For years, Colonel Harland Sanders carried the secret formula for his Kentucky Fried Chicken in his head and the spice mixture in his car. Today, the recipe is locked away in a safe in Louisville, Kentucky. Only a handful of people know that multi-million dollar recipe, and each is obligated to strict confidentiality by contract. Okay, so you are probably asking yourself “what is the secret formula that triggers an audit?” and “does Uncle Sam have it in the back of his car too?”
Like KFC, the IRS has a secret formula, but it’s not kept in the back of a car. While there are a number of ways that a taxpayer could be selected for an audit, the DIF score is the most widely used method for selecting tax returns to be audited. The higher the DIF score corresponds to a higher level of IRS red flags. So what is the DIF score? DIF stands for discriminate function system and it is a computer generated score the IRS uses to select returns for an audit. While there are a number of factors and variables that go into this statistical profile that are not revealed, there a number of factors that have shown to result in an increased likelihood of a tax audit. Below we have come up with our a list of common audit red flags:
· Unreported income
· Suspiciously low income
· Having a high income
· Drastic changes in income
· Round numbers
· Home office deduction
· Business meals, travels and entertainment deductions
· Claiming 100% business use of a vehicle
· Claiming a loss for a hobby activity
· Cash businesses
· Failure to report a foreign bank account
· Engaging in cash transactions
· Math errors
· Too many charitable deductions
· Participating in tax scams
· High itemized deductions
· Differences between a State and Federal return
While these may increase your odds of being selected for an audit, if you are challenged on a tax item by the IRS and your position is supportable, then generally an audit should only be an inconvenience and be of no concern. Be sure to support all of your tax positions by keeping for example, every receipt for charitable deductions, receipts and records for all itemized deductions, etc.
As part of the Liberty Tax® written guarantee, if your return is selected for an audit and your return was prepared by Liberty Tax Service®, we will accompany you to the audit to offer assistance by explaining how the return was prepared.
For more information or assistance with an audit, please see Keep Organized Tax Records in the Event of an Audit, IRS Audits & Statutes of Limitations, Relief for the Common Audit, Complete Tax Returns Carefully to Avoid an Audit or contact your local Liberty Tax Service® Office.
Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.