Why Did the IRS Audit Me?
By Steven A. Leahy
Many of our clients have lived through an audit before seeking our help to resolve their IRS problems. The audit will leave them with a balance they are unable to pay. A common question is “Why did the IRS audit me?”
The IRS calls an audit an “Examination of Returns.” The IRS accepts most federal tax returns just as they are filed. Some returns, however, are selected for review. The IRS selects returns for audit by computerized screening, random sample, or by an income document matching program. An examination can take place in several ways. Some audits are handled exclusively by US Mail, in the taxpayer’s home or place of business, at an IRS office or at your representative’s office. The time, place, and manner of the audit are negotiable.
Taxpayers are free to represent themselves, and, if the taxpayers filed a joint return, either spouse, or both, can meet with the IRS. Taxpayers are also free to hire a representative to represent them in an audit. The representative must be a federally authorized practitioner – attorney, certified public accountant, an enrolled agent, an enrolled actuary, or a tax preparer (as long as they prepared the return in questions and signed it as the preparer).
The first audit selection process is computerized screening, and it works on a scoring procedure. The IRS uses a computer program called the Discriminant Inventory Function System (DIF). Exactly how the system scores a return, and the statistical formula used, are closely guarded secrets. DIF assigns a score to each return based on oddities and discrepancies.
For example, if your income or deductions change dramatically from one year to another, the IRS will take notice, and your chances of an audit increase accordingly. Deductions that are too great a percentage of your income may cause an audit. Lots of home office deductions may cause an audit. Not filing your return on time without applying for an extension, or not paying the full tax owed without attaching an Installment Agreement application, will increase your chances of an audit. And finally, tax return errors, mistakes, typos or a sloppy return will increase your DIF score, along with your chances of an audit.
The second selection process is a random drawing. The IRS selects some tax returns randomly. That means, even if you do everything right and zero red flags are raised, you still may be audited. The random process is used as a benchmark to compare the random returns, to those selected by other methods.
Document matching is another way the IRS selects tax returns for audits. The IRS will match a tax return to information they gather from others – vendors, businesses, related entities, and other sources. The IRS will match your reported income with 1099, W-2 and other third-party documents. If there are discrepancies, the tax return will be audited.
Finally, other sources are used to assume non-compliance or inaccurate filings. For example, we had a group of individuals seeking our help from the same large company. It turns out that they all used the same tax preparer. The tax preparer used questionable tactics to increase their clients’ refunds. Large tax return refunds worked to grow the tax preparer’s business very quickly, but also raised red flags with the IRS. When the IRS caught on, they audited every tax return that business prepared. The IRS ultimately closed the tax preparer’s business.
Generally, the IRS has three years from the due date to audit a return. That explains why the IRS will usually conduct an audit for three consecutive years, rather than just one. There are exceptions to the three year rule. For example, if you underreport your income by more than twenty-five percent, the IRS has six years to audit. And, if a taxpayer files a fraudulent or false return, there isn’t a time limit on an audit.
So, if you are facing an IRS audit, or have already been audited, you should work with a local law firm that will work to get you through the audit process and collections in the best way possible. You should give me a call – Opem Tax Resolutions & The Law Office of Steven A. Leahy, PC (312) 664-6649. Call NOW to set up your FREE Consultation.