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Secrets of the IRS audit system

whisper photoThe IRS began accepting tax returns for 2014 on January 20th, 2015. That’s exciting stuff for the office here at Padgett, as we’re rearing to get moving on another season of stellar work for our clients.

Let’s go over some tips for our taxpaying clients. Follow along with these and both taxpayer and tax preparer will experience a more pleasant tax season for the year.

Secrets of the IRS audit system

Did you know that U.S. taxpayers’ tax returns are first flagged for an audit by a computer program and not by a human being? It’s true. It’s called the Discriminatory Inventory Function System, or DIF for short.

DIF scans tax returns and assigns each one a score. The higher the score, the more likely a tax return will be tagged for further review by an agent of the IRS. Certain factors raise your score and certain factors lower it.

Having your taxes prepared by an Enrolled Agent, for example, will lower your score and your likelihood of an audit. If your reported numbers don’t match your employer’s on your 1099 or W-2, this will increase your chances of an audit.

Other common causes of an audit include:

  • Returns that include ‘Schedule C’ are believed to be more likely flagged for examination.
  • Unusually high charitable contributions, especially when compared to an income that results in an unusual ratio.
  • Excessive travel and entertainment deductions are a popular target. Record all receipts for each deduction made.
  • If you claim your home as your office, keep expenses and deductions reasonable, as this is another popular target.
  • When making deductions, rounding cents to the nearest dollar is permissible. What makes for a quick target are deductions rounded to big numbers. If everything you deduct is $25, $75, and $250, your return will most likely be pulled.
  • Recipients of the Home Buyer Credit receive a higher DIF score because the credit is a common target of tax fraud. This is a classic case of one bad apple ruining the bunch.
  • Businesses and real estate investments, such as rental properties, that report losses earn increased attention.
    And finally, disproportionate vehicle expenses to revenue earned is another red flag.

Photo by keyofnight

Do you have the support you need to manage your small business bookkeeping? Schedule a 30-minute appointment to speak with a local small business adviser.

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