Recent news that celebrity Nicolas Cage (real name Nicolas Coppola) cut a deal with the Internal Revenue Service to pay $666,000 plus interest has taxpayers scratching their heads. The IRS initially determined that Cage improperly deducted $3.3 million in personal expenses from 2002 to 2004.

The laundry list of things deducted by Cage included limo rides, meals, gifts, and travel in his jet. The result: $1.8 million in taxes and penalties plus interest, although some experts say the real figure was about $1 million. The issue is finally settled, and the $666,000 settlement includes $99,000 for an accuracy related penalty, but no penalties related to fraud.

Do you think this is a case of a taxpayer successfully challenging assertions made by the IRS or an example of a wealthy taxpayer getting a better deal than the average American could? It's difficult to say without knowing the details of the case, but I will say this: Often the IRS makes huge assessments against taxpayers to "persuade" them to respond to contentious issues. This could be a case in which the IRS slapped a big number onto Cage in the hope of "encouraging" him to cooperate in sorting out the issues.

Do you think that Cage purposely deducted things he knew weren't really deductible in order to cheat the tax man? I wouldn't necessarily say that's the case either. Taxpayers often choose to deduct items that fall into a "gray area," in which certain items may or may not be deductible depending on how the IRS interprets the tax code and the actual expenses. The taxpayer hopes that the IRS doesn't audit his return, or that if he is audited, the issues are decided in his favor. So rolling the dice on some deductions isn't all that uncommon, and that may be what Cage and his accountant did in his case.

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.

The Internal Revenue Service has announced a new warning letter it will be sending to taxpayers. It's replacing a letter than used to go out which suggested changes to income, deductions and credits. The new letter will simply tell taxpayers to check their tax returns, and if they think they've made a mistake, they should file an amended tax return.

With the old letters, the IRS calculated an amount due and included that with the notice. Now, no such estimate of taxes due will be calculated. The IRS computers are still doing the same thing they did before, which was to match tax return information against documentation received from outside sources, such as W-2s, 1099s, and K-1s. The difference is that the IRS will no longer be telling taxpayers what differences have been identified.

It seems a little counterproductive to just send taxpayers letters that hint that they've done something wrong. The old letters seem much more useful in that they identified the actual reason for sending the letter -- we think you've made a mistake and here is what it is. Now, taxpayers are instead told the IRS thinks they may have made a mistake, but the taxpayer is left to guess at what the error might be.

How does this new letter enhance the tax collection process? I have no idea. I can't imagine that it helps at all. The tax code in the United States is incredibly complicated, and playing an additional guessing game with taxpayers seems to be a waste of time. The IRS has said that they are going to test the new letters and see if they result in additional collection of taxes. If they work, their use will be expanded.

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.

Sharon Kukhan is known for selling a tax "decoder" scheme to help taxpayers avoid paying federal income taxes. She claimed she could "decode" the taxpayers' tax records to show that they were not required to pay income. Her system was based on the lie that clients did not have to pay income taxes unless they lived in a U.S. territory, and that residents of the United States could only be taxed with an excise tax on an excise-taxable business. The cost for this misinformation? $1,750 to $3,195.

The scheme had several names, including IMF Decoder, Paralegal Research Advocates, and Advocates for Justice, Liberty and Freedom. Kukhan's now defunct website IRScodebusters.com reportedly used to claim: "IRSCodebusters is a team of researchers including a federal lawyer (not an attorney) and a certified paralegal. This team specializes in utilizing the Freedom of Information Act and Privacy Act to provide a detailed decoding and examination of the Individual Master File and other secretly coded files the IRS keeps on you."

But the scam will run no more. A federal court has permanently barred Kukhan from selling her program, and the IRS estimates her work cost them about $4.9 million from taxpayers who failed to file returns or pay taxes.

If you participated in this scam, you can look forward to the IRS contacting you. Kukhan was required to turn over a list of her clients, and you can bet the government will be sending out audit notices. My advice? Find a competent tax lawyer and go to the IRS before they find you. Many times, they are more lenient with taxpayers who voluntarily report problems with their tax returns and work with the IRS to pay any taxes owed.

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.

All you millionaires reading WalletPop are now put on notice: You're far more likely than me to be audited by the Internal Revenue Service. Who knew? Well, truthfully, we all probably expected that the IRS audited the wealthy much more often. It just makes sense... the more money there is to audit, the more money there is to squeeze out of the taxpayer. And the IRS has never been about collecting less money from us, the last time I checked.

So the IRS is offering up these odds of being audited... If your income is over a million dollars a year, you have a 1 in 11 chance of being audited. If your income is $100,000 or less per year, you have a 1 in 100 chance of being audited. And for those of you with incomes in between, your chances are in between also.

Lucky for us, audit rates are up across the board. The IRS audited almost 1.4 million tax returns in fiscal 2007, which was about 1% of total individual tax returns. And if you're one of the unlucky who are selected to be audited, you can find a few tips for getting through the trauma successfully on my corporate site.

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Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.