Almost everyone knows the story of William Tell. Back in the days when the Austrian Hapsburgs were the bully of the block, one of the family’s lackeys ran an arrow through a hat and stuck it to a tree with the strict edict that all good Swiss in Uri should remove their hats in the presence of their overlords. William Tell, either because he was a nationalist or because he had a receding hairline, refused to doff his capuchin.
The enraged Duke of Someplace – whose name no one seems to remember – stood Billy’s son against a tree and placed an apple on his head. The pressure was on. If William could not shoot the apple off the boy’s head with a single arrow at 120 paces, it would not be a pleasant ending for either of them. But the task was mere child’s play for our intrepid hero. “Your life is now safe,” the Duke admitted. Yet, he was curious. “Kindly tell me why you put a second arrow in your jacket,” he inquired. William evenly replied that “If my first arrow had killed my son, I would have shot the second one at you, and I would not have missed.”
The details get even sketchier after that exchange, but there’s something about being locked in a castle’s dungeon and “no longer seeing sun or moon.” Local legend has it that William escaped in classic super-hero fashion and started a rebellion against the Hapsburgs and their hated underlings. That may or may not be true. At the very least, William got some posthumous fame and a song named after him.
The application for us is that tax season is a really lousy time for you to stand against a tree with an apple on your head and dare the IRS to “catch me if you can,” because these exchanges nearly always end up something like this. Recently, there was an insightful piece in Forbes magazine entitled “15 Ways to Get Audited.” Unless you want to end up on the next episode of “Cops” or be a chapter in the “Don’t Let This Happen to You” section of someone’s tax guide book, take heed.
Profiling
The company line at the IRS these days is “doing less with less.” The number of auditors is nearly at a historic low. The Service simply does not have the resources to do as many audits as they have in past years, and there weren’t a whole lot to begin with.
There may be no way to disguise your income, at least not unless you want to cause more problems than you solve, but you can avoid profiling. First, use a very well-heeled tax preparation service. In much the same way as you can judge an academic book by looking at the publisher or have a good idea about a movie you haven’t seen by noting its director, the IRS sometimes judges returns, at least initially, by looking at the signature at the bottom. If it’s someone they know, there’s a better chance you’ll make it beyond the initial screening.
Next, avoid dumb mistakes. Sign your return and don’t transpose the digits in your Social Security number. Similarly, double and triple-check your math and do not claim deductions in whole numbers. The less they look, the better.
Your Money
In keeping with the William Tell theme, if you have money in Switzerland or some other foreign country, be prepared for extra work and extra scrutiny. Be sure you’ve filed all necessary forms, but don’t file superfluous ones. If you need help, ask a lawyer or accountant. Now is no time to let pride get in your way.
Watch your charitable deductions. If you claim large ones, be prepared to provide a detailed paper trail. In some cases, the IRS may even require before-you-file documentation, which means just what it says.
Many people have a home business that hemorrhages cash so they can claim the loss. The IRS is smaller, but not dumber. A rule of thumb is that if your business claims a loss in three out of any five years, the auditors will begin a-snooping.
Whistleblowers
Remember Jimmy the Gent’s advice to a young Henry Hill in Goodfellas? As well all know, not everyone follows that advice. Be careful what you say around people you don’t know very well, because the Service pays good money for junior G-Men. In a similar vein, smoke the peace pipe with any disgruntled former partners or employees.
Of course, even if you follow these rules, there’s no guarantee that the IRS won’t spot another red flag, or at least a beige or pink one, and audit you anyway. Just consider this blog as a cordial reminder from your friendly neighborhood tax lawyer.