Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: MONDAY, April 8, 1991                   TAG: 9104060109
SECTION: BUSINESS                    PAGE: A-7   EDITION: METRO 
SOURCE: Newsday
DATELINE:                                 LENGTH: Medium

STICK TO TOPIC IN IRS AUDIT, EXPERTS SAY

What is the unanimous advice of the tax experts? Do not panic. And do not make small talk.

New York City tax accountant Theodore Harris remembers one client so relieved when his audit was over that he became conversational and told the IRS agent about his son's rabbinical studies scholarship. "A scholarship?" replied the agent. "I think that constitutes additional income to you."

"Nervousness is what gets people in trouble," says IRS spokesman Robert Kobel, "because they don't zero in on what we're asking for." An IRS notice, whether a routine request for information or an audit appointment, typically is very specific about its topic - a particular medical deduction, for example, or interest income from a specific bank account.

Read it carefully. It probably will take a while to figure it out. The IRS has up to three years to audit a return - or forever, if fraud is suspected. Chances are you have filed two returns since you looked at the information they are asking about.

Do not assume you are crazy if you think the IRS is wrong; it is not infallible. This may be a request for information you already provided. Or it may be based on misinformation from other sources. For example, banks often report Individual Retirement Account interest, although it is not taxable.

And do not panic if the IRS sends a second notice demanding the tax, interest and penalty, even after you send documents proving the interest income was from a non-taxable IRA. Until your response is entered in the IRS computer, you will get a notice every month. Just keep on sending copies of your response. How do you know the IRS has accepted it? You stop getting notices. "We don't usually acknowledge responses," Kobel says.

To minimize the agony of the correspondence, Alan Weiner, a senior tax partner with Holtz Rubenstein & Co. in Melville, N.Y., advises taxpayers to put a daytime and evening telephone number on all letters to the IRS and send anything really important - such as a tax payment - certified mail, return receipt requested.

"And file the change-of-address form, No. 8822, whenever you move," Weiner adds. If you don't, the IRS will send notices about your 1988 return to your 1988 address - even though you have filed from a new address for the past three years.

Even a letter announcing an audit appointment should state specifically what the audit is about. Focus on that issue, says tax preparer Victoria McGinn. Do not bring any information to the audit that does not relate to it. And do not bring up anything else, even in passing.

The agent doing an audit is not supposed to ask about anything unrelated to the subject of the letter you received, Kobel explains. But if you mention something else, it immediately becomes a legitimate subject for the agent to discuss.

If the audit appointment is inconvenient, or you need more time to prepare, ask that it be rescheduled. Ask your tax preparer to come with you, or go in your place. He or she can argue on your behalf if you sign an IRS power of attorney form. The latest IRS notices include that form, McGinn says.

If you feel an auditor does not treat you fairly, or want to appeal an interpretation of the tax code, ask for a supervisor. Remember, there are a great many gray areas in tax law, says Michael Borsuk, a partner with Coopers & Lybrand. "This isn't always a question of black and white. You can argue about whether a deduction is allowable or an item is taxable."

About 15 percent to 20 percent of audits wind up with no change in a return or a taxpayer refund, Kobel says. If the IRS ultimately rejects your argument, you'll owe additional tax, plus interest for being late.

But you will not be penalized if you can cite precedents for your position or if you disclosed on your return that you were taking a controversial stand. The disclosure is worth making, Borsuk says. The penalty equals 20 percent of a large tax underpayment - and it is not tax-deductible.