Thursday, January 28, 2010

How Does The Irs Choose Which Returns to Audit

The Examination (Audit) Process website

FS-2006-10, January 2006

The IRS selects returns using a variety of methods, including:

Potential participants in abusive tax avoidance transactions — Some returns are selected based on information obtained by the IRS through efforts to identify promoters and participants of abusive tax avoidance transactions. Examples include information received from “John Doe” summonses issued to credit card companies and businesses and participant lists from promoters ordered by the courts to be turned over to the IRS.

Computer Scoring — Some returns are selected for examination on the basis of computer scoring. Computer programs give each return numeric “scores”. The Discriminant Function System (DIF) score rates the potential for change, based on past IRS experience with similar returns. The Unreported Income DIF (UIDIF) score rates the return for the potential of unreported income. IRS personnel screen the highest-scoring returns, selecting some for audit and identifying the items on these returns that are most likely to need review.

Large Corporations — The IRS examines many large corporate returns annually.

Information Matching — Some returns are examined because payer reports, such as Forms W-2 from employers or Form 1099 interest statements from banks, do not match the income reported on the tax return.

Related Examinations — Returns may be selected for audit when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for examination.

Other — Area offices may identify returns for examination in connection with local compliance projects. These projects require higher level management approval and deal with areas such as local compliance initiatives, return preparers or specific market segments.

Just Remember an IRS Audit does not have to be stressful or painful.
1. Take the time necessary to gather and organize your information.
2. Make sure you have a income documents. (w2's, 1099's, if you own a business sales receipts, even cash income if you receive tips and did not report them to your employer your employer may have reported an estimated amount that you should have earned based on others that do the same job or the IRS will impose an amount based on other tipped employees. Always be honest.
3. Make sure you have all you documents and receipts for all expenses and deductions.
4. Keep all records for a minimum of 3 years, some for 7 years and others like your tax returns forever.
5. Should you be audited: First Don't Panic if you have followed the simple steps above your audit will be painless.
6. Should you be audited: If you did not follow the above steps, again don't panic.
Provide actually what the IRS Audit letter asks for. If reading the letter and you need help give us a call and we will help you.

But you will need to gather the documentation that the IRS requires. Like income (w2's, 1099's sales receipts) deductions:( expenses, like actual receipts for even stamps, canceled checks, mortgage interest etc.)
If you do not have this documentation: You must get it or deductions will be disallowed. If you don't know how to locate the documentation give us a call and we will help you.

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