Everybody wants to avoid getting audited by the IRS.
Updated July 2016
Every year people ask me, “What can I do to prevent being audited by the IRS?” The honest answer is, “Absolutely nothing.” Because in fact, everyone is audited every year. You just don’t know it. Every year, your tax return is run through a computerized audit. First there is the search for missing documents—such as an unfiled W2 form or interest statement. This is called the document matching program.
What I’m saying is that every year, your tax return is getting audited by a computer. You just don’t know because you don’t hear anything from the IRS unless there’s a problem.
Now it used to be that when a return got tagged by the computer, a human being would take a look at it. A return that got snagged by the computer might still not be audited if it made sense to the human. If the human still had a question, then an audit letter went out. Nowadays, there isn’t much human verification, so a lot more letters get sent for returns that normally wouldn’t seem to be a problem. That’s why you don’t just want to automatically pay the IRS if you get a letter – there’s been no double check, you might not really owe.
Even people who don’t file tax returns are audited. The IRS runs the documents about your income even if you don’t file a return. If they determine that you’ve earned enough income to file, and you owe them money, rest assured, you’ll get a letter about it. If the IRS figures you should be receiving a refund – rest assured, you won’t hear a thing!
Another audit device the IRS uses is called the DIF score, it’s a process where the IRS basically checks “what’s normal” for expenses for taxpayers in various income brackets. The IRS tracks data for all sorts of things, if your “DIF” score is out of line for your profession, that’s also likely to trigger an audit.
Now I bet you’re wondering, “How do I get my hands on those DIF scores Jan mentioned so that I can keep my return from being pulled for audit?” Yeah, I’d like a copy of those too. Unfortunately, the IRS doesn’t publish them. That would be like showing your hand in a poker game. Every tax preparer in the country would like to know how those DIF scores are arrived at.
In the meantime, your best defense for an audit is hanging on to your records. Now that tax season is over, make sure that you’ve put all those papers someplace safe. Hopefully, you won’t need them.