IRS Audit Factors to Be Aware Of

Know the Audit Selection Process

Doing taxes is hard enough.

There’s the tricky math and complicated forms that have to be filled out every spring tax season. But there’s also the constant record keeping and note taking throughout the prior tax year to claim lucrative deductions and credits.

So when you get that letter from the IRS stating that you’re going to be audited, the federal government has just upped the ante.

Because of your audit, documents will have to be produced and a possible knock on your door by an IRS agent could be in your future.

But knowing how the IRS selects tax returns for audits is the first step toward having a good audit defense.

There’s about a one out of 104 chance of being audited, and the IRS selects its targets very carefully. In fact, it’ll have to be a bit more careful as the IRS Commissioner has said that 100,000 fewer audits will be performed this year compared to last.

Some taxpayers are audited because they are deemed a possible party to a tax avoidance scheme. The IRS collects information on the organizers of such schemes, either from the courts, credit card companies, or businesses, and casts a wide net to root them out.

The IRS also uses a computer scoring system to determine which audits deserve an agent’s time and attention. It’s called the Discrimination Function System (DIF), and it gives each return a numerical score as to how likely a return will change if it’s audited.

The DIF score can also be tailored to determine how likely a tax return involves unreported income, and thus tax evasion. Of course, the higher the DIF score, the more likely the IRS will audit that particular return.

Parties to a transaction can also be chosen for audit if they each report inconsistent information to the IRS. For instance, if a bank reports Joe’s interest statement to the IRS, and Joe only reports half of that figure as interest income, that’s a red flag making Joe’s tax return ripe for audit.

Also, if Joe does business with a partner or investor whose own tax return was chosen for audit, then that’ll make his tax return more likely to be chosen as well. So, be careful who you do business with.

Whether you get audited because of a red flag or the luck of the draw, having a good team of tax attorneys and skilled negotiators behind you is important for a successful audit defense. If that’s your goal, take a look at our website to see how we can help.