Mathematical Corrections
The IRS uses computers to find mismatches between names and social security numbers, earned income credit qualifications, filing status issues, estimated tax and withholding tax errors, estimated tax assessments, late filing penalties and interest, or any number of other issues. Sometimes these audits require an appointment and sometimes the IRS simply recalculates your tax return with a new tax balance due, including interest and penalty assessments.
Income Document Matching
IRS computers match all pertinent forms, such as 1099s, W-2s, and K-1s relating to your name and social security number to what you report on your tax return. If the numbers do not match your tax return, you will be audited. The audit could begin with a phone call, an in-person meeting, or simply a bill itemizing the additional taxes, interest, and penalties.
DIF Scoring
The IRS scores every tax return with a discriminate function (DIF) number. It is based on secret calculations they use to identify income tax returns with the highest likelihood of tax change on audit. The DIF score increases for various items, such as Schedule C or auto expenses, and decreases for other items (such as using a paid preparer). IRS classifiers review high DIF score tax returns and select which ones and which items will be audited.
Additional Documentation Requests
These audits require you to mail documentation for an item or items on your tax return to an IRS auditor. This may include receipts and proof of payment for the items they are examining. For example, if they are auditing your charitable contributions, you will need to provide copies of the receipts from those organizations and copies of the canceled checks to verify your reported numbers. The IRS will disallow any contribution that you cannot prove and will then issue a bill for the balance due, including interest and penalties.
Face-to-Face
These are the audits that have received the most publicity in the last several years. Congressional pressures on the IRS and an increase in funding have dramatically increased audits. This type starts with a telephone call or letter from the IRS. The telephone call tactic is designed to get you to volunteer information long before the face-to-face meeting. During the audit appointment, the IRS will examine items on your tax return that could result in a larger tax bill or an audit of other tax years.
National Research Program (NRP)
This audit is the most intrusive by its very nature, as it thoroughly examines tax returns line by line. So, for instance, if you claimed a child as a dependent, you will need to provide the birth certificate to prove that the child is yours and proof that the child was actually living with you in the tax year being audited. It continues on from there, often through every line on your income tax return.
Random
Selecting a return for audit does not always suggest that an error has been made. Returns are selected using a variety of methods or the IRS can randomly select an individual tax return for audit.
Financial Status
Your standard of living and other related factors could also trigger a tax audit. Auditors use public records and statistical data to trace spending and changes in wealth to prove that you have unreported income. Some of these records include tax returns for all open years, credit reports, property tax records, business license applications, motor vehicle records, 1099 information, currency transaction reports and SEC filings. Due to perceived abuses of these techniques, Congress limited their use in 1998, stating that the IRS cannot use financial status or economic reality techniques unless they have a reasonable indication that there is a likelihood of unreported income. The statute (law) does not define "reasonable indication."
IRS Special Projects
The IRS annually identifies
The Dirty Dozen - 12 of the most blatant tax scams. They use this list to identify income tax returns they will audit. Here is the most recent list:
www.irs.gov.
.png)
