IRS Audits: How Returns Are Selected For Examination

 Email Article |  Twitter |  Facebook |  digg it |   delicious |   StumbleUpon |  reddit 

The IRS examines (audits) tax returns to verify that the tax reported on that return is correct. Almost everyone cringes when the word "audit" is introduced in conversation, formal or not. Although I am classified as the latters I just mentioned, selecting a return for examination does not always suggest that the taxpayer made an error or was dishonest. In fact, some examinations result in a refund to the taxpayer or acceptance of the return without change.

The overwhelming majority of people file returns and make payments timely and accurately. As such, they have a right to expect fair and efficient tax administration from the IRS, including verification that taxes are correctly reported and paid. Below describes some fundamental rights taxpayers have when dealing with the IRS. We'll move to the "meat & potatoes" afterwards.

Taxpayer Rights

The IRS trains its employees to explain and protect taxpayers' rights throughout their contacts with taxpayers. These rights include:

• A right to professional and courteous treatment by IRS employees.
• A right to privacy and confidentiality about tax matters.
• A right to know why the IRS is asking for information, how the IRS will use it and what will happen if the requested information is not provided.
• A right to representation, by oneself or an authorized representative.
• A right to appeal disagreements, both within the IRS and before the courts.

The purpose of throwing the above points in this article before discussing anything else is because many of you reading this are currently dealing with a tax problem or debt and may even have been selected by the IRS for examination. These points also serve as key things to remember when dealing with the IRS.

Should you decide to discuss your tax issue directly with the IRS, no matter how intimidated you get and regardless of how difficult it is to produce documentation their requesting, ultimately, the system is built on ethical grounds. Of the hundreds of publications the IRS have, those bullets can be found in the first publication. Publication 1: Your Rights as A Taxpayer.

Before ending the article, as the title states, below is how the IRS selects tax returns to audit. 

How Returns Are Selected for Examination

The IRS selects returns using a variety of methods, including:

• 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, 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.
• Large Corporations - The IRS examines many large corporate returns annually.
• Information Matching - Some returns are examined because payer reports, such as Forms W-2 from employers or Form 1099 interest statements from banks, do not match the income reported on the tax return.
• Related Examinations - 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.

Other - Area offices may identify returns for examination in connection with local compliance