Advanced Underwriting Consultants

Question of the Day – April 6

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client wants to know if her tax records will be audited by the IRS.  How can she tell?

Answer: The IRS generally gets involved with a taxpayer if

  1. the taxpayer’s return gets selected for review, or
  2. the taxpayer has failed to file a required return.

A return may be examined for a variety of reasons.

A return may be selected for examination on the basis of computer scoring. The IRS uses a computer program called the Discriminant Inventory Function System (DIF), which assigns a score to each individual and some corporate tax returns after they have been processed. If the program generates a high score under the DIF system, the return is likely to be selected for examination.

What kind of information on a return will generate a high DIF score?  The IRS won’t say specifically.  However, the philosophy behind the DIF is to identify those returns that, statistically speaking, are inconsistent with returns for taxpayers in similar circumstances.  Tax returns with the highest DIF scores represent returns with the highest probability of inaccuracy, and should provide the best chance for IRS personnel to collect additional taxes.

A return may also be selected for examination on the basis of information received from third-party documentation, such as Forms 1099 and W-2, that does not match the information reported on the return. Or, a return may be selected to address both the questionable treatment of an item and to study the behavior of similar taxpayers in handling a tax issue.

In addition, a return may be selected as a result of information received from other sources on potential noncompliance with the tax laws or inaccurate filing. This information can come from a number of sources, including newspapers, public records, and individuals.

In fact, the IRS has an entire department devoted to gathering information provided by tax informants.  The Whistleblower Office (you can’t make this stuff up) will even pay rewards to snitches.  The amount of award will be at least 15%, but no more than 30%, of the collected proceeds in cases in which the IRS determines that the information submitted by the informant substantially contributed to the collection of tax.

After an examination, if any changes to the tax liability are proposed, the taxpayer can either agree with those changes and pay any additional tax owed, or disagree with the changes and appeal the decision.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.