The IRS is the midst of reorganization. Its processes are in disarray. What does this mean to you as a taxpayer?

IRS audit rates are at an all-time low. The rate for personal returns fell to 0.49% during the fiscal year ended September 30, 2001. That's down from a historical range of 1.5% to 2.3%.

Audit rates for business have also dropped. The audit rate for corporations with assets of $1 million to below $5 million fell to 2% from 7.78% in 1997--a decline of nearly 75%.

Audits are now more common for low-income individuals than for high-income individuals! Because of the high error rate on low-income returns claiming the earned-income credit, the IRS says Congress mandated it to pay closer attention.

Taxpayers with incomes of less than $25,000 had an audit rate of 0.4%! Those with incomes of $50,000 to below $100,000 had an audit rate of only 0.23%!

Among taxpayers who reported business income on Schedule C, the audit rate was 2.7% for those with gross receipts below $25,000, versus only 1.2% for those with gross receipts above $100,000!

Don't be complacent: The IRS still conducts 600,000 audits each year. IRS computers score returns to target those most likely to contain errors or discrepancies. In addition, IRS computers "examine" every return and match figures on information returns, such as W-2s and 1099s. In September 2002, the IRS is starting up a new "super audit program" that involves line-by-line audits. Don't ignore the items reported by third parties, banks, and partnerships.

AUDIT BATTLE PLAN

Don't overestimate what the IRS auditor knows. The Agent knows almost nothing about you that isn't in front of him on your tax return. The IRS's record-keeping system is archaic-information is spread over several largely obsolete computer systems that don't communicate with each other. Any information the auditor gets to use against you will come from you.

DOS AND DON'TS

Don't volunteer anything. Consult your tax professional before answering any questions. Be concise, and say nothing more. When an auditor asks for additional records, ask him to put his request in writing. Ask for at least one month to retrieve records from your files. Produce only what was requested.

Don't make friends with the auditor. Small talk about family, business, vacations, hobbies, etc. will only provide the auditor with more subjects to investigate. In fact, the IRS manual instructs auditor to encourage small talk for this reason-and even to create awkward silences to encourage taxpayers to volunteer something to "break the ice".

Self-defense: Instead of attending the audit yourself, hire a tax professional to represent you. Your tax preparer may not have experience handling IRS audits. I am an Attorney-CPA certified by the Florida Bar in Taxation. I am experienced in dealing with the IRS at all levels from collections to Tax Court.

CORRESPONDENCE AUDITS

IRS workers who handle correspondence audits are not trained tax examiners. These clerks are required only to have granted from high school.

To minimize exposure to a correspondence audit, gather the information requested in the first letter you receive and call me.

If you delay your response, make an unconvincing excuse for your missing records or try to argue, you risk having your case "passed up" to trained IRS auditors who may examine your entire return. At that point, you may be asked to come into the local IRS office to continue the audit. Bad news from the IRS doesn't go away. The prompt proper response from a tax professional can frequently resolve to matter before it escalates out of control.