None of us like to think about it, but it is useful to know how the IRS selects tax returns for auditing. One way the Internal Revenue Service makes its selections is to use information from a return, adding numbers into a formula to arrive at a DIF (discriminate function) score. A return with a high score has a greater chance of being audited, and up to 60% of such returns are selected by this method. In calculating your DIF score, the formula considers:
* Your business. If you deal largely in cash, your return will face greater scrutiny.
* Your location. Your chance of an audit depends on your geographical area. The
* IRS in Galt CA
* does not offer a regional breakdown, but the most frequently audited state is Nevada, with California, Colorado and Alaska not far behind.
* Deductions. A return with large deductions is more likely to face an audit. Certain deductions, such as travel, entertainment and automobile expenses may be a red flag to the IRS.
* Business losses. If your business shows a loss, you are more likely to get audited, especially if losses are consecutive.
* Business organization. A sole proprietor will get a higher score than a corporate or LLC owner, and is more likely to get audited.
The Matching Program
When a client pays a contractor more than $600 for services during a tax year, they must report that payment to the IRS on form 1099-MISC. The IRS matches that information with reported incomes, using SSNs and other identifiers. A discrepancy usually results in a correspondence audit.
Being Targeted for an Audit
Every tax year, the Internal Revenue Service pays attention to certain high-fraud taxpayer groups, such as cash businesses. Other targets for an audit include dentists, physicians, CPAs (such as those at Symons Accountancy), sales staff and lawyers. The IRS also goes after those with trusts and offshore accounts, but being rich doesn’t make you a target.
Referrals
Some tax audits come about because of inter-agency referrals. If the California tax department gives the IRS in Galt CA a tip, they’re likely to act on it. Some tips come from citizens, such as vengeful ex-spouses or disgruntled business partners. There are ways to minimize your chance of an audit, but sometimes it comes down to simple bad luck. As long as you can document your deductions, you should get through the tax season unscathed.
