Not Just for the Rich and Famous: Audits on the Rise -- As the Season Winds Down, the IRS Revs Up

And in 1992, long before her most recent legal problems, MarthaStewart was ordered to pay $220,000 in New York state tax. A judgeruled that Martha's claim of not spending a lot of time at her EastHampton, N.Y., home wasn't a credible excuse for failing to pay hertaxes.

Over the years there's been no shortage of high-profile casesinvolving luminaries who've gotten into trouble with the tax man. Butwhile the travails of celebrities garner the biggest headlines, therich and famous aren't the only ones who can suddenly find themselvesunder the watchful eye of the IRS.

Audits on the Rise

Think you're immune? Think again. This year it's estimated thatAmerican taxpayers have a 1 in 107 chance of being audited, and thechances are even greater if you make over $100,000 -- jumping to 1 in63.

The increase in audits brings up some important questions: Howmany Americans actually cheat on their taxes? How many taxpayers"fudge" a little on their tax returns but don't really think of it ascheating? And whether you're a cheater or not, what are the audit "redflags?"

According to the IRS, roughly 16 percent of all taxes owed, or$345 billion, initially went unpaid in 2001 and that figure is morethan likely understated. And even though the vast majority oftaxpayers are honest, the cost of those who do cheat is felt by all.In fact, the IRS Taxpayer Advocate stated recently that eachindividual pays almost $2,000 more in taxes annually to subsidizethose taxpayers who do not pay their share.

But just what is considered cheating? "A lot of people think it'sOK to fudge a little bit on their taxes, whether it's claiming adinner out with friends as an unreimbursed business expense or takingcash under the table for moonlight work," said Kathy Burlison, H&RBlock tax professional. "Not every cheater will be audited; but somewill. And once that happens, the original tax savings can't compare tothe ultimate bill for tax, penalties and interest."

H&R Block advises that to minimize the risk of an audit, taxpayersshould be aware of two common mistakes that typically trigger scrutinyfrom the IRS:

-- Failing to sign the return, and

-- Including incorrect Social Security numbers

"Better yet, e-file," Burlison said. "It's quicker and you'll benotified of an error within 24-48 hours. Then you can easily correctthe mistake and resubmit the return. Remember, e-filed returns are 99percent accurate versus 81 percent for paper returns."

Where To Get Help If Audited

The IRS is reporting that tax returns prepared using a computer --either with software or online services -- is up 17 percent over taxseason 2005. And this is especially good news for TaxCut users withthe introduction this year of Worry-free(TM) Audit Support.

With Worry-free Audit Support, paid TaxCut clients whosuccessfully e-file can now rest easy knowing one of H&R Block's morethan 70,000 tax professionals is ready to help, at no additionalcharge, in the event of an audit. From outlining what to expect andproviding guidance on how to prepare for the audit, to having a Blockenrolled agent(a) represent the TaxCut client before the IRS, H&RBlock can help manage the process -- 365 days a year, not just at taxtime -- and it's all free. No one else in the industry can offer auditprotection like H&R Block.

For those who choose a paid preparer to do their taxes, an addedbenefit in choosing H&R Block as your tax preparation provider is ouraudit assistance service, provided free of charge through our StandardGuarantee to our more than 16 million retail clients. If the IRSaudits you, an H&R Block representative will assist you in answeringquestions regarding the preparation of your tax return.

Audit Flags

In making a determination about who to audit, the IRS relies onsophisticated computer technology to identify potential audit targets,including a highly confidential computerized formula that checks yourreturn against specific computer models.

A questionable return is then flagged and scrutinized by IRSagents. Burlison said there are a number of areas that the IRSexamines closely when determining whether to launch an audit.

These include:

-- Unreported Income -- If you received money (interest, dividends, wages, gambling winnings, etc.) that was reported to the IRS, the IRS will notice pretty quickly if it's not on your tax return. And just because a payment -- such as interest under $10 or contract work under $600 -- wasn't reported to the IRS by the payer, that doesn't mean you can omit it from your tax return. Any money you receive is taxable, unless the law specifically exempts it from tax.

-- Itemized Deductions -- Taxpayers who itemize are more likely to draw scrutiny from the IRS than those who do not. A key trigger for the agency is deduction amounts that appear to be outside the norm, whether for medical expenses, vehicle expenses, or business meals.

-- Casualty Losses -- Although losses from fire, theft or storms are deductible, they can only be deducted if the total losses exceed an insurance reimbursement by $100 and exceed 10 percent of an individual's adjusted gross income after the insurance payment is received. Taxpayers with casualty losses should maintain complete records in case their returns are selected for review.

-- Hobby Losses -- The IRS takes a dim view of individuals who work full-time but also operate side businesses that are essentially hobbies and perennial money-losers. Therefore, it pays to keep detailed records of all business expenses, and to make sure they're separate from personal expenditures. If you're claiming business expenses, run the business like it's meant to make money and keep records to track what you're doing to improve your profitability.

"Given the risks of an expensive audit, paying strict attention tothe rules is the only smart decision you can make," Burlison said.

According to H&R Block, here are the main areas taxpayers need tobe aware of to help avoid an audit:

-- Learn the rules -- There are lots of rules around what needs to be reported and what doesn't;

-- Keep up with deductions -- Knowing what's deductible and what's not is key to getting your return completed accurately; and

-- Keep records -- It's always good to keep your records, so that if you were ever questioned you can refer back to your documentation.

"Remember that even if you haven't been audited in the past, itdoesn't mean you won't be in the future," Burlison said. "And it onlytakes one audit to ruin your day."

About H&R Block

H&R Block (NYSE:HRB) is a leading provider of tax, financial,mortgage, accounting and business consulting services and products.H&R Block is the world's largest tax services provider, havingprepared more than 400 million tax returns since 1955. The company andits subsidiaries generated revenues of $4.4 billion and net income of$636 million in fiscal year 2005 from operations in four principalbusiness segments: tax preparation and advice via in-office, onlineand software solutions; investment and financial advisory services;retail and wholesale mortgage services; and tax/accounting/businessconsulting services for midsized companies. Headquartered in KansasCity, Mo., H&R Block markets its services and products under threeleading brands: H&R Block, Option One and RSM McGladrey. For moreinformation, visit our Online Press Center at www.hrblock.com.

(a) While enrolled agents are not tax attorneys and cannot providelegal advice, they are knowledgeable tax professionals who areeligible to represent the TaxCut client before the IRS.