Prying Eyes IRS tests software that will track capital gains

Prying Eyes IRS tests software that will track capital gains

By JIM MCTAGUE
BARRON’S Online

Monday, August 19, 2002 – If you have sold a stock or a bond and have claimed a loss on your tax returns when you actually had a gain or fudged the numbers in other ways to reduce your capital-gains tax, then you may soon have reason to chew on your nails. The Internal Revenue Service is testing new software that might be able detect your cheating ways. If the software passes muster, the IRS will use it as part of the new National Research Project, an annual spot-audit of 50,000 random taxpayers.

The software was developed by a fledgling, privately held company in Tucson called NetWorth Services. The company has a 10-gigabyte database containing every single trade price for stocks and bonds traded in three major markets for the last 20 years. NetWorth believes that it can help the IRS determine the cost basis for every share you sell, even if you have been reinvesting the dividends for years and years and have lost your original paperwork.

“This is not a policing tool,” NetWorth spokeswoman Marisa Diaz emphasized. “It’s not designed to help the IRS clamp down on people.” Her spin is that the new software is a “positive tool” in that it will enable the IRS quickly to eliminate accurate returns from its auditing sample, which makes it sound more like a cotton gin than a high-tech bloodhound. “It would be a teeny-weeny part of the National Research Project,” she said. The software tests go on at least through October.

The National Research Program is still scheduled to launch sometime in the fall. The last time the IRS conducted spot audits on this scale was in 1988. Line-by-line dissections of the returns of 55,000 randomly selected taxpayers indicated that 8% of the populace was underreporting taxes to the tune of $200 billion a year. The random audits were so expensive, time-consuming, and excruciating for both crooked and honest taxpayers that Congress demanded the IRS put a stop to them and come up with a kinder and gentler method for gathering the data.

Under the new program, 50,000 returns will be selected from several sample groups, such as self-employed people, wealthy taxpayers, and corporations; but not every one of those taxpayers will be subjected to a face-to-face, line-by-line scrutiny. IRS Commissioner Charles Rossotti previously estimated that 8,000 of the randomly selected returns would pass the smell test, requiring no action. Some 9,000 taxpayers might receive a letter requesting information about specific line items. A block of 30,000 taxpayers will have to visit an IRS office for a “limited scope audit,” which means they will not require documentation for every line of their return. Finally, about 2,000 will have to sit through a line-by-line audit with “reasonable substantiation expected.” This means that if they lack documentation for a specific line item but have a convincing story, they might avoid a penalty for under-reporting their taxes.

Pen Pals
The five pens provided for President Bush at the signing of the Corporate Responsibility Act are certainly hot collector items. But beware if you ever encounter one on the secondary market. Bush only used three of the pens when he signed the bill on July 30, despite press accounts to the contrary. We were there and we later reviewed the video tapes to double-check our observation.

Bush mixed the pens in his right fist with the deftness of a three-card Monte dealer before he handed them out. From our vantage point, it appeared that Bush handed a “real” pen to Republican Rep. Michael Oxley, one of the Bill’s two sponsors. Maryland Democrat Sen. Paul Sarbanes, the other co-sponsor, initially appeared to us to have gotten one of the unused pens. But reviews of the videotape provided inconclusive evidence. The president also presented pens to Sen. Majority Leader Tom Daschle of South Dakota and Sen. Minority Leader Trent Lott of Mississippi. He kept one pen for his presidential library.

Harry Rubenstein, a curator of political history at the Smithsonian Institution, says the pens used by Bush might be more valuable to collectors if, indeed, they can be identified. If not, they’d all be worth about the same. Rubenstein adds that he doesn’t know when the tradition of giving away pens began. He believes it originated in the 18th century at treaty signings.

Chicago lawyer and pen collector John Loring says that Roosevelt, Truman and Eisenhower used inexpensive wood-shaft dip pens to sign bills. During Ike’s last year, he substituted an Esterbrook pen that looked like a dip pen but held ink like a fountain pen, says Loring. Bush uses cross medium-point, felt-tipped pens for bill signings, according to the White House.

Bill Clinton, not surprisingly, was a prolific dispenser of souvenir signing pens. He used 20 Parker pens at one ceremony and 16 at another. Bush, by comparison, is a pen-miser. When he signed the trade legislation recently, he used just two pens.