Tax season will be over in a week.
The IRS has already begun the process of selecting returns for audit and it will accelerate that process after April 15th.
President Obama has ordered the IRS to intensify its efforts to close the tax gap and we expect the IRS to select a record number of returns for audit during his first term.
The IRS selects returns for audit in a number of different ways.
Potential participants in abusive tax avoidance transactions
Some returns are selected based on information obtained by the IRS through efforts to identify promoters and participants of abusive tax avoidance transactions.
Examples include information received from “John Doe” summonses issued to credit card companies and businesses and participant lists from promoters ordered by the courts to be turned over to the IRS.
Computer Scoring
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 (i.e. upward adjustments of taxpayer’s tax liability) based on the IRS’s experience with similar returns.
The Unreported Income DIF (UIDIF) (PDF) rates returns for their potential for unreported income.
Specially trained IRS personnel review the highest scored returns and choose those they believe should be audited.
Large Corporation Annual Audits
Because of the sheer size of some corporations and the complexity of their returns the potential for error is great.
A failure to ensure in advance that errors are not made could be very costly to the government.
The IRS audits these companies every year.
Information Matching Program
Some returns are examined because payer 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.
The IRS usually audits these returns through the mail unless the omissions of income are unusually large and the IRS has reason to believe they were intentional.
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.
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
Area offices may identify returns for examination in connection with local compliance projects.
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.
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1 5 Surest Audit Red Flags // Jun 29, 2009 at 4:54 am
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