Avoiding the Dreaded IRS Audit

As the deadline nears to file our personal tax returns, we all are doing our best to maximize our deductions and increase our tax refunds while avoiding the dreaded IRS audit.  Although getting selected for an audit does not always result in additional taxes needing to be paid or imply an error, it is obviously something that anyone would rather not have to deal with.

Since the IRS receives millions of tax returns, they obviously do not have to resources to go through them all, so they need some sort of method to determine which returns they should further examine.  There are a variety of methods that the IRS uses, which include ‘tips’ the IRS may receive, looking at large corporations, complex transactions, returns with forms that do not match or even by scanning Facebook or Twitter posts, but the most systematic approach the IRS uses is an automated computer-based scoring system called the Discriminant Function System.   Per the IRS website, the Discriminant Function System (DIF) score ‘rates the potential for change, based on past IRS experience with similar returns,’ meaning they use their computer system to check for irregularities in returns that may indicate an erroneous return.  Though the calculation of the actual scoring system is a well-kept secret, the purpose behind the programming is likely an attempt to determine which returns would have the most potential of generating additional revenue for the IRS.  This seems logical, because it would be a waste of time for the IRS to pursue errors on returns that would not create additional tax revenues for the government.

What this means for you is that if you are taking more deductions than the average person in your tax bracket is, your DIF score may be higher than normal.  Of course, our Irvine CPA firm would take care of these issues for you, but as a reference the average itemized deductions for 2007 per CCH are listed below.  If you are taking more than these levels beware, the IRS may come knocking!