Why are tax returns selected for a IRS tax audit?
The answer is a simple one. The IRS has guidelines and boundaries they have placed over the years and they can pretty well tell which tax returns will yield them IRS audit bucks.
I worked for the IRS for 10 plus years and it is easy to tell which tax returns the computer system will kick out for a IRS tax audit.
On staff at Fresh Start Tax LLC we have over 60 years of direct work experience in the local, district and regional offices of the IRS.
Reason Tax Returns are selected for a IRS tax audit.
There are many reasons tax returns are selected for audit and the one answer used across the board is a simple one, your tax return fell out of the national standard based on your Gross Income and line item inputs.
IRS keeps very close statistical numbers on what the national norms should be.These formulas are secret, kind of like the formula for Coca Cola.
Each tax return is coded into the IRS computer system by line items. If 5 or more of your line items run to high there is a good possibility that tax return will be bouncing out for a IRS tax audit.
Every tax return is graded and depending on the IRS budget, the IRS will audit those tax returns with the highest scores.
Different Types of IRS Tax Audits
1. The first type of tax audit is called the TCMP or the “audit from hell”.
IRS audits each and every line item on your tax return. IRS will randomly pull some 10,000 tax returns across the broad spectrum. The results from these audits are used by the IRS to compile statistical information that will be used to find areas of negligence.IRS will then target the highest area of abuse.
2. The second type of IRS audit and the most popular is the DIF.
This is the number one source of tax audits. Your tax return will be evaluated based on your “DIF” score, a set of IRS formulas known as the “Discriminate Function System.”
About 80% of all tax returns audited are selected by the DIF system which compares deductions, credits, and exemptions ( line items) with the norms for similar taxpayers in each income tax bracket.
3. Market Specialization Program.
These audits are the most popular type of business audit for larger corporations . IRS has trained agents in all walks of businesses. They have studied for hundreds of hours and have a complete understanding of the unique features of that particular business. An example of this is agriculture. Special trained IRS Agents will only audit the agriculture sector so they get to develop a market specialty in that area. IRS has a whole host of specialization programs.
4. High Dollar Cases
Although the overall individual audit rate is about 1.10%, the odds increase for higher income filers. IRS statistics show that people with incomes of $200,000 or higher had an audit rate of 3.87%, or one out of slightly more than every 25 returns.
If you make over one million dollars there’s a one-in-eight chance your return will be audited.
5. Matching programs of the IRS. ( W-2, 1099 )
The IRS gets copies of all 1099s and W-2s you receive from third parties. IRS computers match up the W-2’s and 1099’s with the income shown on your return. A mismatch sends up a flag and causes the IRS computers to send out a match audit letter. 1.4 million letters like this are sent out each year.
If you receive a 1099 or W-2 showing income that isn’t yours or listing incorrect income, get the issuer to file a correct form with the IRS immediately .
6.. Large Charitable Deductions.
IRS computers know what the average charitable donations should be for folks at your income level. IRS knows this is a area of great abuse. If you deduction falls out of the normal range expect a IRS audit letter. Many times we encourage taxpayers who have a large deduction to attach it to your tax return.
7. Claiming the home office deduction.
This is a huge target for the IRS. Many taxpayers feel their whole house should be written off and take liberties of adding many extras when taking this deduction. Be careful to only take what the law allows. Call us for more details.
7. Deducting Travel and Entertainment
Talk about abuse. IRS will ask for every receipt and complete documentation for travel and entertainment. They will want to know who you took and how that relates to future business income. Advice here, document, document, document.
8. Claiming 100% business for you vehicle.
Another favorite target of the IRS. Most taxpayer think the IRS auditor will never go over a auto log. Think again. Some agents live to review auto logs as boring as it sounds. They will compare your daily business with the travel log to make sure everything matches up.
9. Failing to report a Foreign Bank Account FBAR
With the breakthrough a UBS other governments and banks caved in to the US and turned over the names and the accounts for taxpayers with foreign bank accounts. After the first 3 years the Feds have collected over $5.5 billion. IRS will be on the prowl. 33,000 persons came forward and IRS knows this is just the tip of the iceberg.
10. Engaging in currency transactions
The IRS gets many reports of cash transactions in excess of $10,000 involving banks, casinos, car dealers and other businesses, plus suspicious-activity reports from banks and disclosures of foreign accounts. Be careful not to play the $9500 game to avoid detection.
You can stay out of an IRS audit. Call us and allow us to audit proof your tax return. 1-866-700-1040
