One of the most stressful pieces of mail an individual can receive is one that has the Internal Revenue Service marked as the sender. That stress level will most likely spike when the letter inside informs the receiver that they are being audited. The good news? Only one percent of taxpayers are audited. The bad news is if you are one of those one percent chosen.
If you have been notified that you are being audited, it is critical to contact a tax attorney immediately to ensure that you are fully protected. Contact a law office today to meet with a skilled tax attorney.
How the IRS Chooses Who to Audit
In order to determine which tax returns need a closer look, the IRS uses the Discriminant Information Function (DIF) System. This is an automated scoring system which analyzes returns looking for any potential red flags which may require a more in-depth examination, as a tax appeal lawyer in Allentown, PA, like from Hoegen & Associates, P.C., can explain. The DIF system zeros in on a geographic area and then compares certain factors for any discrepancies. Some of the factors the system looks at includes:
· Amount of income earned
· Size of family
· Value of real estate
The second system the IRS utilizes is the Unreported Income Discriminant Information Function (UIDIF) System which analyzes a tax return for indicators that the taxpayer did not correctly report their income.
In addition to the above two systems, there are other factors in a tax return which may trigger an audit. These include:
· When the information the taxpayer has entered on their return does not match tax documents that their employer(s) or clients have submitted to the IRS in their W-2 or 1099 forms.
· When the taxpayer earns the bulk of their income through self-employment. They may also be audited if their income is paid to them in cash instead of through checks, direct deposit, or some other method which provides a “paper trail.”
· When a taxpayer takes large deductions, which do not appear to be the norm or eat up a large portion of their income, such as unrecognized home business deductions, voluminous business expenses, or an inordinate amount in charity deductions.
· When there is evidence that the taxpayer engaged in activities which had the intent to avoid paying taxes.
· When another person or organization that the taxpayer is connected to in some way is being audited by the IRS.
· When a person deposits a lot of money in their bank accounts or makes large cash purchases. The law requires financial institutions and other types of businesses to report any transactions for $10,000 or more. If the IRS finds an individual is making these types of purchases or deposits in their savings, but their income claimed on their tax return does not match their ability to be able to, this will raise the IRS audit flag.