We all know the last thing we want to endure is an INTERNAL REVENUE SERVICE AUDIT.
What if you knew in advance?
If you knew you were going to be audited up to six months in advance, that knowledge would allow you the opportunity to get all of your documents in order so when the audit occurs you would be prepared. Further, if you know in advance that you’re going to be audited, it can help reduce costs to an Enrolled Agent (usually an accountant or attorney). You would be able to prepare for the audit even before you receive the notice from the Internal Revenue Service.
Here’s how it works
The Internal Revenue Service audits approximately 2% to 3% of all the individual tax returns submitted every year. There are approximately 130 million tax returns submitted by individuals annually. This means about 4 million tax returns are audited each year by the Internal Revenue Service. YOU COULD BE ONE OF THOSE PEOPLE THAT ARE SELECTED FOR THIS AUDIT.
Types of Audits
There are many ways the Internal Revenue Service determines if an audit is going to occur on your tax return. Some of them are as follows:
1. The Differential Income Factor (DIF) Method
Each tax return that is submitted to the Internal Revenue Service is given a score based on the amount of income you report and the deductions you claim on your tax return. If the score your tax return receives exceeds a particular threshold for your income, then the Internal Revenue Service could select your return for audit. For instance, if you earn approximately $50,000 and you have medical expenses in excess of $7,000, this would give you a higher DIF score than someone who has medical expenses of only $4,000.
Further, if you report home mortgage interest of approximately $15,000 and your income is $35,000 then your DIF score is higher than someone with the same income showing only $7,000 in home mortgage interest. The higher the expenses relative to the income, the higher the DIF score.
2. The Information Returns Factor Method
All W2s and 1099s are submitted to the Internal Revenue Service every year. Then the Internal Revenue Service records the social security numbers from these documents and matches them to the social security numbers on the tax returns that are submitted. If you have received a 1099 INT (Interest Income) showing $1,000 from a bank or credit union but only report $500 worth of interest income on your tax return, the Internal Revenue Service will catch this. They will match the 1099 INT against your tax return, based on your social security number, and they will see that you underreported your interest income by $500. This will select your tax return for audit.
3. The Random Selection Method
All tax returns are submitted into a computer random number generator. The tax returns with the high DIF scores and non-matched information are taken out. A certain number of tax returns are picked at random to make sure the needed four million tax returns are audited on an annual basis.
These are some of the methods the Internal Revenue Service uses to determine who is being audited. Once these tax returns are selected for audit, they are assigned to Internal Revenue Agents and Revenue Officers. This is known as assigning cases or inventory to the auditor.
Find out what the IRS knows about you
When your tax return is selected for audit, it is given a certain transaction code (TC). The code identifies it as being selected for audit. Each of us who submits tax returns to the Internal Revenue Service has a record that is kept by the IRS for many years. These records are known as our INDIVIDUAL MASTER FILE (IMF).
Since 1974 the Freedom of Information Act has allowed us to access this IMF. The IMF will give information on a computer generated report about each taxpayer the IRS has on record. For instance, if you have been selected for audit, the IMF will tell you. It will also tell you if your tax return has been received by the IRS, if additional taxes have been assessed, and what the final collection date is for the tax return and many other codes that are interrupted from the IMF.
Since cases (inventory) are assigned to agents up to six months before the taxpayer is even notified of an audit, a copy of your IMF, can tell you whether or not your tax return has been selected for audit.
Get a copy of your IMF
We at Robert F. Hockensmith, P.C. would like to offer you, at a minimal cost of $39.95, a complete IMF package. This will show you how to request, under the Freedom of Information Act, an Individual Master File or Business Master File plus instructions on how to read the codes that are submitted to you with this Master File.
We have an entire package that we will send to you which will include a sample Freedom of Information Act Master File request, instructions, and information for preparing your own request. Plus, an example IMF and tips for analyzing your IMF along with the IRS document 5576, which helps you decode your Master File, will also be included.
All this for the low price of $39.95! What a small price to pay for peace of mind.
Contact us today to order our IMF package.
Submit your request today and have peace of mind knowing whether or not you have been selected for audit. DO IT TODAY!
You could be the next taxpayer selected for an Internal Revenue Service Audit.
If you get a notice from the IRS, contact us immediately
If you receive a notice from the IRS, don’t ignore it. You can rest assured that the IRS will not just go away. All contacts by the IRS should be handled promptly. Unless you are an accomplished IRS “fighter”, you would be wise to seek the professional assistance of our firm from the very first correspondence.
If you are contacted by any government agency concerning your tax matters, your first call should be to us. We will take care of it so that you can get on with your business.