Like other agencies and businesses, the IRS increasingly relies on programs and technology to streamline its work. This includes using an algorithm to audit returns.

Known as the Discriminant Function System (DIF), this computer program scores tax returns for potential audits. This program is a mathematical model that scores tax returns, although the exact metrics and factors for that scoring system aren't public information. The IRS also doesn't inform taxpayers of their DIF scores.

Part of the score is the Unreported Income DIF (UIDIF). The UIDIF rates returns based on the potential for unreported income.

What Happens to Returns Selected for Review?

Not all returns are selected for DIF review, but those that are will be assigned a score. DIF essentially compares that return to similar returns based on income, occupation, and filing characteristics. Scores that are outside of the median raise concerns for possible errors, misstatements, or fraud. These returns are flagged.

IRS staff then reviews the highest-scoring returns. During this review, IRS personnel will select some tax returns for an audit. They'll also identify what items or topics on these returns should be reviewed.

That the DIF has flagged a return doesn't automatically mean a taxpayer has made a mistake. It simply means the program identified a discrepancy compared to similar tax returns.

What Are the Odds My Return Will Be Flagged?

Factors that can increase the likelihood of a tax return being flagged:

• Reporting income that clashes with information the IRS already has, such as what's reported on a W-2.
• Large deductions that are disproportionate to a taxpayer's income level.
• Providing little or no documentation for deductions, self-employment income, etc.
• Unusual expenses.

In some cases, taxpayers may simply need to provide additional documentation. In other cases, they may owe additional tax.

For example, a taxpayer is self-employed as a writer but includes a vehicle deduction as part of their business expenses. The majority of writers don't claim a vehicle deduction, and this, combined with other inconsistencies, raises flags about a tax return.

In this case, the taxpayer did legitimately use the vehicle but didn't properly report it. One of the taxpayer's clients is unable to drive, and the client paid the taxpayer to run errands related to the client's business.

A Skilled IRS Tax Attorney Can Help

If you have questions about audits or how the IRS flags tax returns, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.