Taxpayers who fail to sub their taxes deter the country’s growth, marginalizing the inputs of a large number of fellow citizens who pay their taxes on time. The IRS therefore, must address and take actions on all cases of non-compliance. Among others, conducting a tax audit is one sure way of identifying defaulters; although it must be remembered that the selection of a tax return for examination does not necessarily imply that the taxpayer has defaulted or has been dishonest at the time of filing. More often than not, tax returns are randomly picked for audit and the purpose of selecting these returns is to check if the filings are accurate and in accordance with tax laws. In fact, in a lot of cases, an IRS audit may actually lead to a refund for the taxpayer.
How the IRS Selects Returns for Examination
The IRS uses a variety of methods to select returns for audit. Let’s take a look:
- One of the ways the IRS selects tax returns for verification is by obtaining information about individuals or companies that promote or participant in tax avoidance transactions. One such example, is the information received from John Doe Summons to pursue investors in tax shelters, donors of real estate, account holders, and many others.
- The IRS may also select returns based on the method of ‘Computer Scoring’. In this method, each return gets a numeric score. The IRS uses two types of scoring systems for this purpose, namely the Discriminant Function System (DIF) and the Unreported Income DIF system (UIDIF). These systems are used to calculate the ratings of taxpayers, based on the potential for change in income and for being unreported. Both the systems also consider the past filings by taxpayers. The 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 when selecting a return for tax audits. In certain cases, reports such as Form 1099 – the 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 selects the return for audit.
- Large corporations have several transactions in a financial year, which is why the IRS examines many large corporate returns annually to verify that the same are accounted and filed accurately for tax related purposes.
- Even in cases where the taxpayer’s return is related to an issue or transaction of another taxpayer, the IRS may select the related taxpayer’s return for the purpose of auditing both the returns. The taxpayers may be related in any manner, such as being business partners, investors, friends, or family, among others.
A Word of Advice
If your tax return has been selected for auditing this year, there is no need to panic. The IRS is sensitive towards the rights of its taxpayers and strives to make sure that they are protected, however, if you think that any of your rights are being violated, feel free to contact us and discover what makes us one of the most credible Dallas law firms specializing in taxation affairs.