Information About Tax Audits
Tax audits can occur anytime 2-4 years after the year of filing at the state or federal level. Most of the time, audits are done via mail correspondence using interrogatories to obtain more information or clarification.
Federal returns are filed and compared against similar returns and the IRS computer program compares your deductions to others in your income bracket. The IRS uses a DIF score which is based on their own study of thousands of returns. From this study, they determine what is an average and valid range for certain deductions. If the tax return given is much higher in deductions than normal, a high DIF score is given and it is more likely an audit will occur. The IRS computers will also detect under-reporting and failure to pay by cross-checking items on a return that IRS gets from all reporting sources, like employers and banks. In this day of age, these electronic records can be received rapidly.
Some states use the the benefit-cost ratio of 5 to 1 or more for all cases based on net proposed tax assessments. Benefits are revenues and compared to costs for a type of case resulting in a ratio and case ranking. Common audit issues are:
- Sale of property
- Misuse of Head of Household
- Rental real estate gains and loss
- Residency issues
- Security Transactions
If the audit is not in your favor, you must pay the amount stated, but you do have the right to protest in writing by the date noted. The best way to avoid an audit is to be honest and fair about the deductions claimed because you know their system will catch oddities, whether in excess or under. Once that occurs, it is flagged as "suspicious"