Wondering how you got chosen to be audited by the IRS? There are several avenues that may lead to the dreaded IRS examination. If you omit income that was reported to the IRS, their computers will pop-up and send you a notice to correct the error. This may get your return pulled for a closer look. Be sure to include all 1099s, w-2s, etc. If the income listed on the form does not belong to you, contact a tax professional for help.
Another way that computers help the IRS find potential audit targets is your DIF score. What’s that? It is a Discriminant
Inventory Function System score. We don’t know how it is calculated but the IRS does! Tax returns are scored automatically and those that have a high score might be audited.
The formula for a DIF score is a closely-guarded IRS secret but we can speculate that very high deductions for your income or similar anomalies could trigger an audit. However, if you have good records for unusual deductions — by all means, take the deductions. Most likely, the DIF score formula is a combination of several factors; we just don’t know.
In order to calculate DIF scores, the IRS seems to do research. You may be selected for a personal or business income tax audit to help the IRS fine-tune its audit-selecting prowess. Many audits under the National Research Program are very, very thorough. I sincerely hope this does not happen to you.
Instead, may you be fortunate enough to win a big prize, like the first season of Survivor. The IRS might check on newsworthy winners to be sure they’ve paid taxes on their bounty.
Finally, I truly hope that no one dislikes you enough to tattle to the IRS on you. If they report your alleged tax indiscretion on Form 211, the source can get a piece of any money recovered by the IRS from you. Depending on your tax bracket, this could be a powerful incentive, so choose your friends and associates wisely!
Well, forewarned is forearmed. I hope these insights into the IRS audit factory are helpful or scary, or both! With good representation, many audits can be resolved with the least possible hassle. An excellent place to start if you are being audited is Pub 556 and the phone number of a good tax professional. As I always say – whatever you do, do not ignore an IRS notice!