If you own a small business or are self- employed, your return may be selected for audit by the IRS for several reasons. The most common reason is that the numbers on your tax return were run through a computer screening program and scored too high on the discriminant function (called the DIF score). This program identifies returns most likely to produce adjustments by IRS. The formula for this is highly secret. Taxpayers’ have filed a number of law suits attempting to force IRS into revealing the formulas and each time the courts have sided with IRS.
Another selection method is data matching. If there are too many items that have been reported to IRS by others (like your stockbroker or banker) but not reported on your return. One or two items missing on your return will generate a correspondence audit (conducted by mail) but too many items missing would be a trigger for IRS to believe that there was major non- compliance in the rest of the return and lead to a field audit.
If you’ve received a request for audit, reach out to us. We can help you plan, prepare, and answer audit-related questions.