This is a continuation of the last post on one of the most frequently asked questions I receive. Will I get audited? In addition to the income level and other factors previously mentioned, the IRS uses a tool called the Discriminant Function System (DIF). The DIF is a sophisticated computer-based scoring system used by the IRS to select tax returns for examination or audit. Its primary purpose is to identify tax returns that have a higher likelihood of containing errors or discrepancies, potentially resulting in underreported taxes or tax evasion. In essence, the DIF system helps the IRS prioritize which returns to audit.
How Does the DIF System Work?
The DIF system uses a complex algorithm to assign a numeric score to each tax return based on various factors and criteria. These criteria may include:
- Income Level: Returns reporting exceptionally high or low incomes compared to similar filers in their income bracket are flagged for review.
- Deductions and Credits: Unusually high deductions or credits in proportion to reported income can trigger scrutiny.
- Filing History: The system looks at an individual or business’s past filing history, especially if there are discrepancies or irregularities.
- Income Sources: Certain types of income, such as rental income or self-employment income, are more likely to be audited due to the potential for underreporting.
- Geographic Factors: Regional economic data may influence the selection process to identify areas with a higher likelihood of noncompliance.
- Industry Norms: The DIF system considers industry-specific averages and norms to spot outliers.
- Red Flags: Certain patterns or anomalies in the data, such as frequent amended returns or suspicious deductions, can trigger higher DIF scores.
Once the DIF system assigns scores to tax returns, those with the highest scores are more likely to be selected for a thorough audit by IRS agents. It’s important to note that a high DIF score does not necessarily mean that the taxpayer has done anything wrong; it simply raises the likelihood of further scrutiny.
