Many of our clients feel as though they have an IRS target on their back. Once the IRS has them in their sights they begin to attack and won’t let up. Why do some taxpayers have to go through this year after year? This post gives insight how the IRS selects individuals and companies for audit.
The IRS uses a variety of methods to select returns for review:
- One of the ways the IRS selects tax returns for audit is by obtaining information about individuals or companies that promote or participate in tax avoidance transactions. One typical example of these transactions is when for-profit entities use tax-exempt entities such as charities to avoid paying tax.
- The IRS may also selects returns based on a method called ‘Computer Scoring’. In this method, each return gets a numeric score. The two types of scoring systems are the Discriminant Function System (DIF) and the Unreported Income DIF system (UIDIF). They rate based on the potential for change in income and the potential for being unreported, respectively. Both systems rate based on experiences from past filings by taxpayers. IRS officials screen the returns that are rated the highest and select a few for the purpose of auditing and in-depth investigation of items that need to be reviewed.
- Information mismatch is another criterion for selecting a return for tax audits. At times, reports such as Form 1099 – Interest statement from the bank or Form W2 from the employer, may not match with the income reported on the taxpayer’s tax return. In such cases, the IRS and flag the return for audit.
- Large corporations are frequently targeted for audit to verify that accurate returns have been filed.
- Even in cases where the taxpayer’s return may be related to an issue or transaction of another taxpayer, the IRS may select the related taxpayer’s return for the purpose of auditing both returns. The taxpayers may be related in any manner, such as being business partners, investors, friends, and family, among others.
If your tax return has been selected for audit, we can guide you through the process. We solve IRS problems.
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