While the IRS does not have the manpower that it had 20 years ago, there are certain taxpayer actions that can trigger an audit by the Internal Revenue Service. As technology continues to evolve at a significant rate, the IRS has increased its use of automated programs to identify tax returns that may deserve further inquiry and inspection. The IRS uses a computerized process specifically designed to identify irregularities in tax returns. Known as Discriminant Information Function (DIF), it scans every tax return received by the IRS.
The task of detecting unreported income is a difficult one. The IRS has implemented different efforts to address issues with unreported income, including the Information Returns Program (IRP), the Economic Reality Ratio (ERR) and the Unreported Income Discriminant Function (UI DIF).
The definition of “unreported income“ is the difference between income reported voluntarily and income that should have been reported – unreported income results in lost income and self-employment taxes.
The automated DIF process uses a computer to mathematically determine the audit potential of returns, which are then manually screened to determine the scope of an audit and the information needed to satisfy any audit. Involving a mathematical concept known as “Discriminate Function,” DIF analyzes income tax returns for their potential to be examined or audited.
This technique relies on the development of formulas based on IRS data, which are programmed to classify returns based on weights assigned to certain basic characteristics of the returns. For each return processed by the IRS, the number of weights is added to obtain a composite score, which is ranked in sequence from highest to lowest. The higher this composite score is, the higher the probability of significant tax anomalies. The highest scored returns are then “made available” for audit.
DIF monitors duplicate information while comparing a return to those of other taxpayers who earned approximately the same income – any red flags generated through the DIF process, prompt review by human agents.
The IRS is simply attempting to determine the likelihood that a taxpayer is under-reporting income or over-reporting deductions. A taxpayer’s DIF score increases from deviations from the norm. For example, if a taxpayer has total income of only $50,000, but lives in a residence worth $500,000, in an exclusive area with five children, the possibility of an audit is significantly increased, since this scenario will increase a DIF score. Another example of conduct that would cause a higher DIF score is a taxpayer claiming $15,000 in charitable deductions.
The Gartzman Law Firm offers delinquent tax return preparation and tax settlement help for both federal and state tax debt. Use our contact form to request a consultation with an Atlanta tax resolution attorney or call (770) 939-7710.