IRS selects around 1.5 million taxpayers in a year and ‘invites’ those to explain inconsistencies in their tax return. How does it select these taxpayers out of 135 million returns filed every year? Well most of the times it applies some criteria to pick a ‘deserving’ taxpayer. Here are some important ones.
1. Mathematical corrections – Usually IRS computers generate these audits. If you have made mistakes while filing your tax return, these computers are most likely to catch you. These are silly mathematical mistakes which you would have avoided easily. Some of these mistakes are – entering incorrect spelling of your name on your tax return, entering incorrect social security number, entering the incorrect status, making a wrong calculations about earned income credit and improper assessment of estimated tax.
Usually IRS assumes that your details are correct and makes the calculation of your tax figures based on them. If there is any additional tax liability, they will add interest and penalties to it and you will be sent a notice demanding such money.
You will have a period of 30 days to contact IRS and schedule an appointment to prove that your original data is correct.
2. Mismatching of documents – These audits are also computer generated. All the forms you file along with your tax return like W-2 forms or K-2 forms will be cross checked with the details sent by the issuer of such forms. If IRS comes to a conclusion that you did not report all your income on the basis of this cross verification, they can send you a bill specifying the extra amount including interest as well as penalties to be paid by you.
When you receive such notice, you get 30 days to clarify your position.
3. DIF score – This is a secret formula developed by IRS which identifies the returns most eligible for tax audit. If the DIF score on the tax return is higher, IRS will decide to audit such tax return. The reasons which trigger increase in DIF score are many like Schedule C expenses, drastic changes in your income or unusually high deductions.
4. Random selection – IRS selects randomly individual returns for audit purposes. These returns will be scrutinized very minutely. The auditor will go line by line to examine the whole of your tax return and will ask you to provide enough supporting evidence. These are most dangerous audits and nobody can predict which returns will be selected in a particular year.
5. Public records and statistics – Focusing on the standard of living of a taxpayer, based on public records and statistics available, the auditors will try to establish that you have unreported income. Public records may include credit reports, property records, motor vehicle records and reports on currency transactions.
6. Special projects – IRS will pick a dozen scams every year and intensify scrutiny of all concerned people. These ‘dirty dozen’ will face all sorts of scrutiny and will be handled by a special division of IRS.
While IRS will naturally concentrate on unscrupulous people not reporting their correct income, it is possible for an ordinary taxpayer to avoid most of the above nets with a disciplined and honest approach.
If you are caught by IRS for tax audit, you get nervous. It’s a very testing time in your financial life. If you know how IRS selects returns eligible for audit, you can avoid such audit many times. What are the criteria of IRS? How it picks up returns for audit every year out of millions? Chintamani Abhyankar explains the inside secrets of such tapping process.
Solve Your Tax Debt Though Settlement With the IRS – This is the Best Way to Do it in This Economy!
So, you’ve been audited and the IRS has told you that you owe a whole lot of money. This may have been an innocent mistake done while filing and the penalties have just added up so much, that there is no way to pay it. Whether it is for this reason, or because you didn’t bother to file taxes, there is a debt to be paid. If the amount is impossible for you to do so, you might want to consider settling with the IRS. Yes, there has been a lot of criticism about this process, especially if you end up paying an amount of the forgiven balances, but hey, the ending amount is generally much less than what it started out to be.
If you want to hire an agency or lawyer to go through the process with you, then you will need to provide them with all the documents. They will do the negotiating for you, and the settlement if possible will be reached. This is not to say that all will be forgiven, because the IRS generally demands that you pay whatever they consider to be a reasonable amount. If you do this application process yourself, be sure to do it correctly with accurate information.
Whatever the method that you choose, you will have a better chance of being successful if you make them an offer that looks realistic and fair. They will have more respect for your situation, so to speak. If you need to file for a settlement, don’t be afraid to do it. It could save you a lot of hard earned money.
“This article is brought to you by Gus Woltmann”.