As a former IRS agent the number one question I am asked is, “why does IRS audit a tax return.”
While there are variety of reasons the IRS audit tax returns, the chief reason is because of the DIF score.
That stands for, Discriminate Index Function.
Every return filed goes through an numerical DIF audit and every return is rated/ranked/scored by the Internal Revenue Service.
But the DIF process is responsible for more IRS tax audits than any other of the IRS processes.
Why you ask, this type of IRS tax audits get results.
Each year more filters are added and it process becomes more deadly and brings a greater ROI.
So what is the” DIF ? ”
Discriminate Index Function
It is a mathematical technique used to classify income and expenses on tax returns as to successful IRS tax audit potential.
Under this concept, formulas are developed based on available data and are programmed into the computer to classify returns by assigning weights to certain basic return characteristics.
These weights are added together to obtain a composite score for each return processed. This score is used to rank the returns in numerical sequence (highest to lowest).
The higher the score, the higher the probability of significant tax change.
The highest scored returns are made available to IRS audit agent and eyeballed so see what tax returns have the greatest audit potential and bring to the field.
IRS has mandates on how many tax returns they audit based on examinations guidelines from the National office and expected revenue, so it only make sense the IRS plans to attack the low-hanging fruit.
IRS commenting on the DIF process:
Its a computer scoring audit.
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 past IRS experience with similar returns.
The Unreported Income DIF (UIDIF) score rates the return for the potential of unreported income.
IRS personnel screen the highest-scoring returns, selecting some for audit and identifying the items on these returns that are most likely to need review.
More good info on the DIF Score.
The program takes into consideration your:
1.income,
2.the size of your family,
3.where you live, zip code,
4.how your money is earned,
5. expenses taken,
6. tax credit,
7, business income compered to business losses,
8.and key line items on your tax return.
There are about 22 filters IRS uses.
IRS has an algorithm it runs all returns through to see if a tax return has audit potential.
Your DIF score is far from the norm, BINGO, you win the nasty gram from the IRS.
If you know that your return has what we refer to as “red flags,” you need to be extraordinarily careful to keep accurate records and receipts.
Another interest of note, just because your tax return has a high DIF score does not necessarily mean that your tax return will be audited.
A human auditor will look at the return to confirm that this tax return has audit the potential.
Big key tip
If you’re submitting a tax return that you believe has red flags, attach the documentation to the return so when the auditor is looking at the return to score, the information is attached to shield off the audit.
Example:
A great example of this is if you tithe to a church and that tithe is well above the norm, actually enclose the statement and the check so when the auditor is looking at the tax return he can nix the tax audit.
thats all folks
