AUDITING YOUR RETURN.
[1] Initial selection, or, the electronic auditor.
The statistics supplied by the IRS tell us that only about 1.5% of individual tax returns are audited. This seems to give the taxpayer a "comfort" zone of 98.5% and may entice him to play the "audit lottery". My opinion is that these statistics are misleading for two reasons:
1. The statistics are based on all tax returns, not just those of business taxpayers.
An employee's return is relatively simple and has very little "flags" that will trigger an audit.
Businesses are more closely watched, for example, through the information return reporting system mentioned
in How the IRS finds out about you. In addition, the IRS conducts special
auditing programs for certain industries. The construction industry is always receiving special attention.
Independent contractors are also a favorite. Some big businesses are audited year round. Therefore, we conclude
that audits of businesses far exceeds the 1.5% ratio.
2. The other reason is the method which the IRS uses to audit with the computer. Every return received by the IRS
is run through their computer. The IRS has a system called the Discriminate Income Function (DIF). This system
consists of "models" that the IRS has created for types of taxpayers. This model relates your income to your
expenditures and is the most guarded secret of the IRS. If your return does not conform to the model, the return
is selected for review (by a human). If the examiner determines that there is "something weird" about your return
it is set aside for auditing. If the examiner does not see anything "weird" your return gets thrown back in the
water. Because of this DIF system, our contention is that every return is audited.
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There is a type of audit called TCMP (Taxpayer Compliance Measurement Program). This is an audit made through a random selection, and is what the IRS uses to create the DIF models. If you are selected for this audit, I pity you! The IRS is going to examine everything that you put in your return. They will test your Social Security number for validity, your birth, and marriage certificates, if you claimed a dental medical expense, the auditor may try to look inside your mouth, etc. etc.
[2] The audit.
There are two types of audits:
[a] Office audits.
[b] Field audits.
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