Tips from Former IRS Manager - How The DIF Score Triggers the Dreaded IRS Tax Audit

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Michael Sullivan, of Fresh Start Tax and a former IRS Agent says, “There is a very simple truth about an IRS Tax Audit. Each and every tax return pulled for an IRS audit is reviewed by IRS computer and issued a DIF score. If that DIF score falls out of the national average, then that return is manually reviewed by an IRS Examiner. Taxpayers need to know what affects the DIF score because that is what determines if a tax return should be audited.”

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Michael Sullivan, Former IRS Agent

Sullivan says,"Falling out of the National Average Guidelines in the areas of Charitable Contributions, Casualty Losses, Home Office, and Travel & Entertainment will affect the tax return's DIF Score."

US Taxpayers have always wondered how and why they were selected for an IRS Tax Audit. The IRS audits over 1.3 million tax returns annually and taxpayers are fearful of being audited. The answer may seem overly simple, but most people do not have knowledge of the audit process. Each tax return is issued a DIF Score (Discriminatory Index Function). According to the IRS, a DIF Score “is a mathematical technique used to score income tax returns for examination potential.” This technique establishes the National Average Guidelines. Generally, if a DIF score is above the national average, then the risk of an audit escalates. The highest scoring tax returns are then forwarded to an IRS Examiner for further review.

So what triggers a high DIF Score? Sullivan says,"Falling out of the National Average Guidelines in the areas of Charitable Contributions, Casualty Losses, Home Office, and Travel & Entertainment will affect the tax return's DIF Score. Other audit triggers are unfiled tax returns and failure to file the FBAR (Foreign Bank and Financial Account) Form. "

How DIF Actually Works
To arrive at the DIF score for each tax return, the IRS computer identifies returns by assigning weights and certain basic tax return characteristics. These weights are added together to obtain a systemic composite score for all tax returns. That score is used to rank all returns into numerical sequence. The highest scores are then manually reviewed by IRS Agents at the Service Centers to determine the merit and worthiness of a Tax Audit.

Sullivan goes on to say, “Since each return is manually reviewed, if you have an unusually high deduction, attach a copy of the bill, receipt and an explanation to the return. Those extra steps will probably prevent that tax return from the dreaded IRS Tax Audit."

The number of audits performed annually is also determined by the IRS Annual Budget and Agent availability, region by region. According to the 2013 Proposed Budget, the IRS has increased appropriations again to increase resources for the Enforcement Division. This includes investigations, examinations and collections.

If are an in need of assistance for an upcoming IRS audit, please contact the Tax Resolution Specialists at Fresh Start Tax LLC.

Fresh Start Tax is a professional tax resolution firm. On staff are Board Certified Tax Attorneys, CPAs, and Former IRS Agents, Managers and Instructors. We have over 206 years of professional tax experience and over 60 years of direct IRS experience. To learn more about Fresh Start Tax, LLC, please visit http://freshstarttax.com or call us at (866)700-1040.

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Kelly Hadlock
Fresh Start Tax, LLC
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