How does the IRS select which returns to audit each year? What is the IRS Discrimination Function System (DIF) and what additional factors increase your likelihood for an IRS audit? What are some of the primary IRS audit targets and what should you do if you are contacted for an IRS audit?
The process begins with an automated system that analyzes all returns surrounding issues the IRS believes to be a significant source of unreported income. Recently, these targets can include offshore accounts, assets and income reported on IRS FBARs and other forms, 1099 employees, high income individuals, foreign trusts and corporations and PFICs. The DIF algorithm assigns a value to every return based upon an algorithm that is as secret as Google’s search engine algorithm. The higher the DIF score, the more likely it is your return will be selected for an audit. The system will also plot a “bell curve” which shows the IRS returns which fall outside of the larger statistical “normal” for any specific targeting issue.
The IRS audit resources have been cut back recently due to severe budget cuts and personnel issues. However, this increases the chances an income above $200,000 will trigger an audit. This is simply a “bang for the buck” strategy that realizes larger numbers will equal a larger debt owed to the IRS at the end of the audit. This allows the IRS to generate more income per auditor. Your chances of being audited if your income exceeds $200,000 is presently about 1 in 38.
What should you do if you are contacted by the IRS for an audit? The first and most important thing to know about an IRS audit is this: it is not in the interest of the US taxpayer to speak directly with the IRS. The IRS begins with one tax year, and a specific strategy for your audit. The IRS revenue officer knows how much they intend to collect from you before you are ever contacted. The goal of the auditor is to expand the audit into additional areas of examination and when possible to expand the audit into prior years. Usually, the IRS begins by questioning deductions and the written evidence that supports those deductions, as well as unreported income and claiming personal expenditures as business expenses.
If you are selected by IRS audit targets and have been contacted for an IRS audit a we invite you to call the experienced IRS audit attorneys at Allen Barron for a free consultation at 866-631-3470.