpayer's income tax returns.  Some other factors include significant spending on home purchase, home remodelling, or purchase of cars, boats, airplanes, etc.  If it is not clear how the taxpayer(s) can afford to his/her/their lifestyle on the taxable income reported, an office audit or additional investigation is likely. 

     In order to implement and expedite this program, Congress enacted a law requiring that any payment in cash or cash equivalent of $10,000 or more for services or goods, e.g., for a car, jewelry, or a money-order, must be reported to the I.R.S.  

     The life-style analysis program changes what you need to do for an office audit.  Instead of providing the documentation to support a deduction, you need to document where every deposit that was made into your accounts came from. Just using cash, instead of checks, a credit card or both, would not help you since the I.R.S. would ultimately want to know where you got the cash to buy the car, the boat, etc. 

     In addition, the I.R.S. is developing specialized audit teams.  Within two years, the I.R.S. expect that 90% of all business audits in the San Francisco District will be done by one of a team of specialists for a particular industry.  Thus all laundromats will be audited by a laundromat specialist, all bed & breakfasts by a bed & breakfast specialist, and all auto dealerships by a specialist in auto dealerships.  This could be an advantage to some taxpayers since they will not need to explain their industry to their I.R.S. auditor. 

Two Sets of Books! 

     The last  new development deals not just with the I.R.S. but also with bankers and other credit-givers or lenders.  A survey several years ago  indicated that lenders believed that a business income tax return was a more reliable report of business income or loss than a financial statement with an Accountant's Compilation Report. 

     This is now common knowledge, and what has started to happen is the tax preparation equivalent of two sets of books -- namely, two tax returns.  Some taxpayers are preparing two sets of tax returns, either by themselves or by altering the one that their preparer gives them. The one with no income or losses is filed with the Internal Revenue Service, and the one with the income is given the bank or other lender.   

     Needless to say this has upset tax return preparers, the I.R.S., and lenders. To stop this, lenders are either having loan applicants sign an I.R.S. Form 4506 so that the lenders can obtain a copy of the loan applicants' tax returns directly from the I.R.S., or requiring that the loan applicants give the lender permission to speak directly to the preparer of the tax return to confirm information in the return.