The IRS Is Back

As the economic slowdown threatens to become a recession and the stock market shows all the buoyancy of a crowbar, you may well ask: Can things get any worse? Of course they can. Remember when the Internal Revenue Service regularly tortured taxpayers with backbreaking audits and slapped liens on personal property faster than you could say Schedule C? Well, the Bean Counters from Hell are back and laying the groundwork for a fresh assault.

New enforcement efforts won't be anywhere near as brutal as those that came to light during the 1997 to '98 congressional hearings, which shamed the IRS into a full-scale reorganization. A kinder, gentler agency is now focused on service to taxpayers more than on enforcement. The shift has been so total, in fact, that the consensus within the agency and among tax professionals is that the IRS has got too lax--and tax cheats have got bolder.

We know why. Audits of individual income tax returns as a percentage of returns filed have fallen 81% in 20 years. Taxpayers used to have a 1 in 63 shot at being audited; now it's just 1 in 318, according to data at Syracuse University's Transactional Records Access Clearinghouse. The number of levies, liens and seizures related to wages and personal property have declined 86% just since 1992.

Part of the reason for the declines has to do with the trouble the IRS has had in attracting, training and securing funding for tax examiners, whose numbers have been dropping since 1988. But the sharpest staff and enforcement falloffs have occurred since the high-profile hearings. Examination staff is down 19% since 1997; the number of audits is down 46%. I spoke with many enrolled agents--it's their job to represent taxpayers--who haven't attended an audit in years.

That's about to change. The IRS reorganization was mostly completed last year. Examiners who were being retrained are back on the job, and the IRS has funding for another 2,000 jobs--possibly half of which will be for examiners. IRS commissioner Charles Rossotti, while seeking more money for staff last year, warned "that it is important for the IRS to stabilize the level of enforcement activity" and that the agency is "taking some specific steps now to improve compliance levels."

Most tax pros believe enforcement levels will creep higher this year, starting with collection efforts in old cases. The odds of being audited will trend higher too, though probably not by a lot--until next year. By the way, this is a good thing. Seriously. Most of us are subject to withholding and have little opportunity to fudge. The extent to which fudgers get nailed and would-be fudgers discouraged keeps everyone's tax bill lower.

Still, even a friendly audit is no fun. You're most likely to get audited if you're self-employed or own a small business, or if you itemize. Red flags include declining reported income and large deductions for travel and entertainment. Don't round off numbers; they look made up. If the IRS asks for more information, give it promptly--but nothing more than requested. And if you get audited, hire someone to represent you to prevent emotions from turning the audit ugly. Today's IRS tries to be understanding. Best to keep it that way.

Related Links:
IRS Homepage

NOLO: Taxes and Audits

E-mail Dan at kadlec@time.com . See him Tuesdays on CNNfn at 12:20 p.m. E.T.