How Does the IRS Decide Which Tax Returns to Audit?

 Posted on November 09, 2017 in Tax Audits

The prospect of being audited by the IRS is rather frightening, and many taxpayers do not know what to expect in a potential tax audit. However, only around 1 percent of people who file taxes are audited, and there is a great deal of confusion about what makes an audit likely. When filing a tax return, it is important to understand what the IRS looks for when deciding who to audit.

The DIF System

The IRS uses automated scoring known as the Discriminant Information Function (DIF) System to analyze tax returns. This system compares people’s incomes in a geographic area and looks at factors such as family size, how income is earned, and real estate property values to find any discrepancies that may require an audit. The IRS also uses an Unreported Income DIF (UIDIF) score to analyze whether a person is likely to have any income that was not reported correctly.

Other Factors

There are a number of other reasons why the IRS may decide to perform an audit, including:

• How income is earned - Self-employed workers and people who receive much of their income in cash often face greater scrutiny, since they have the potential to misreport income or claim improper business deductions.
• Document matching - If the information on an individual tax return does not match the information that employers or clients provide to the IRS in W-2 or 1099 forms, this may trigger an audit.
• Tax avoidance schemes - If an organization or tax preparer has been found to have operated transactions designed to fraudulently avoid paying taxes, any participants in these schemes may be flagged for an audit.
• Related investigations - The audit of one individual or organization may result in other people or organizations who have a financial connection to them being audited as well. For instance, if an employer is being audited, the IRS may also look into possible misreported income by their employees.
• Improper deductions - Large deductions may raise a red flag for the IRS, whether they are charitable deductions that constitute a large proportion of someone’s income, extensive business expenses, or home office deductions that do not meet IRS requirements.

Contact a San Jose Tax Audit Lawyer

If you are facing an audit by the IRS, you should contact an experienced tax lawyer as soon as possible. A skilled attorney will understand how to best respond to any IRS requests and work to reach a satisfactory resolution to your case. Contact a San Jose, CA tax audit attorney at John D. Teter Law Offices today at 408-866-1810.

Sources:

http://www.valueyourmoney.org/taxtalk/taxplanFAQaudit.asp

http://www.foxbusiness.com/features/2012/03/22/why-irs-picked-to-audit.html