When in doubt, deduct it out.

• Author: Schnepper, Jeff A.
• Position: Economic Observer - Tax returns

HAVE YOU EVER THOUGHT of bungee jumping? Have you skydived or considered exploring the ocean floors? Would you rather gamble in Las Vegas or lie on the beach? Just how much risk do you enjoy taking?

If you really enjoy the adrenaline rush of risk-taking, then the tax game may be for you. No, I'm not advocating cheating on your taxes. What I am suggesting is that there are situations where the tax law may be vague or subject to different interpretations. In fact, there have been many tax decisions where four out of nine of our top jurists on the Supreme Court got the answer wrong!

Our tax code is not known for its clarity or its simplicity. Former CitiCorp Chairman Walter Wriston called it a system where "All the Congress, all the accountants and tax lawyers, all the judges, and a convention of wizards cannot tell for sure what the tax law says." Current Treasury Secretary Paul O'Neill was more blunt. He called our tax code an "abomination."

Each year, Money magazine asks 50 tax professionals, including attorneys and CPAs, to complete a tax return for a hypothetical family. The publication normally gets 50 different answers--with spreads that have approached nearly 1,000%! How about the supposed "know it alls" from the IRS? Last year, the percentage of wrong advice given by the agency to investigators posing as taxpayers was 47%.

Again, I'm not suggesting that you cheat or make up numbers. What I am noticing is that there are many gray areas with potential to push the envelope--especially when the odds of being audited have been so decimated.

Audit odds

Now that you've filed your tax return, what's the chance of your actually being audited? The latest numbers have shown an enormous decrease in the "audit rate"--the amount of returns examined divided by the total number of returns filed the previous year. The total audit rate for Fiscal Year 2001 was a mere 0.58%. That's more than the 0.49% rate for 2000, but still only about one-third of the 1.67% rates for 1995 and 1996. The number of individual returns examined in 2001 rose to nearly 732,000, from a Fiscal Year 2000 low of about 618,000, but audits for returns showing income of more than $100,000 declined from 99,547 in 2000 to 91,550 the following year. Do you feel lucky? In many cases, the difference between a legitimate tax shelter and "abusive noncompliance" is whether or not you win the audit lottery.

According to the IRS, wealthy individuals and big corporations took more than...