So you’ve been AUDITED (Why ME?).

Generally speaking, you can blame most audits on the IRS computer. Every year your IRS tax return data is sent to the IRS National Computer Center and is analyzed by the Discriminant Function. Your return is then given a numerical DIF score. The higher the score, the more potential a return audit has. The DIF scoring system is top secret. So few people (including those in the IRS) know how it works and why a return is given a particular score. Hundreds of variables on a return can be weighed by the IRS computer. No one really knows.

Around 1 in ten tax returns (those with the highest DIF) are selected for further review. IRS classifiers (people – not computers this time) then look at this batch and recommend 10% for audit.

The final say on who gets audited is made by examination group managers at your local IRS offices. These examination group managers then supervise and assign the auditors. Auditors are assigned according to their experience and expertise. Managers decide wheter you will be audited by the local IRS office or if you will get the more rigorous field audit.

Each local IRS office has its own screening process. They all take into account the expense levels in their individual communities. For example, people are more likely to claim car expenses in Los Angeles than in Manhattan. Group managers select about 10% of all the tax returns received from the service center classifiers to be audited. Historically only about 1% of all returns are actually audited. In recent years this number has decreased below 1% but it is expected to rise again in the future.

The IRS manual states that only significant items should be examined. The IRS’s overall view of the return as well particular items that seem questionable are what determines “significance”.

Here are a few examples of what is likely to figure into the audit process:

Comparative size of an item to the rest of the tax return.
For example, a $10,000 expense on a return reporting $30,000 in income. The same expense on $100,000 income would not be as significant.

An item on the return doesn’t suit the taxpayer.
For example, you work out of your home, but claim travel expenses to and from work.

An inappropriate item is reported on the return.
You report $1500 worth of credit card interest as a business expense. The IRS might suspect this is personal rather than business.

Data on your return that appears you are cheating.
Not providing all of your information or filing a return with missing schedules will definitely raise suspicion.

The more you earn…
If you make more than $100,000 a year the IRS is more likely to target you for an audit.

Self Employed
Sole proprietors are four times more likely to be targeted by the IRS than wage earners.

Claiming losses from investments and businesses on your tax return.
The IRS

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