Tax Compliance - Audits
The odds of a taxpayer audit will vary depending on your profession, transactions reported, deductions taken, income level, where you live and the type of return. Individual returns are classified by all income items. Let's take a look at the different types of audits:
- Field Audit – Performed on the premises of the taxpayer and will include the review of several items.
- Office Audit – Performed at an IRS office and will typically focus on specific items.
- Correspondence Audit – Generally performed through the mail, where the issue in question is typically a minor item.
Items that "Increase" the chance of an actual Audit:
- Income reported on your return doesn't match what was reported to the IRS by way of W2, 1099, etc.
- Prior audit history that resulted in tax liability
- Itemized deductions exceed IRS target ranges
- Large charitable contributions in relation to income
- Claiming tax-shelter losses
- Business expenses are large in relation to income
- Operation of a "cash" business (cab driver, waiter, tip oriented business, etc.)
- Significant investment losses
- Informer tells the IRS that you are omitting income
Discriminant Functions System (DIF)
The IRS utilizes a method of screening tax returns called the Discriminant Functions System, which selects which ones will be subject to an audit. The DIF creates a score that ranks returns on a scale based on likeliness of tax error. The higher the score, the more likely an audit will proceed.
Statute of Limitations:
- Three-Year Statute – The IRS has three years from the due date of a filed return to assess additional taxes; usually April 15, unless an extension is filed, then from actual date the extension return was filed.
- Six-Year Statute – Under special circumstances the IRS is given a six-year window, this includes cases that involve under reporting of gross income in excess of 25%.
- No Statute of Limitation – There is NO TIME LIMIT for returns involved in fraud or for failure to file.