You don’t have to be a tea party conservative to attract the attention of the IRS. The IRS audited nearly 1.5 million individual returns in federal fiscal year 2012. Some of the audits were just taxpayers pulled at random. Typically, two percent of taxpayers are subjected to random audits every year. The rest of the returns are selected for examination in a variety of ways. Lowering you IRS profile will help minimize your chances of being audited.
The IRS uses a computer scoring system called DIF (discriminate information function). The DIF system is not a random selection process. Based on a closely guarded formula, the DIF system analyzes tax returns for oddities and discrepancies. The DIF system scores returns and those with the highest DIF score are examined by experienced IRS agents to determine if an audit is warranted. These discrepancies could be larger deductions than an average taxpayer with similar income, large swings in the amount of income from year to year, being self-employed, and claiming rental losses on a vacation home. The actual DIF formula is not known, but these areas have been targeted for closer scrutiny in the past.
It is becoming increasingly evident that your amount of total income can attract the IRS’s attention. Last year, the IRS audited about 1 of 10 taxpayers with income between $1 million and $5 million. The audit rate jumped to 1 of 5 taxpayers with income of $5 million to $10 million. However, taxpayers with $500,000 to $1 million of income dropped to 1 in 25. The chances of these same taxpayers being audited were even greater if they owned their own businesses.
If you do get an audit notice from the IRS, don’t take it personally. It does not mean the IRS believes your return is fraudulent. Most IRS inquiries raise questions by mail about an item on your return. You want to be courteous and helpful, without volunteering more information than what the IRS is requesting.