The IRS tax audit – Things to watch out for

For every tax return that the IRS receives, a corresponding tax score is assigned. In the event that the score received is higher than the preset score, the return will be reviewed thoroughly and may merit a tax audit.

The Discriminant Function System (DFS)

The IRS employs a software program called the Discriminant Function System and this performs statistical analysis on the returns received based on several factors and this program will be able to determine the errors and the liabilities on the tax returns. This is a highly sophisticated program that can even compare an individual’s income to that of similar professions within the same geographic locations. That is why it is making tax evasion more difficult each passing year.

The IRS Red Flags

Here are some of the things that may trigger an IRS audit:

1) Sudden Change in Income
If an individual’s income drastically changes; let’s say the person lost his job or suddenly got promoted to a CEO position; the individual has to be able to show proof and that the individual’s 1099 or W-2 must be able to back this up.

2) The Art of Rounding off numbers
If an individual has a tendency to round off every decimal figure to a whole number on their tax return, the IRS may see this as a case of sin of omission-commission and would raise flags. Reality is figures like interests, incomes, and payments are not usually a whole number.

 

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