How the Internal Revenue Service Selects and Audits Individual Income Tax Returns (2024)

FAQs

How the Internal Revenue Service Selects and Audits Individual Income Tax Returns? ›

Generally, the problems are identified by a computer. District offices select returns randomly sometimes for special research programs, but generally the returns are selected because they have good audit potential. The potential is discovered by a computerized system called the Discriminant Function System (DIF).

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.

Never give the auditor more information than requested. Answer only the questions asked. Provide succinct answers, and always respond honestly and briefly. If you're unsure of how to answer a question, make a note of it and offer to get back to the agent with answers.

Unreported income

The IRS receives copies of your W-2s and 1099s, and their systems automatically compare this data to the amounts you report on your tax return. A discrepancy, such as a 1099 that isn't reported on your return, could trigger further review.

What is a DIF Score? The IRS uses a computer generated program that compares your return to others in your income bracket and compares the differences in deductions you are taking against the average in your group.

A tax audit is done by a certified Chartered Accountant who verifies the books of accounts maintained by the taxpayer and issues a tax audit report in the prescribed format. The tax audit report contains various details such as gross receipts, expenses, depreciation, tax liability, etc.

Tax Audit is an examination of underlying records to determine whether a taxpayer has correctly reported its tax liabilities. Tax audits are more detailed and extensive than other types of examinations such as desk examination, compliance monitoring/reviews.

Review Your Deductions: Review your expenses, deductions and credits on your tax return to ensure you are not missing anything in your favor. Just because the IRS is looking for issues that increases your taxable income does not mean you can't introduce new evidence that was omitted on your original tax returns.

The IRS performs audits by mail or in person. The notice you receive will have specific information about why your return is being examined, what documents if any they need from you, and how you should proceed. Once the IRS completes the examination, it may accept your return as filed or propose changes.

Taking unusually large deductions

So, if you claim a large deduction that doesn't make sense for someone in your income range, the IRS computers are going to flag that deduction. For example, if you make $50,000 during the year, the IRS is going to be suspicious if you claim $20,000 in donations to charity.

Does IRS check every tax return? ›

The IRS mostly audits tax returns of those earning more than $200,000 and corporations with more than $10 million in assets.

The taxpayers most likely to be audited are those with annual incomes exceeding $10 million — about 2.4% of those returns were audited in 2020. But the second most likely group to get audited are low- and moderate-income taxpayers who claim the Earned Income Tax Credit, or EITC.

Generally taxpayers must pay at least 90 percent of their taxes throughout the year through withholding, estimated or additional tax payments or a combination of the two. If they don't, they may owe an estimated tax penalty when they file.

But higher-income earners can face increased scrutiny. The odds rise for those reporting income over $200,000 and, according to research from Syracuse University published in January, millionaires are the most likely to be audited out of any income bracket.

Generally, if you fail an audit, you get hit with a bigger tax bill. The IRS finds that you didn't pay the correct amount of taxes so it utilizes the audit to recover them. In addition to penalties, you're required to pay the additional taxes as well as the interest on those taxes.

The taxpayers most likely to be audited are those with annual incomes exceeding $10 million — about 2.4% of those returns were audited in 2020. But the second most likely group to get audited are low- and moderate-income taxpayers who claim the Earned Income Tax Credit, or EITC.

(Source: IRS Data Book, 2022.) Overall, the chance of being audited was 0.2%. So, only one out of every 500 returns was audited.

The IRS mostly audits tax returns of those earning more than $200,000 and corporations with more than $10 million in assets.

As it audits more taxpayers, the IRS says there are some groups it will be targeting more: Wealthy individuals whose income tops $10 million. Companies with assets above $250 million. Complex partnerships with assets more than $10 million.