Scoring system:
The IRS uses a Discriminant Function System (DIF) to determine returns that are most likely to generate additional revenue for the government. Although the scoring is secret, it’s based on two factors: Total Positive Income and Total Gross Receipts. A return with a high DIF score is more likely to be audited, since such a score indicates a greater probability that additional revenue will be generated. The DIF score is based on statistical profiles developed through the National Research Program (NRP).
You are a high earner:
The IRS is underfunded and understaffed. They don’t want to allocate scarce resources to tax returns with low chances of collecting taxes. They prefer to audit taxpayers with high income to make their audits pay off.
Most audited returns are for taxpayers who earn $200,000 a year or more, and most of them had incomes of over $1 million. Of course, you and I don’t have to worry that. You see, high-income taxpayers carry complex tax issues and with such issues come related errors.
You manage to zero out your adjusted gross income:
Middle and high-income taxpayers are expected to pay their own share of taxes. We all are. However, some can wipe out total income via tax deductions, sometimes a little too creative. Such creativity increases your odds of IRS audit.
Only about 1 percent of taxpayers earning between $200,000 and $499,999 were audited the other year, whereas 3.25 percent of those who reported no adjusted gross income were invited for IRS audits.
FYI: IRS statistics indicate that you’re safest if you report income about $50,000 to $74,999. These taxpayers are audited the least.
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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.
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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.” Readers may email tax questions to [email protected].