It's not hard to get tripped up by tax code

John W. Schoen Senior producer • Profile • E-mail

In owning up to the mistake of nominating former Sen. Tom Daschle for his Cabinet — in spite of known problems with his tax returns — President Obama said it was important to stress that “there aren’t two sets of rules, one for prominent people and one for ordinary folks who have to pay their taxes.”

There may be one set of rules, but there's different levels of scrutiny. Prominent people, or at least those nominated for high profile government jobs, face a level of inquiry that most taxpayers don’t have to worry about.

Still, no matter how hard “ordinary” taxpayers try to get it right, they're vulnerable to getting tripped up by the extraordinary complexities of the tax code.

“Our tax laws are complex,” said Diahann Lassus, a certified public accountant and chair of the National Association of Personal Financial Advisors. “Certainly if someone went through most individual tax returns over the last 10 years, the odds are pretty good they could find something. In most cases probably small, but they could find something.”

In the latest fiscal year, the IRS examined only 1 percent of all individual returns. The more money you make, the higher the odds the Tax Man will take a closer look. Last year, the IRS examined about 3 percent of returns for filers with income of $200,000 or more; the rate for those with income of $1 million or more was 5.6 percent.

The same holds true for business returns; the IRS examines a much higher percentage of returns from large companies than it does for small businesses.

You’re also more likely to face scrutiny if your return looks unusual compared to other people in your tax bracket. One of the tools the IRS uses to determine who to audit is a computer screen that compares the line items in your returns against similar returns in your tax bracket. If you’re claiming much bigger charitable deductions than others at your income level, for example, that could be a red flag.

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When the IRS does find mistakes, a lot depends on what they are. The most common are the basics: filling in the right Social Security number, math errors, etc. Those are fairly easy to catch.

Next on the list are deductions, the part of tax preparation many filers pay the most attention to. No one wants to pay more tax than they must, but the IRS pays as much attention to deductions as you do. If you claim one you don’t qualify for, you’ll be on the hook for extra taxes and possible penalties if the IRS successfully challenges it. You don’t have to take their word; if there’s a lot of money involved, you can always challenge their ruling in court.

But the mistakes that tripped up Daschle — along with Treasury Secretary Tim Geithner, who won his nomination, and Nancy Killefer, who withdrew as a nominee for as a key White House aide — were among the most serious. These involve failing to report income and not paying the full amount of tax owed on that income.

Those mistakes don’t usually get very far when made by “ordinary” taxpayers with mostly wage income.

“For the average person everything they have as income has been reported to the IRS,” said Tom Ochsenschlager, vice president of taxation at the American Institute of Certified Public Accountants. “If you don’t report that on your tax return you’ll get a notice back from the IRS' computer in a matter of days after they get your return.”

People who make a living as freelancers, consultants, or independent contractors with multiple clients are at greater risk. If you earn more than $600 from any one employer or client, that payment is supposed to be tracked by a 1099 form sent to both you and the IRS.

“Sometimes you may not receive them, but that doesn’t mean the work you performed isn’t taxable,” said Gil Charvey, an analyst with the Tax Institute at H&R Block.

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