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].