How The IRS Reviews and Flags Your Return

You’ve sent  off your tax returns and hope the IRS doesn’t come calling for one reason or another. You dotted your i’s, crossed your t’s, triple and double-checked your figures, and signed your return. Perfect.

Not so fast. The IRS screens each and every return it receives, using a point assignment system known as the Differential Inventory Function System (DIF), which assigns a score to every tax return. If a return receives a high enough score, it’s flagged for an audit.

Here are some of the items that can trigger a higher DIF score on your return: W2 or 1099 information that doesn’t match the information on your return, third party information (public records, newspapers, and individuals) about possible activity that isn’t in compliance with tax codes, and entries that are questionable in the eyes of the IRS.

If the system flags your return for review or audit, by law the IRS must notify you in writing to give you enough time to prepare for the review or audit (also called an “examination”)

This is where Publication 556 comes in. This form describes the audit process and details your rights in an audit. Read it carefully and follow the instructions. Whatever you do, don’t set it aside hoping the IRS will “forget” about your return. The IRS, like an elephant, never forgets.

Your Next Steps

You may decide to enlist a qualified tax pro to help you with your case. Here are some good reasons to consider hiring a tax advisor:

  • The thought of interacting with the IRS on any level leaves you feeling intimidated.
  • You’re not familiar with the tax codes as they apply to your case
  • You’re not sure of the limitations of the law as it applies to your case
  • You would rather have a subject matter expert deal with the IRS
  • Less stress for you.

While you have the legal right to represent yourself in an IRS audit, hiring a tax pro makes sense if any of the above apply to you. While a tax pro can’t guarantee a great outcome, you do have better odds of reaching a reasonable settlement with a knowledgeable tax pro; after all, they deal with tax codes for a living and are subject matter experts when it comes to all things IRS. 

On Monday: Representing Yourself in an Audit