(Part 1 of 3)
WHILE audit penetration has, decreased, the quality of audits has improved. Auditors undergo specialization training. They conduct economic reality audits that involve looking at issues beyond your tax returns into how you survive with the amount of income that you report. This intrusion into the lifestyle of taxpayers has become disturbing. Read on to analyze the life cycle of an audit to prepare for your next potential audit:
1. Returns are filed on April 15 (April 18, 2017 this year) of each year with the extensions through October 15 for individual returns. Upon arrival at the Service Center, the tax returns are sorted and assigned a document locator number (DLN), a control number that serves as the identification for the particular item. Although different DLNs may be assigned to the same taxpayer, the taxpayer’s Social Security number ties all together.
2. Returns are reviewed for completeness after each return is sorted. Selected items are entered into computers and returns are checked for mathematical accuracy. Paper returns are filed and computerized versions are forwarded to the National Record Center in West Virginia.
3. Information is then entered into a master file, an online file of all known taxpayers, after returns are received at the National Records Center. Returns are classified into individual master files (IMF) and business master files (BMF). The IMF is a magnetic tape record of all individual income tax filers arranged by Social Security numbers. All of tax data and related information pertaining to an individual are posted to this IMF and is continuously updated. The BMF is arranged by employer identification numbers (EIN) and is maintained for corporations, partnerships, payrolls, fiduciaries and gift taxes.
4. Returns are scored with a discriminant function system (DIF) to determine which of you will be reviewed for audits at the National Records Center. The DIF function is a statistical scoring of each return based on information developed by the taxpayer compliance measurement program (TCMP). The scoring is based on total positive income and total gross receipts. Once scored, the returns are sent back to the Service Center (in your case, the Fresno Service Center) for audit consideration. The returns are selected for audit based on the DIF score and other criteria such as failure to report all W2s and 1099s.
Development: The TCMP is old and outdated and was replaced by National Research Program (NRP).
A new scoring system has been generated as a result of the recent audit of 50,000 tax returns.
5. The selected returns are then scheduled for audit—internal audit, correspondence audit, office audit, or field audit. Returns with specific questions or easily verifiable information such as missing W2s and 1099s undergo correspondence audits. Office audits require you to visit an IRS office where you will be examined by an office auditor. The more complex returns are assigned to Revenue agents in field audits.
* * *
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.
* * *
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].
