1040 Cheaters Beware: The Taxman Cometh

THE odds of being audited are going up.

To catch tax cheats, the Internal Revenue Service has been pulling about 1 percent of all tax returns for a closer look. But this year, the chance of being audited will double -- to 2.21 percent, according to IRS spokesman Anthony Burke.

If that isn't discouragement enough to would-be evaders, the IRS is reinstating and tripling the reach of the superaudit program, which is ''the mother of all audits,'' according to one tax expert.

Doing its bit toward balancing the budget, the tax agency expects to scrutinize more than 2 million returns to recoup some of the estimated $150 billion in unpaid taxes. About 80 percent of all audits turn up extra revenue for Uncle Sam.

The superaudit, which the IRS calls the Taxpayer Compliance Measurement Program, will ''randomly select'' 153,000 taxpayer returns for special attention, Mr. Burke says.

Of the total, some 92,000 returns will involve versions of Form 1040, from individual or married taxpayers. These super-audits are used to develop information to help the IRS set guidelines for its regular auditing/compliance programs. The last super-audit was conducted in 1988, involving roughly 50,000 tax returns.

Taxpayers selected for the super-audit will quickly learn just how thorough the IRS can be, says Edward Wallower, who heads up the auditing and appeals program for H&R Block Inc., a national tax-preparation service based in Kansas City, Mo. The IRS will require detailed verification for almost every item, every deduction, and every dollar and cent mentioned on the tax forms, he says. Even birth certificates can be required to show proof of identity for listed dependents.

To handle this extra oversight, the IRS is adding some 1,125 revenue agents, 416 tax auditors, and 1,210 tax service center personnel. High-speed computers will be used to cross check tax documents, such as matching tax returns with Form 1099s, which report income, dividends, and freelance earnings.

A large number of the audits will be ''correspondence audits'' -- audits done by mail, Burke says.

The stepped-up compliance comes at a time when, despite efforts at tax simplification in recent years, United States federal taxes may be ''more complicated than ever,'' says Elda DiRe, a senior tax manager with Ernst & Young LLP, a management, accounting, and tax-consulting firm based in New York.

Some forms are simpler now, such as the 1040EZ form, which is used by individual and joint filers with no dependents. But for taxpayers with situations such as a home office, or who are sole proprietors, navigating the shoals of US tax law may prove challenging, Ms. DiRe says.

''The tax code is not really simplified,'' DiRe says. ''Congress did remove certain deductions, such as the consumer interest deduction.'' But it made many other sections of the tax code ''more complicated,'' she says. For example, it's now more difficult to define ''passivity,'' that is, a taxpayer's participation or lack of participation in a venture, in determining tax losses and credits.

''For many Americans, you can no longer just sit down with a calculator and quickly prepare your taxes,'' DiRe says.

How does the IRS select its ''candidates'' for an audit?

For the standard, garden-variety audits, the IRS ''scores'' each return, using a point system, to determine whether an audit should be done.

But certain items stand out like red flags to the IRS, Mr. Wallower says. He cites unusual or above-average medical or charity deductions; the filing of Schedule C, the form for sole proprietors; entertainment, travel, and moving expenses; and the home-office deduction.

In addition, the government's tax-collection agency is now looking at ''economic reality,'' Wallower says. That is, the IRS can tell from various computer entries how well a taxpayer is living. If the taxpayer's lifestyle is ''too grand'' for the income claimed, that may make the taxpayer a candidate for an audit to check for hidden income, he says.