Two IRS faces - friend and foe

IRS.

It's an acronym that can cause even the bravest of taxpayers to shudder.

After all, the world's largest tax agency digs year-round into the personal finances of ordinary Americans, trying to collect all taxes owed to the US government.

At the same time, the agency - caught up in the swirl of public and congressional criticism in recent years - is seeking to be more "user friendly," to help out the taxpayer as much as possible.

Uncle Sam calls

Audit. It's perhaps the most dreaded word at tax-filing time. But with a modicum of prudence and a careful attention to detail, say tax experts, you can get through the tax year without that call from Uncle Sam.

In fact, the IRS is helping taxpayers avoid audits.

Given increasing computerization of tax information - which enables IRS agents to quickly reconstruct how returns are put together - the number of audits has been declining. The audit rate has dropped from 1.7 percent of filers in fiscal year 1995 to just under 1 percent in 1998.

Moreover, most audits are now informal - usually involving a quick query from an IRS agent by letter or over the telephone.

Slightly under half of all audits, however, involve a person-to-person meeting with an IRS agent. Most are held at government offices. But the IRS will occasionally conduct a "field" visit, coming to meet with you.

Some tax experts consider "field visits" particularly risky for the taxpayer, since the agent - trained in estimating degrees of affluence - will look for visual evidence suggesting that the taxpayer may have deliberately underreported income. If the agent asks to come to your home, most experts agree, seek to meet instead at his office.

Still, to reduce the probability you will be subject to an audit, tax expert Ed Slott, based in Rockville Centre, N.Y., lists these recommendations:

1. Make sure you report all wages and income.

2. List only qualified dependents.

3. If you have unusually high deductions, be certain to document why, even if that requires adding an explanatory note to your tax form.

4. Be sure your form is carefully prepared, with math that adds up, and is neat and legible.

5. Finally, if you file business losses, make sure it's a genuine business, and not a "hobby" that you are treating as a business.

If you are audited, stay calm, says Mr. Slott. If the issue in dispute is essentially straightforward, have documents ready to show how you arrived at your conclusion.

If the issue is more complex, or goes to the totality of the return, don't volunteer unnecessary information. That could open up a whole new chain of inquiry. Stay with the issue at hand.

Seek reasonable time, if necessary, to gather additional information. If you feel under the gun, bring in a professional tax expert - such as a tax attorney or accountant - in complicated situations.

And remember, writes Eric Tyson, in his popular book "Personal Finance for Dummies," most tax auditors are "decent people." They have a job to do.

That doesn't mean you have to sign any document that adversely affects your interests. But be patient with the auditor, and show how and why you filed your taxes as you did. He or she is probably very busy, and would like to quickly clear your case.

Taxpayer advocates

But if your tax problems still seem irresoluble, seek out a taxpayer advocate.

Advocates are at the forefront of recent IRS efforts to put on a friendlier face. The agency notes its taxpayer advocates division and their toll-free number (877-777-4778) in almost all its literature for the 1999 tax season.

Advocates have represented taxpayers' interests in disputes with the IRS since the late 1970s, "but no one knew about us," says W. Val Oveson, head of the advocates division.

Most of the issues the advocates office deals with are misapplied payments and people who haven't gotten their refund, says Mr. Oveson.

"Seventy percent of the problems are service glitches and no one has taken the time to unravel what's happened. And it just escalates," he says.

Oveson is also authorized to erase taxes people shouldn't owe and show some sympathy for taxpayer hardships.

Though they work for the IRS, "what we say doesn't always make people around here happy," he says. On the other hand, if taxpayers really owe money, "we can't set aside the law."

Another function the advocates' office has taken on is to lobby Congress for changes that would help taxpayers.

While the advocate isn't just an office of last resort, the IRS recommends trying to resolve problems through its standard channels first.