THIS is the second of three articles on how the IRS selects tax returns for audit. Our first article discussed how tax returns are received, verified, and reviewed. This article deals with how your tax returns are stored into master files. The next and last article will discuss how the IRS scores your tax returns for audit.
After receiving your tax return, the IRS enters your tax data into an IRS master file. The master file is separated into Individual Master File, Business Master File, and Non-Master Files.
1. Individual Master File is a magnetic tape record of all individual income tax filers in social security number sequence. All tax data and related information pertaining to each individual income tax filer are posted to this file. It’s continuously updated as a current record of each taxpayer’s account.
2. Business Master File is a magnetic tape record of all business taxpayers with employer identification numbers. Taxes processed include corporate, partnership, LLC, employment, excise, fiduciary, estate, gift, and tax-exempt organizations with investment income.
Each taxpayer’s account is divided into tax modules (tax years) reflecting current status, balance, and transactions applicable to each tax year. This information includes tax return data, assessments, and changes made to return as filed. A transcript of taxpayer’s account is a printout of tax module information.
3. Non-Master File is a smaller database that controls returns not processed on the master files. This includes assessments, adjustments, and refunds that are performed manually at the Service Centers. Master files are not efficient because of manual processing required to obtain accurate balances from other files. The IRS hopes this problem to disappear with the introduction of a modern data engine called CADE (see below).
4. There’s a new kid in town—CADE that stands for Customer Account Data Engine. It’s replacing the aging Master File System. This is a modern data storage management and accessing system that is designed to provide real-time access to taxpayer accounts, up-to-the-minute data, and easy access by authorized IRS personnel. CADE handles returns with Schedules C, E, and F and those claiming Earned Income Tax Credit (EITC) and Dependent Care Credit. A newer version called CADE 2 updates taxpayer account information on a daily basis. This speeds up responses to taxpayer inquiries, reduce the number of out-of-date notices, and allow a shorter refund cycling time.
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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].