By John Lyke
The Lyke Report
Form 8275 is a form the IRS would rather you did not know about or use. It is called the Disclosure Statement. When filed with the return, it calls attention to a claim made and says "I claimed this based on these specific grounds." Bottom line, it allows you to prove your claim without going through an audit.
By proving your case before an audit, you greatly reduce the need for an audit, and the depth of an audit if there are other claims called into question later. The IRS would rather not audit those who are informed and prepared to quickly respond.
Audit proof Form 8275 - Audit-proofing techniques can be used effectively to prevent audits, penalties and the wasting of time. The techniques are simple, and should be used especially since the IRS produces a special audit-proofing form you can use. Form 8275. Audit-proofing is based on the principal of providing with your return the information relevant to a claim in your return. You provide information for claims you think could raise a red flag and cause an audit.
Charitable contributions, mileage claims for a small business, unusually high entertainment costs, a home office reduction, or unusual medical expenses are among those deductions that are highly scrutinized. By providing proof in the case of a potentially suspect deduction with the return, you eliminate the need for the return to be audited. Proof may include items, such as copies of canceled checks, copies of receipts, or an affidavit explaining how you arrived at certain deductions.
There has been a long-standing debate in the tax community as to whether attaching a Form 8275, Disclosure Statement, to a return increases the chances of that return being audited. That debate has now apparently been resolved with the release of a revision to the Internal Revenue Manual (IRM) dated July 24, 1995, which provides new internal processing instructions for individual returns with Forms 8275.
Intuitively, many practitioners have believed that there was a direct correlation between attaching a disclosure statement and having a return selected for examination; the Service consistently denied there was any such connection. Rather, IRS officials have uniformly maintained that the first time a Form 8275 is looked at is only after a return has been identified under its computerized selection system.
All individual returns and most corporate returns are evaluated for audit potential under a computerized process called the discriminant function (DIF) system. The Dif system is a mathematical technique that allows the Service to measure certain items on a return to determine the possibility of adjustment if that return is examined. After a return is run through the DIF system, it is assigned a DIF score. The higher the DIF score, the greater the chance that the return will be manually screened for audit potential. Manual screening is the process by which the IRS makes a judgment decision whether to accept the return as filed or audit it. (Note that all income tax returns or corporation's assets over $10 million rations with assets over $10 million are manually screened).
In addition to the DIF selection process, certain returns, identified by the Service as "Specials," are given audit codes during the initial data inputting process in the Service Center. This early coding results in these returns automatically being pulled for manual screening. A return is classified as a Special if it contains one or more identifiable features listed in IRM 4118.1 (individuals), 4118.2 (corporations) or 4118.3 (S corporations).
Although the IRM presently provides guidance only for individual returns with Forms 8275, it is safe to assume that similar procedures will be issued for C and S corporation Special returns. Under new IRM 4164.2, an individual return with a Form 8275 attached will be screened by the Service Center for the reason of the disclosure statement and the potential audit significance. As part of the screening, all items on the return will be considered. Returns selected as a result of this process will be forwarded to the distinct examination function.
It is important to note that the fact that a return is screened in the Service Center or referred to the district examination function does not necessarily mean that the return will be audited. There are many other factors considered before a return is actually selected. Moreover, due to the large number of Forms 8275 filed each year, it is unclear what the IRS intends to do with all the returns coded under his new procedure.
Editor's Note: John Lyke is editor of The Lyke Report, P.O. Box 290, Glenview, Il 60025, 1 year, 12 issues, $89. www.lykepublications.com. The Lyke Report is a privacy news digest and also provides updates on currencies and precious metals. The above is quoted from Privacy Rights Clearinghouse.
