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How To Avoid A Tax Audit

How Does The IRS Choose Which Returns To Audit?

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The IRS uses several means for identifying which returns to audit. These include:

Discriminant Function System (DIF): DIF is a computer program that assigns weights to various features of your return, such as the amounts of your deductions or the inclusion of a Schedule C. If the total score it gives your return is above a certain level, the IRS will consider auditing it.

Computer Matching Program: The computers at the IRS automatically check the information on your return against the information reported by third parties. Items that are matched include social security numbers, W-2 statements, and 1099s. For example, the computer will check to see that what your employer said it paid you matches what you put on your tax return. If the information doesn’t match, you will automatically receive an inquiry about it from the IRS. Unless your return is questioned for other reasons, these issues are usually satisfied entirely through the mail.

Identification of Unallowed Items: Items that are illegal according to the tax code are also automatically identified. Examples of this include claiming surviving spouse status for more than two years, or deducting personal legal expenses. If problems are found, you’ll receive a letter explaining the proposed corrections and charging you for the amount of additional tax that results.

Federal-State Comparison: Reports from state agencies are compared with your federal return.

Mathematical or Clerical Errors: The IRS will automatically find and correct any mathematical or clerical errors on your return, such as incorrect addition or calculation of a credit. This type of error will usually only result in a correspondence audit.

Information received in other audits or from informants: The IRS acts on “tips” received from other people. The IRS is also more likely to audit your return if you were previously audited and owed additional taxes as a result. Contrary to popular belief, however, if you were previously audited but didn’t owe anything extra as a result, your chances of being audited again are still the same as if you never had been.

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