How Does the IRS Select Companies to Audit?Atlanta CPA Explains How Audits Are Selected
The IRS is stepping up its efforts for unpaid income taxes and has filed almost 1.1 million tax liens this past year alone. MSNBC just reported that the IRS is seeking now more than ever to work with taxpayers to seeking to add increased flexibility to their enforced collection efforts.
How Audits are Selected
"There are many misconceptions about the ways that the IRS selects a potential client for review and audit. The stories range from your return being audited because you electronically filed, or audited because you filed an extension or audited because of when you filed your return. These are all just myths."
John Dillard CPA, President of His CPA PC
Just because you receive an IRS notice it does not necessarily presume there are tax issues with your return as the IRS has long held and published the criteria for audit selection:
The IRS selects clients for audit based upon three criteria including:
- Random selection (effectively you and everyone else who file are all put into the population and a certain number are randomly selected). This selection mode is purely random and is without thought or prejudice to any particular income, profile, or industry.
- Dif test (a Dif test is a statistical analysis test based upon your income on whether your deductions are in line with what would be normal given your income, position, business, etc. Those whose test results are outside the norm indicating a higher probability of risk/revenue generation are therefore selected).
- If you are in a certain industry that the IRS is having substantive collection issues, then you will be more at risk than if not. By auditing a larger percentage of taxpayers in a problem industry class, the IRS is most apt to enforce collection issues as well as to begin to bring effective and wholesale compliance.
Many will shy away from certain deductions because of a fear of being audited. Although clearly no one desires to be audited as both the administrative burden and potential economic burden of an audit are more than enough to be considered as well as the emotional stress. However, I believe all clients should always take a deduction they are legally entitled to as otherwise they are overpaying their taxes and paying more than their fair share. However, in serving the truth, we can trust that the truth, regardless of an audit environment or not, will indeed set us free.
Contact us today to see how you can learn more than ever before about managing your taxes as well as your business. Just because you receive an IRS audit letter it is not the time to panic but it is the time to carefully consider and determine that all of your tax returns are carefully prepared and compiled on a basis consistent with tax law and payment thereof.
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