You’ve received a letter from the IRS notifying you that your tax return from last year is undergoing an audit and the first question that comes to mind is, “Why me?” Unless you’re intentionally committing a tax crime such as tax evasion or under-reporting your income, you probably won’t know beforehand why you were chosen to be audited. After your tax return has been reviewed by the IRS, there are a variety of different reason the return will be audited.
When a return is reviewed individually by an auditor, they may either accept it as filed or pass it on to an examining group if anything on the return raises suspicion. If the manager of the examining group also does not accept the return as filed, the return is given to an auditor for one final examination. At this point either the return will be accepted or the taxpayer will be audited.
The majority of audits are chosen by computers that conduct a statistical analysis of tax returns to determine the likelihood of the information on the return to be correct. The IRS uses a couple different computer systems such as the:
- Discriminant Function System (DIF): This system analyzes a tax return and gives it a score, called the DIF score, based on how accurate it appears to be. The higher the DIF score, the more likely the return is to be audited. The IRS does not disclose the specifics on how this system works, but it is believed that many factors are considered with deductions and exemptions being of most importance.
- Unreported Income Discriminant Function (UIDIF): This program determines the likelihood for a return to have unreported income based on an expense to income ratio. If the program finds that an individual or firm is spending significantly more money than it makes, unreported income is probably occurring, triggering an audit.
- Information Returns Processing System (IRP): The third program the IRS uses information gained from third parties that are required to report taxpayer income to the IRS such as employers and banks. If the income listed on your tax return is inconsistent with the data given by the employer, you are likely to be audited.
If the IRS audits a tax return involving transactions with other taxpayers or businesses and that return had questionable items, it is likely that individuals and businesses associated with the suspicious return will be audited.
While this method is not used very often, the IRS does use computer screening and random selection to determine which returns will be audited.
Your income can determine the likelihood of the IRS auditing you. The more income you make, the more likely you will be audited. IRS statistics state that over half the audits conducted are for taxpayers making over $1 million per year. In fact, even if you make $100,000 per year your chances for being audited are much higher than average. High-income taxpayers claim more deductions and contribute more to charity, leaving more room for error on a return and more reason for the IRS to take a closer look.
The IRS will audit a tax return if the information provided on the return does not match other records. For example, if the income listed on a tax return does not match the income listed on a Form W-2, the return will be audited.
Whether you’ve been audited for inconsistent records, missing documents, or even randomly selected, you shouldn’t try to handle an audit all on your own. The Law Offices of Jef Henninger, Esq. provide professional representation during audits, taking the burden off your shoulders and ensuring the audit settles in your favor.