Thursday, September 25, 1997

Finding a list; checking it twice

By A.J. COOK / Scripps Howard News Service

The Internal Revenue Service selects returns for audit based on potential for additional taxes.

Most of the returns are selected by computer, but the tax man also chooses victims from target groups.

For example, the IRS takes special aim at people in groups historically tempted to underreport tips. And so the agency picked cab driver George Kiloran of Reno, Nev.

In court, Kiloran claimed his tips weren't income, but rather gifts from customers who liked him. The judge wasn't so fond of Kiloran's argument: He ruled tips were tokens of better service; therefore, taxable.

More recently the IRS has focused attention on exempt organizations which also operate profitable and unrelated businesses.

Some leads come from businesses required to report when they receive cash of $10,000 or more in one transaction. The IRS then checks to see if these customers pay taxes on their cash earnings.

One bank reported that John Tokarski of Buffalo, N.Y., had deposited $30,000 cash. When the agency asked why he hadn't paid income taxes on the money, he said his father left him the money in a cigar box. Because he couldn't prove the money was a gift, Tokarski was required to pay.

IRS agents, as we all know, love lists.

While auditing James and LeJeane Maxwell, agent Anthony J. Aguiar found a list of members of the Maxwells' organization, Exchange Enterprises. Members exchanged merchandise and services with each other, receiving a charge or credit on Exchange Enterprises books. But no one cut Uncle Sam into the deal. Aguiar took the list and began auditing.

The IRS's favorite lists, however, come from return preparers such as Arthur G. Venie who have a reputation for getting unusually high refunds. After the agency audited Venie and got his client list, the Harrisburg, Pa., office hired additional clerical people and auditors to review 3,000 returns and collect $3 million owed it.

The moral: The IRS is making a list and checking it twice ... to find taxpayers who have been naughty.

(A.J. Cook, lawyer and accountant, is counsel with the Memphis law firm of Harris, Shelton, Dunlap and Cobb.)