WINNING YOUR AUDIT (T/G 502) covers the "selection for examination" process via DIF scoring, the documents to be presented, the income verification torture, life-style inquiries, informant reportings (on Forms 1099), "cost or other basis" accounting, and the "prickly issues" on Schedules A, C, E, and elsewhere. Also covered:

• Your "rights" during & after audit
• Clarifying contradictory positions
• Mortgage interest "matching"
• Cautions with luxury auto leasing
• Wrestling with IRS "adjustments"
• Example "repetitive audit" hassles

Winning Your Audit
Book: 502

Table of Content

1.  PURPOSE (s) OF AUDIT                        1-1

    Code Section 7602                           1-2
    Determining “Correct Tax”                   1-5
    Meaning of “Any Return”                     1-6
    Basic Revenue Enforcement                   1-8
    Subtle Intimidation                         1-9
    Training of IRS Personnel                   1-12
    Compliance Measurement                      1-13
    Penalty Pyramiding                          1-14
    Evidence of Evasion                         1-15

2.  THE SELECTION PROCESS                       2-1

    Procedural Mechanics                        2-2
    National Computer Center                    2-3
    Eyeball Screening                           2-5
    Arithmetical Corrections                    2-6
    Information Matching                        2-9
    Audit Based on DIF Scores                   2-10
    DIF Input Considerations                    2-11
    Final Selection at District Offices         2-13
    Your Chances of Audit?                      2-14
    Selection by Vendetta                       2-15
    Audit Notification Letters                  2-16

3.  POSITIVE ATTITUDE                           3-1

    Get Your Act Together                       3-2
    Do Phone for Appointment                    3-3
    After 30 Days: In Default                   3-4
    Reread and Gear Up                          3-6
    Your Rights During Audit                    3-9
    Clarify Contradictory Positions             3-11
    Winning Is Not 100%                         3-12
    The Magic of Good Preparation               3-13

4.  DOCUMENT PREPARATION                        4-1
    
    Discount the Fairy Tales                    4-2
    Recordkeeping IS Required                   4-3
    Know Your Audit Year                        4-4
    Third-Party Documents                       4-7
    Cancelled Checks                            4-8
    Electronic Statement Problems               4-11
    Invoices and Itemizations                   4-12
    Acquisitions and Dispositions               4-13
    Photographs and Sketches                    4-15
    Mileage and Expense Diaries                 4-16
    Self-Serving Declarations                   4-18

5.  INCOME VERIFICATION                         5-1
    
    Gross Income Defined                        5-2
    Items Specifically Excluded                 5-4
    When Payer Forms Inapplicable               5-5
    Income Reconstruction Methods               5-9
    When Records Lost, Destroyed                5-11
    Bank Deposits of Income                     5-12
    Duplicate Deposit Problems                  5-13
    Foreign Bank Accounts                       5-15
    Avoid Substantial Omissions                 5-17
    Understatement of Tax                       5-18

6.  COST OR OTHER BASIS                         6-1

    Capital vs. Expense Items                   6-2
    Tax Schedules Affected                      6-3
    Cost as Basis                               6-5
    “Other Basis” Explained                     6-6
    Adjustments to Basis                        6-10
    All Adjustments Arguable                    6-11
    When Assets Sold                            6-13
    Cost of Goods Sold                          6-14

7.  INFORMANT REPORTINGS                        7-1
    
    Big Brother Everywhere                      7-2
    Box 1 on Form W-2                           7-3
    Form 1098: Mortgage Interest                7-5
    Schedule K-1 (1065): Partnerships           7-7
    Form 1099-S: Realty Sales                   7-8
    Menu of Form 1099s                          7-9
    A 1099 for “Each Account”                   7-11
    Form 1099-MISC: The Catchall                7-13
    Other Surveillance Reports                  7-15
    Lining Things Up                            7-16

8.  SCHEDULE A ITEMS                            8-1
        
    Specific AGI Thresholds                     8-2
    Miscellaneous Expenses: 2% AGI              8-4
    Medical Expenses: 7.5% AGI                  8-5
    Casualties and Thefts: 10% AGI              8-6
    Charitable Contributions:  50% AGI          8-8
    Deductible Taxes: No AGI                    8-11
    Mortgage Interest “Matching”                8-12
    Other Interest Deductions                   8-13
    Disaster Loss “Carryback”                   8-15
    Unreimbursed Employee Expenses              8-17
    Other Miscellaneous Deductions              8-18

9.  SCHEDULE C ITEMS                            9-1

    Size and Audit Likelihood                   9-2
    Gross Income Verification                   9-3
    Returns and Allowances, Etc.                9-4
    Cost of Goods & Services                    9-4
    Independent Contractors: 1099s              9-7
    Ending Inventory: Sec. 263A                 9-9
    “Ordinary and Necessary”: Sec. 162          9-10
    Exceptions Under Sec. 162                   9-11
    Overview of the Deductions                  9-12
    Line Item Packaging                         9-14
    Pick-Picking at Personal Use                9-16
    1099-MISCs Revisited                        9-17
    The Sec. 179 Expense Election               9-19
    Listed Property: Sec. 280F                  9-20
    Depreciation Classes & Methods              9-22

10. SCHEDULE E ITEMS                            10-1

    Rental & Royalty Properties                 10-2
    Personal Use Aspects                        10-3
    “Active Participation” Defined              10-4
    Your Deductible Expenses                    10-6
    Documentation of Income                     10-8
    Depreciation: Straight Line                 10-10
    Depletion of Natural Resources              10-11
    The $25,000 “Loss Limit” Rule               10-12


11. PRICKLY ISSUES                              11-1

    Business Mileage Log                        11-2    
    Leasing Luxury Autos                        11-3
    Travel & Entertainment                      11-4
    Office-at-Home                              11-5
    Not-for-Profit Activities                   11-9
    “At Risk” Limitation Rule                   11-10
    Alimony Paid & Received                     11-12
    Alternative Minimum Tax                     11-14

12. CLOSING MATTERS                             12-1

    Pre-Closing Review                          12-2
    Change Reports                              12-3
    Read the Covering Letter                    12-5
    Example Explanations                        12-7
    Give It One Good Try                        12-8
    Repetitive Audits                           12-10
    To, or Not to, Appeal                       12-11
    Post-Audit Critique                         12-13