by Fresh Start Tax | Oct 2, 2012 | IRS Tax Audit, Tax Problem Help
There is nothing worse than a letter from the IRS saying your tax return is selected for a IRS tax audit. After a couple moments of catching your breathe you start thinking are there any skeletons on that tax return and the thought of what else will the IRS find rifles through your mind. Will IRS audit more tax years and how much is this going to cost me are questions most taxpayers process.
The question you must ask yourself is this, “who do I really want to represent me ?”
If your tax return got audited in the first place why did my tax practitioner allow that IRS audit to happen, do I really what that same person to represent me.
We are a specialty tax firm dealing primarily with IRS problems. We have over 206 years of professional tax experience and over 60 years working directly with the IRS in the local, district and regional offices of the IRS. We are one of the premier firms for Tax Audit Defense.
Call us today to get a IRS perspective on your tax audit. We have former IRS Agents, Managers and Instructors represent you for a tax audit.
So, why was your tax return audited? Here are some of the most likely reasons.
How Are Tax Returns Selected For Examination?
The Internal Revenue Service examines (audits) tax returns to verify that the tax reported on the tax return is correct.
Some returns are selected for examination on the basis of the Discriminant Function System (DIF) score. Each return is given a (DIF) score by a complex computer program based on past information obtained by the IRS from specific examination programs The higher the score, the more likely that the tax return will be subject to audit.
The specifics of the DIF score program is not public, but certain items appear to cause a return to be selected for examination, such as participating in a tax shelter, large charitable contributions, home office deductions, casualty losses, large travel and entertainment expenses. These are the deductions most likely subject to abuse by taxpayers.
Other returns are selected under the Unreported Income DIF (UIDIF) score. This type of computer selection is based on the potential of the IRS finding unreported income on this type of selected tax return.
The specifics of this method of selecting a tax return for unreported income are not public, but certain information appear to cause a return to be selected for examination. Such information would include the occupation of the taxpayer and the type of business activity. potential exists as to omitted income.
After the tax returns has been has been selected under the DIF and UIDIF program, the tax returns are manually screened by an IRS employee known as a “classifier” in the Classification Section of an IRS Service Center.
This individual will review any attachments to the return and consider other data that a computer cannot detect. Finally, he will select the items on the tax return that will be examined.
Some tax returns are selected at random as part of tax compliance studies to update and reformulate its basis for audit selection formulas (DIF score) and is called the TCMP (taxpayer compliance measurement program).
This is in-depth audit where every item on the tax return is examined and the examiner must fill out an extensive questionnaire concerning each audit and the results. Based on these findings, the audit selection formula is adjusted to make it better in selecting tax returns for examination.
Still other tax returns are selected because payer reports of income, such as W-2’s or Form 1099’s do not mach the income reported on the tax return.
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.
From this information, the IRS will perform third party requests to obtain additional information before starting the audit. This type of audit will include the disclosure of foreign bank accounts and other sources of foreign income.
Other returns may be selected for audit when they involve issues or transactions with other taxpayers, such as business partners or investors whose returns were selected for examination.
Thus, if a partnership is examined, the partners will also be examined if the partnership is adjusted or the IRS wants to determine whether the partners are allowed the flow-thru losses. If a corporation is examined, the shareholders would also be examined to determine whether they received any distributions from the corporation.
Still others may be selected for examination based on newspaper articles, police arrests and grand jury investigations. A newspaper article might include information on an individual who embezzled funds from a client. The embezzled funds are taxable income and more likely these funds were not included as income on the tax return.
A person may be arrested for narcotics and the police find cash on him. This cash more likely than not represents omitted income.
Finally, a person may be selected for audit because of an informant. There is a federal program known as the IRS Whistle blower Office which pays money to people who blow the whistle on persons who fail to pay the tax that they owe.
If the IRS uses information provided by the whistle-blower, it can award the whistle-blower up to 30 percent of the additional tax, penalty and other amounts it collects.
Thus, a person could be audited based on the information provided by a business acquaintance, relative or even your former spouse!
by steve | Jun 3, 2010 | IRS Tax Advice, Tax News
One of the questions Fresh Start Tax ( 866-700-1040 ) is asked the most is:
“How and why the IRS Selects Tax Returns for Audits?” Here is what the Internal Revenue Service reveals
FACTS: Did you know that:
* The IRS audits a total of 1,391,581 tax returns a year.
* The IRS field agents complete more than 310,000 audits by office or business visits a year.
*
The IRS completes over 1,081,152 correspondence audits a year.
IRS Policy Statement P-4-21. It states “The primary objective in selecting returns for examination is to promote the highest degree of voluntary compliance on the part of taxpayers”.
The examination plan
The plan that is used by the IRS is based on long range coverage planning, and objectives on the resources requested in the Congressional Budget. From this, there is an established plan where staff years are allocated to all area IRS offices using resource allocation and a prescribed methodology. Each Area Manager of the IRS is responsible for preparing an area response following instructions from the National Headquarters.
Staffing for the IRS audit
Staffing is based on the examination priorities that differ from office to office and region to region, front loaded programs set up before hand, historic examination rates adjusted to yield sure ended results and audits that match experience of the personnel.
Front loaded programs
Front Loaded programs are those audits that headquarters has determined are very important and a considerable amount of time must be spent on these programs and activities. Each area has discussions within management as to what the programs should be for each region, district, and office. Some of the programs are:
* Special enforcement programs – An example of this may be compliance of all flee market vendors. A program I was involved with.
* High Income non-filers – IRS would get their information from a match program of w-2’s and 1099’s and match up social security numbers against filed returns.
* Abusive Tax Avoidance – This could be in the area of offshore activities.
* Offshore credit card program
* National Research programs – Those set forth by management after doing a trends project.
The IRS makes sure there is balanced coverage.
The National Office makes sure there is a balance approach for audit return delivery and tax compliance. Resources and inventory and the size of personnel all go into this formula. The focus is blended into these areas:
1.
Individual returns less than $100,000.
2.
Individual returns greater than $100,000 but less than $200,000.
3.
Individual returns greater than $ 200,000.
4.
Small Business Corporations.
5.
Small Business Flow-Through Entities – S Corporations, Fiduciaries and Partnerships.
Classification Plan
The IRS will prepare a plan, which is classified. A National DIF score indicator is placed on all Federal Income tax returns that are filed. Each return has certain factors that contribute to its score such as Gross Income, Adjusted Gross Income and line item expense. There are several classified secrets that go into the DIF score.
A ratable ordering tool and guide are also available on the Exam Planning and Delivery Web site, .http://sbse.web.irs.gov/epd/
DIF Cutoff Score This is BIG STUFF
1.
The IRS will calculate the Area DIF cutoff score for each activity code, giving consideration to the selection rate. This is the lowest DIF score necessary to secure the number of returns required for audit. For example, if the return plan shows 225 returns for an activity code and the selection rate is 70%, the IRS will need to order 321 returns (225/70%). The DIF Cut off Score is 500. The number of returns with DIF scores greater than 550 is 280, which is less than the number of returns required, so the lowest DIF score on an ordered return will be in the range of 500 to 550 and the DIF cutoff score is 500. This is the IRS example as found in the IRS IRM section 4.
Where your case is worked
1.
Examination inventory is assigned to IRS offices based on ZIP codes, using the Look up Tables at Martinsburg Computing Center.
High Assault Risk Areas
1.
Certain ZIP code areas are identified as High Assault Risk Areas. There are special instructions the IRS has regarding these audits. These returns will be audited.
Survey of Examination Cases. The IRS can look over your case and close the case with an eyeball look.
1.
While cases should be selected and started in accordance with all guidelines, in a limited number of circumstances, there may be returns that appear in the “judgment of the examiner and manager” to warrant survey without taxpayer contact. That is to not even contact the taxpayer.
2.
Cases delivered to the IRS area manager will generally fall into one of three categories: mandatory work, strategic (priority program) work, and non-strategic work.
1.
Mandatory work includes nationally-coordinated research projects such as NRP and employee audits (excludes “new” IRS employee audits)
2.
Strategic work is identified annually in the Exam Program Letter which can be found at http://sbse.web.irs.gov/Exam/ . The procedures to survey strategic work and referrals from other business units, “new” employee audits and cases with previous taxpayer contact require an explanation for the rationale for the survey.
3.
Cases that are not mandatory work, strategic work, a referral from another business unit, and are not part of an employee examination or research study may be surveyed based upon the professional judgment of the examiner with concurrence of the immediate supervisor.
3.
Here are some factors to consider when determining whether to survey strategic work:
1.
Taxpayer is in bankruptcy
2.
Taxpayer has suffered an extreme hardship or illness
3.
Taxpayer is deceased, or
4.
Examiner has additional information that was not available during classification.
5. This is in the complete judgment of the IRS tax auditor.
From year to year the IRS changes their programs to keep everyone honest. However, after years of experience, a trained eye can know what tax returns will be pulled for audit.
Should you have any IRS needs, please call our professional staff made up of former IRS agents, to help solve your case.
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