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Understanding the DIF and other IRS auditing standards

Like most Americans, you may be concerned that the IRS will one day audit you. It has not happened yet, but you are convinced that it will. It is only a matter of time.

The good news is that only a very small portion of tax returns received by the IRS signal the need for further explanation, and the agency has a system for that: It is known as the DIF.

Red flags

Experience shows that out of the millions of taxpayers in the U.S., only a fraction—about 1 percent—get audited. To determine which tax returns need to be reviewed, the Internal Revenue Service employs a scoring system known as the discriminate information function. The DIF compares the tax returns of peer groups where, for example, the people involved have similar jobs and income levels. If the system notes an obvious discrepancy, it gives that return a high score, which increases the chances of an audit.

Two kinds of audits

Many people are afraid that the doorbell will ring one day and it will be an IRS agent coming to call. However, there are two kinds of audits. The one most feared is the in-person audit, but the correspondence audit is much more common: The IRS asks a question by letter, the recipient responds, and that is the end of it. Most audits involve a simple issue that just needs resolution.

Deductions as a trigger

People often steer clear of taking deductions to which they are entitled because they think that deductions trigger audits. One example is that many people today have home offices and may take a deduction. That this is an invitation for an audit is a myth. Nevertheless, a lot of money goes to the government this way - dollars which the taxpayer should keep.

Audit support

If the DIF system selects your tax return, there may also be more complex issues at stake. Keep your anxiety to a minimum with the help of a professional who will work toward a favorable resolution for your case.

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