The Internal Revenue Service’s Tax Return Selection Process

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People often wonder how the IRS determines which tax returns it will select for examination. Many questions come to mind. Will they select my return at random? Will they select my return because of my political affiliation? Might someone call the IRS and cause my return to be examined? Is there anything that I can do to make my tax return less likely to be examined? First, let’s look at what normally occurs, and then we’ll discuss the exceptions.

The IRS initially screens your tax return with a computer. Each tax return filed with the IRS is scanned by their computers and assigned a score called the Discriminant Income Function (DIF) score. The higher the score of a screened tax return, the greater the potential is for that return to be selected as an audit candidate. Once the returns are scored they are stored for later retrieval at an IRS Service Center. When an examination team needs any inventory workload for their auditors, a request is generated and the returns are forwarded to the examination team, with the highest DIF scored returns available being sent.

Once the return is assigned to the examination team a number of things can happen. Initially the Team Manager will review the return and either survey the return, i.e. send it back to the Service Center for storage, or he will decide to assign the return to an examiner. Once the examiner receives the return he will also review the return and either recommends to the manager that the return be sent back to the Service Center or he will place the return in an active examination status and begin his examination. This is when you will either get a letter letting you know the return is under examination, or you could be contacted by telephone. Then the examination will begin.

Is there any other way that your tax return might be examined? Yes, it is possible that the IRS might choose your return to be examined under the National Research Program (NRP). If your return is selected for a NPR audit the audit will be comprehensive and include an examination of virtually every line item on the tax return. Why would the IRS do such a thing? In order to use the data gained in your NPR audit to reset their selection computers so that the returns selected for examination are the returns with the highest probability of error.

So, is your return selected at random? Not entirely, as the selection is based on your tax return’s DIF score. Are their political implications to your IRS examination? Not really. The IRS computers are unaware of your political status. Could someone cause my return to be examined? It is possible. The IRS’s Criminal Investigation Division accepts calls from anyone who may claim to have knowledge of the violation or any criminal or civil income tax law. Such a whistleblower might actually receive a reward from the IRS if the ensuing examination results in an additional tax assessment. Finally, is there anything that can be done to lessen the probability that my tax return might be examined? Nothing other than engaging a competent preparer, such as Dixon Hughes Goodman, to carefully and thoughtfully prepare your return in compliance with existing IRS rules and regulations.