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 [email protected].

Victor Sy, CPA, MBA (retired)

Victor Santos Sy, MBA. CPA (Retired) 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. * * * He retired after 50 years of defending taxpayers audited by the IRS, EDD, BOE and other governmental agencies. He published a book on “How to Avoid or Survive IRS Audits” that’s available at Amazon. Readers may email tax questions to [email protected].

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