How IRS verifies your income tax returns for audit

How IRS verifies your  income tax returns for audit

DID you ever wonder how the IRS selects tax returns to be audited? Here’s a three-part series on how tax returns are received, stored, and chosen for audit:

• How e-filed and paper-filed tax returns are verified, validated, and reviewed for accuracy.

• How tax returns are stored into master files.

• How IRS scores your tax returns for audit.

Let’s explore the first part in this series – verification, validation, and review for accuracy.

Upon receiving your income tax return, the IRS can:

• Question any entry on your return,

• Request an explanation of income that does not match Form W-2, 1099 and other data from 3rd parties,

• Audit your return, or

• Collect tax due on the return.

How E-Filed Returns are Verified, Validated, and Accepted:

• Electronic tax return data are transmitted to a designated Submission Processing Center.

• Coding and correcting errors are sharply reduced with the elimination of manual chores.

• Tax softwares assign a unique 14-digit Declaration Control Number to each return.

• A unique Filing Location Code shown as the first two digits distinguishes returns as e-filed.

• An electronic Management System provides data verification, data translation, and delivery.

• Federal return is validated and accepted.

• Any attached state return is transferred to a State Retrieval Subsystem.

• State returns are then made available for retrieval by participating state revenue agencies.

• This explains how state tax agencies learn of your IRS audit.

• This also explains how the State Board of Equalization learns of undeclared sales tax.

How Paper-Filed Returns are Sorted, Numbered, and Reviewed for Accuracy:

• Tax returns are sorted upon arrival at a Service Center.

• Payments included with the returns are removed and deposited.

• Return and checks are assigned Document Locator Numbers for identification.

• Different numbers may be assigned to the same taxpayer (all tied together by your social security number).

• Business returns are tied by employer identification numbers.

• Each return is reviewed for completeness and mathematical accuracy.

• Service Center personnel look for gross or obvious errors and fill in incomplete items

• A computerized version is forwarded to the computing center in Martinsburg, WV.

• Martinsburg generates refunds and notices.

• It also notifies Service Centers if any other action is required to settle your account.

Statistics:

• Computers choose about 10% of all tax returns for audit consideration.

• IRS classifiers manually screen and choose about 10% from this initial bunch.

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Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation in Pasadena, California. 

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He has 50 years of experience in defending taxpayers audited by the IRS, FTB, EDD, BOE and other governmental agencies.  He is publishing a book on his expertise – “HOW TO AVOID OR SURVIVE IRS AUDITS.” Our readers may inquire about the book or email tax questions at vicsy@live.com.

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