The mystery of how the IRS selects tax returns for the IRS is not so complicated. There are certain factors that enter in the mix. The IRS can only audit so many tax returns.
President B. Obama has ordered the IRS to intensify its efforts to close the tax gap.
Some returns are selected based on information obtained by the IRS through efforts to identify promoters and participants of abusive tax avoidance transactions.
Some returns are selected for examination on the basis of computer scoring. Computer programs give each return numeric ?scores?. The Discriminant Function System (DIF) score rates the potential for change based on the IRS?s experience with similar returns. This has been going on for 60 years.
The IRS has specially trained personnel that review the highest scored returns and choose those they believe should be audited. They are very experienced personnel.
Large Corporation Annual Audits. These are audited by special groups within the IRS. Dollar amounts are usually over 5 million in sales.
Because of the large size of some corporations and the complexity of their returns the potential for error is great . Many times the companies can bury false deductions.
Information Matching Program
Some returns are examined because payers reports such as Forms W-2 from employers and Forms 1099 interest statements from banks, do not match the income reported on the tax return. Dividends and interest programs are always matched.
Related Examinations
Returns may be selected for audit when they involve issues or transactions involving other taxpayers (i.e. business partners or investors whose returns were selected for examination).
For example, when the IRS audits an S Corporation return it is likely to also examine the individual tax returns of its shareholders. This always happens, two for the price of one.
Also, when the IRS audits a divorced taxpayer who claims a deduction for alimony payments made to an ex-spouse, the IRS will, at a minimum, review the ex-spouse?s return to verify whether or not the alimony payments were included in income.
Local Compliance Projects i.e. Florida, fishing industry or restaurant industry
Area offices may identify returns for examination in connection with local compliance projects. Could be a flea market project.
These projects require high level management approval and deal with areas such as local compliance initiatives, investigation of specific return preparers or specific market segments.
Make sure your return makes common sense, if it does not, fear the reaper.
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