(MONEY Magazine) – Although virtually every one of Bill and Hillary Clinton's moves has been recorded, analyzed and debated, there is one facet of their lives that hasn't gotten the same level of scrutiny until now. Over a nine-week period that ended in early March, Money focused on that unglamorous and overlooked area -- the Clintons' record as taxpayers. After studying each of their federal income tax returns for the years 1980 through 1992 (they hadn't yet filed for '93), we pieced together a portrait that many of MONEY's affluent readers might recognize: The Clintons tend to get tripped up by the tax complications that come with professional and financial success. A close examination of the Clintons' tax returns, which they have made public, suggests that the First Couple committed three glaring mistakes: Though both are sophisticated lawyers, they didn't keep adequate records, they tended to overestimate certain deductions, and they relied far too much on their tax preparer to get everything right. In all, their questionable write- offs indicate that the Clintons may have underpaid their income taxes by $16,358 over the 13-year period -- which means their total liability today would be $45,411 if you include interest the IRS charges for underpayment. Their questionable write-offs dealt with 1) their charitable contributions, 2) his business expenses as Arkansas governor, 3) her automobile depreciation and, most important, 4) their Whitewater real estate development deal, which went bad. Three working days before our deadline in March, MONEY sent 16 written questions based on our reporting to Bruce Lindsey, special assistant to the President. Though Lindsey had granted us an earlier interview, he declined to answer any of the 16 for publication despite repeated requests from the magazine's managing editor. Instead, he issued a three-sentence statement, saying in part: "The Clintons believe that they have complied completely with Internal Revenue Service requirements and that all deductions which they took on their tax returns were appropriate and proper." (Two days later, Robert B. Fiske Jr., the independent counsel investigating the Whitewater affair, subpoenaed Lindsey and five other White House aides to testify before a federal grand jury.) Although our audit shows the Clintons may have underpaid their taxes by $16,358, they would not be legally required to pay most of that sum or any interest unless fraud was found, even if the deficiency was confirmed in an actual IRS audit. That's because the IRS' standard statute of limitations on audits has expired on returns filed before April 15, 1990. (The IRS' deadline to audit their 1990 return -- on which we spotted a potential $4,145 problem -- is this April 15.) Still, in the past the Clintons have paid back taxes brought to their attention, though they were not legally obligated to do so. MONEY's curiosity about the Clintons' returns was piqued by the recent series of seemingly contradictory news reports on their tax moves. We asked ourselves this question: How could a couple who had so meticulously logged a $15 charitable deduction for long underwear walk away from the opportunity to deduct all of the $68,900 they believe they lost on the now notorious Whitewater land deal? (See our chronology of what the Clintons and others have said about that deal, on page 90.) The ultimate judgment on Whitewater may not come until independent counsel Fiske spends an estimated $10 million analyzing more than 1 million documents over the next two years. For now, however, here's what our audit of the Clintons' taxes shows: -- The Clintons appear to have repeatedly overstated their charitable contributions. While Bill Clinton all but boasts about leaving financial matters largely in his wife's hands (see "How Hillary Manages the Clintons' Money," MONEY, July 1992), he maintained a colorful habit for at least seven years while Arkansas governor: He took time out every few months to hand-write a list of his small deductible charitable contributions ranging from his now storied skivvies to a brass key ring. The write-offs have gained wide press attention because many of them seem too high -- $100 for a sports coat, for example. -- They may lack the records needed to back up their biggest Whitewater tax moves. Even if the Clintons can document all their Whitewater deductions with their canceled checks, that may not be enough to preserve the write-offs in an IRS audit. They would need Whitewater records too, to show they were entitled to the deductions. And those crucial documents are so far either missing or unavailable. In January, the White House's Lindsey told the Washington Post: "If anyone knew the entire corporate history would be paraded before the American public, they might have kept more documents and better records." -- They sailed into Whitewater without proper tax advice. Every one of the five tax experts consulted by MONEY agrees on one issue: The Clintons either didn't seek, or didn't heed, the right tax advice from the moment they entered the complicated Whitewater deal back in 1978 and '79. "There is no evidence of the hand of a tax professional in any of it," says Jack Porter, national tax director at the accounting firm BDO Seidman in Washington, D.C. The Clintons relied on two certified public accountants in Little Rock to prepare their returns for the years in question -- Gaines Norton from 1980 to '83 and Yoly Redden from '84 to '92; both declined to discuss their work with our reporters. (MONEY has some history with Redden: She took our tax preparers' test in 1989 and concluded that our hypothetical family owed only $16,618. Our expert set the correct tax 41% higher at $23,393.) Our audit, like official IRS inquiries, aims to challenge questionable return entries and estimate what taxes and interest might be owed. Also like the IRS, we are raising tax questions, not affixing legal blame. In an audit, you have the opportunity to defend your tax moves by simply showing, for example, that you made the payments you claimed as deductions and that you are entitled to the write-offs. Moreover, the 4,000-page U.S. tax code is often open to wide interpretation. Therefore, to be fair, we have noted the documents the Clintons would need to produce in an actual audit, and the arguments they might make to justify their tax stance. Our findings:

Charitable deductions The Clintons' claim $177,047 Potential added tax $1,651

From 1980 through '92, the Clintons wrote off charitable gifts totaling $160,886 in cash contributions and $16,161 worth of noncash donations. Often the gifts went to the Salvation Army, churches and educational charities. Given their incomes and prominence, the Clintons' generous level of giving is not in itself a cause for audit scrutiny. Beginning with their 1983 return, however, the Clintons attached a list --usually handwritten -- itemizing and valuing their noncash contributions. They noted things like $30 for three shower curtains, $5 for an electric razor, $40 for running shoes. Many tax pros say such detail invites IRS scrutiny, even if you have filed a perfect return. Attaching a list is particularly dicey with noncash charitable donations, since there is often no way to prove an item's fair market value. In an audit, such disputes boil down to the taxpayer's word vs. the auditor's judgment. Guess what? The auditor usually prevails. There is a valid question about whether the Clintons padded the value of the underwear and other stuff they donated from 1983 through '89. In our audit, MONEY relied on Goodwill Industries' and the Salvation Army's flexible guidelines, which are sometimes used by IRS auditors. We also gave the Clintons the benefit of the doubt. For example, for 1984 they claimed $100 for a gray three-piece suit; we gave them the full $100. Still, some items -- particularly shoes, underwear and T-shirts -- seem overvalued at times. For example, in 1988 the Clintons deducted $15 for long underwear; we reduced it to $2. In another instance, we allowed $30 for a pair of brown shoes they valued at $80. We concluded that the Clintons may have overvalued their noncash contributions by a total of $2,939 from 1983 through '89. The tax due: $1,187. To rebut that assessment, they would have to offer convincing oral testimony. At best, they might get to split the difference between their estimate and the auditor's. The Clintons also deducted a $1,405 cash contribution in 1990 to "Vance Hall Sporting Goods," which doesn't sound like a charity. An IRS spokesman told MONEY that there are cases where a retailer makes an IRS-approved arrangement with a tax-exempt organization; if you write a check directly to such a store sponsoring a charitable event, you can claim a deduction. But unless the Clintons can prove that Vance Hall was qualified to accept tax-deductible donations, they would lose the deduction and owe additional tax of $464, for a grand total of $1,651. One more thing: Amid all the cataloguing of charitable minutiae, one sign of sloppiness cropped up in 1990. That year's return failed to note $11,662 of the couple's contributions to 19 charities. Redden then filed an amended 1040, which brought the couple's charitable deductions that year to an eye-catching record high of $36,875.

His expenses The Clintons' claim $29,190 Potential added tax $5,765

Bill Clinton's $35,000 annual salary during most of his 10 years as Arkansas governor was the lowest in the 50 states. But he also got $70,000 a year to cover expenses -- a $19,000 public relations fund for work-related costs and a $51,000 mansion fund for meals, household items and official entertaining at the Governor's residence. Let's start with the $19,000. For most of his tenure, Clinton was reimbursed in full from this fund for all of his official expenses. And so, quite correctly, he never claimed any deductions on his tax return for expenses. For a 26-month period from January 1989 through February '91, however, the State of Arkansas decreed that the $19,000 public relations fund should be included in Clinton's taxable income. (The same went for the six other Arkansas officials who got such funds.) So Clinton began deducting unreimbursed employee expenses, claiming write-offs totaling $13,212 in 1989, $12,912 in '90, and $3,066 in '91. In themselves, there's nothing suspicious about the write-offs. But they could nonetheless draw an auditor's attention for this reason: The unique nature of a politician's job -- part public servant, part campaigner -- makes it imperative to separate deductible business expenditures from nondeductible campaign costs. Bill Clinton's 1989 to '91 write-offs for printing ($7,316, including $4,812 for brochures), travel ($3,696) and advertising ($1,638) are particularly questionable. An auditor would ask whether they were actually nondeductible campaign expenses. Bill Clinton might also have to explain the $2,848 in "meal-seminar/forums" expenses he deducted on his '90 return. If the meals and gatherings happened * at the Governor's mansion, they should have been paid by the mansion account. And under the tax law, you can't deduct expenses your employer would have normally covered. "I don't think meals for visiting groups in the mansion are a deductible expense, since this (mansion) fund should be used to pay for them," says James Pledger, director of the Arkansas Department of Finance and Administration. To keep the deductions, Clinton would have to show that the meals did not take place at the mansion and that the amounts he claimed were "ordinary and necessary" business expenses. Finally, his $3,066 in 1991 employment-related deductions would raise a question. Clinton would have to demonstrate that this money was spent on deductible business expenses before March 1991. After that, the state law once again allowed him to be reimbursed as he submitted expense receipts. All in all, there's a lot in these expenses for an auditor to chew on.

Car depreciation The Clintons' claim $8,168 Potential added tax $501

In 1986, while Hillary Clinton worked as an attorney at the Rose Law Firm and was Arkansas' First Lady, she bought a $12,615 Oldsmobile that she drove for business purposes 52% of the time. (You can claim accelerated depreciation for a car only if you use it for business more than 50% of the time.) The Clintons' accountant, Redden, correctly depreciated the business portion of the car over three years on their 1986, '87 and '88 returns, for a total allowable write-off of $6,565. According to the tax law, further depreciation would be permitted only if Hillary Clinton increased her use of the car for business. And sure enough, in 1990, she drove it 60.52% of the time for business. But in calculating the four-year-old car's extra depreciation, Redden employed a formula that applied to newly acquired property placed in service after 1986. As a result, she overstated the deduction by $1,518, causing the Clintons to underpay their taxes by $501. Unfortunately, even when a professional tax preparer causes the goof, a taxpayer must pay any tax shortfall the IRS discovers within three years. In addition, Redden herself could be hit with a preparer penalty of up to $1,000.

Whitewater The Clintons' claim $24,154 Potential added tax $8,441

Navigating Whitewater takes total concentration as the numbers whiz by. Since the Clintons have refused thus far to disclose their relevant 1978 and '79 tax returns, you must start midstream with the twisting, tortuous flow of the interest deductions they took in '80 and then again from '84 through '88. The write-offs, totaling $24,154, are for interest payments they claim to have made on three separate Whitewater loans: -- The first was a $20,000 down payment loan at 10% in 1978 from Union National Bank in Little Rock. The loan was taken out by Bill Clinton and James McDougal, the politically connected developer who, with his wife Susan, had just invited the Clintons to become their fifty-fifty partners in a then promising venture to develop the 230-acre Whitewater tract in Arkansas' popular Ozark Mountains. -- The second loan was a $182,611 mortgage at 10%, also in 1978, from Citizens Bank in Flippin, Ark., cosigned by the Clintons and McDougals. Together, the two loans covered the purchase price of the Whitewater site. -- The third was a $20,800 note at 11.5% in 1983 from Security Bank in Paragould, Ark. taken out by Bill Clinton. According to the White House, he used that money to pay off a $30,000 loan at a whopping 20% that Hillary Clinton had gotten from James McDougal's Bank of Kingston in Kingston, Ark. in 1980. She used the original loan to put a model home on a Whitewater lot. An audit of interest deductions ought to be simple. In general, all taxpayers must prove is that they made payments they claimed as a deduction, that the expense was indeed interest for which they were liable, and that they paid the interest in the year they wrote off the deduction. But the complex Whitewater loans made the Clinton's subsequent tax write-offs anything but routine. Also, the Clintons' argument -- that they couldn't have done anything wrong because they didn't make money on the disappointing deal and didn't even claim a capital loss in the end -- is as irrelevant as it is self-serving. A taxpayer can lose everything and still file incorrectly, thereby incurring back taxes, interest and penalties. Our audit indicates the Clintons may face precisely those consequences in the following instances: The first -- and largest -- of the Whitewater deductions on the returns MONEY examined is a $9,000 interest payment to "James McDougal" in 1980. The $9,000 entry is audit bait for two reasons: A business partner is rarely listed as a mortgage lender, and mortgage interest is almost never a round number. The White House has said the Clintons paid McDougal the $9,000 to reimburse him for interest payments he made on their behalf in 1978 and '79. That might explain why the figure is rounded: Although the Clintons and McDougals were fifty-fifty partners, the law does not require that every payment be split equally. Because of the irregularities, however, an auditor would demand both a bank statement showing how much of the amount was interest, if any, plus a signed, dated receipt from McDougal acknowledging the interest repayment. Without this hard proof, an auditor could treat the $9,000 as a nondeductible repayment of loan principal, not deductible interest. If the Clintons' undisclosed 1978 and '79 returns surface, they may well spark more audit questions. For example, the White House claims the Clintons deducted $10,000 in interest on Whitewater loans in 1978. But Time magazine recently reported that records it reviewed show the banks received at most $5,752. The second largest Whitewater deduction also appears on the Clintons' 1980 return -- $4,350 paid to Citizens Bank in Flippin, which provided the $182,611 mortgage in 1978. But even that seemingly innocuous entry has a twist. In 1979 the Clintons and McDougals formed the Whitewater Development Corp. and contributed the 230-acre site to the newly formed company. This turn of events could prompt an auditor to ask for proof that the Clintons were the party entitled to the $4,350 mortgage interest write-off. The White House has insisted in published reports that the Whitewater corporation did not assume the loans. Rather, the explanation goes, when the land went to the corporation, the Clintons, in effect, got a note from the Whitewater company obligating it to the same terms as on the loans they took out to buy the property. In that case, however, an auditor would expect the Clintons to have reported Whitewater's interest payments on their returns as income and then claim an offsetting deduction for the interest they paid. But they did not do that; they never reported any interest income from Whitewater. What actually may have happened is that all three -- the Clintons, the Whitewater company and the McDougals -- made loan payments directly to the bank at various times. When Whitewater didn't have enough money to make the payments, "McDougal would call up the Clintons and say. . .'Can you write the check?' So Clinton would write a $4,000 check, or whatever, so the bank wouldn' t foreclose on the loan," Lindsey told MONEY in a January interview. , Whoever made payments during the year took deductions at tax time. Despite that unorthodox approach, some tax experts think the Clintons could keep the deduction in an audit. "You have a leg up in defending your interest deductions as long as you actually made the payment," says a former high- ranking IRS official who requested anonymity. Yet other tax experts, including Lee Sheppard, a tax lawyer and contributing editor of the professional journal Tax Notes, take a tougher stance: She says that when the land used as collateral for the loan was transferred to Whitewater, the corporation assumed the loans de facto and thus was solely entitled to the interest deduction no matter who, if anyone, paid the interest. If there were a legal challenge to their deduction, the Clintons could rebut it by citing to the IRS federal court cases won by taxpayers in similar circumstances. Even then, however, they would have to present more Whitewater documents than they have so far. The worst-case outcome: The Clintons' $4,350 deduction would be denied. The third set of Whitewater deductions, from 1984 through '88, relate to the $20,800 that Bill Clinton borrowed from the Security Bank in Paragould in '83. In 1984 and '85, the Whitewater company paid Security $5,133 in loan interest and deducted it. A 1992 analysis commissioned by the Bill Clinton for President Committee and coordinated by James Lyons, a Denver tax attorney and family friend, revealed that the Clintons had also deducted the $5,133. The Clintons explained that the bank erroneously sent them a $5,133 interest statement, which they forwarded to their tax preparer, Redden. She then dutifully entered the deduction on their returns. To make good, the Clintons say they voluntarily paid the IRS some $4,000 in back taxes and interest in 1992. The Clintons' Whitewater headache doesn't end there, though. Any IRS auditor who asks Bill why he borrowed the $20,800 would learn of Hillary's earlier $30,000 loan -- and the many tax questions that surround it. When she borrowed the $30,000 from Kingston Bank in 1980 to build a model home on a Whitewater lot, the corporation transferred the three-acre lot to her; she then used the land, at the time worth about $5,500 according to Whitewater real estate agent Chris Wade, as collateral. Records examined by MONEY show that she paid $10 to record the deed; but it's unclear whether she paid a cent more than that. The upshot: The Clintons may be on the hook for a taxable capital gain on the transfer of the $5,500 lot in 1980. The Clintons' gain would equal the fair market value of the lot, minus their tax basis (that is, essentially, the amount they invested in Whitewater from their own pockets). In the absence of further documentation, an auditor would assume a very low basis figure, say the $500 that the couple have said they contributed to the corporation when it was formed. Here's the math: The lot's $5,500, minus the $10 Hillary paid for the deed, minus her $500 basis, equals a $4,990 capital gain. The audit tally on this transaction alone: $4,454, made up of tax ($1,098) and interest ($3,356).To beat an IRS challenge, the Clintons would have to prove that they either paid much more for the lot, or that it was worth much less than $5,500 or that their tax basis in Whitewater was far higher than $500. One more Whitewater matter: As we went to press, AP reported that in 1984 and '88 the Clintons deducted more than $1,400 in Whitewater property taxes they had paid but may have been reimbursed for later on. Whatever the final outcome, the drip-drip-drip of Whitewater revelations will likely continue for years to come.

BOX: Three lessons for you

As a taxpayer, you should take away three basic lessons from our audit of the First Couple's tax returns: The more complicated your finances, the more careful your record keeping should be. As transactions become complex, the number of potential tax traps increases. Ask anybody who ever invested in a limited partnership. Without complete records, you will find it virtually impossible to reconstruct the crucial details of your financial arrangements -- particularly those showing intent, dates and dollar amounts -- if you are challenged in an IRS audit. Then you will not only lose your deductions, you will also owe interest and perhaps penalties. Never overvalue, never overexplain. Unless you can prove to the IRS that your charitable donations are legitimately worth far more than the amounts charities typically set for such items, you will have a hard time convincing an auditor to let you keep the write-offs you claimed. And since the IRS rarely requires that you include documentation with your tax return, the more data you provide with your forms -- such as a detailed valuation of every article of clothing you gave to charity -- the more item-by-item scrutiny you will invite. Don't rely too much on any single adviser. Even if you leave day-to-day | handling of your money to an expert, you should be able to personally assess and understand his or her suggestions, including tax angles. "When an IRS auditor appears, he won't care if your investing pro comes from Mars," says Joel Isaacson, a New York City C.P.A. and financial planner. "He'll hold you responsible."

BOX:

They may have overvalued gifts to charity by $2,939. Their tax pro claimed $1,518 too much for Hillary's car.