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Date: Fri, 14 Nov 1997 06:20:15 -0800
To: (Recipient list suppressed)
From: Paul Andrew Mitchell [address in tool bar]
Subject: SLS: Tax Audit (fwd)
<snip>
>
> HOW TAX RETURNS ARE SELECTED FOR AUDIT
>
> BY
>
> Al Gutkin, Sysop of "THE TAX BOARD"
> 714 - 974 3730
>
>
>
>THERE ARE TWO TYPE CATEGORIES OF AUDITS
>
> 1. Personal tax return audits - done at the IRS office.
> 2. Business Audits - done at the taxpayers place of business or
> the accountants office, if the taxpayer
> chooses.
>
>PERSONAL TAX AUDITS
>
> Personal tax returns can be selected for audit by three different
>methods. I will discuss these methods first as there is a second
>process the tax return goes through before you are notified of an
>audit.
>
> The first method is the DIF score method (see paragraph below on
>DIF score). Every personal tax return is given a DIF score when it is
>processed through the IRS computer. The higher the score, the more
>chance of an audit.
>
> Several months after the return is filed the District Director, of
>your residential area, makes up a budget of available manpower to
>perform audits. This includes the number of audits he expects his
>district to accomplish during the next year. Based upon the budget,
>the IRS computer automatically selects from the highest DIF scores down
>until enough return have been selected to to satisfy the budget
>requirements of the district.
>
> The second method comes from the Adjustment Section of the
>computer center. This is the mistake section. If you make a mistake
>in addition or completion of your tax form the computer can't process
>it without Human help. Thus, your return gets passed over to the
>Adjustment section for correction. If they can't figure out your
>mistake, It's referred for Audit.
>
> The third method is The Special Project Method. Also a computer
>method of selection. If the IRS determines that there is tax abuse in
>a specialized area, the computer searches the data base for deductions
>in that particular area and bango, the whole lot is audited. This
>method can also be used for certain types of occupations, such as
>doctors, tax preparers etc.
> Example... The IRS passed laws regarding Offices in the Home and
>Personal Computers. If the IRS determined that in 1985 most tax payers
>didn't heed the rules (proper way of listing the deduction) or failed
>to segregate the computer from other items listed on form 4562. There
>will be a project to audit tax returns for which there is an (assumed)
>incorrect business deduction.
>
>
>DEFINITION OF DIFF SCORE.
>
> Every five years the IRS runs a program called TCMP ( taxpayer
>compliance measurement program). The purpose of this program is to
>monitor the results of taxpayer audits. This type of audit is very
>much in-depth. As the agent must fill out an extensive questionnaire
>concerning each audit and the results. The computer audit division
>compiles the results of the agent's reports with an eye for areas of
>non-compliance with the tax laws (big adjustments). The IRS computers
>are then programmed to evaluate returns filed in subsequent years based
>upon the this criteria. Thus the diff score of three digits is assigned
>to every return as it is processed through the IRS computer. The
>higher the score the more likelihood of an audit.
>
>WHAT HAPPENS NEXT. AFTER YOUR RETURN IS SELECTED.
>
> After your return is selected for audit, by any of the methods
>above, a real live Human Being looks at it. Agents usually volunteer
>for this duty.
>
> The agent has no idea why the return was selected, this is kept a
>secret. He or She then has to look over the returns and select three
>items to be examined. The computer may have given the return a high
>score because of one item, however, the agent must select three.
>Hence, some taxpayers are are asked to prove areas of deduction that
>are small or obviously correct. In addition, if you, the taxpayer,
>included a lengthy explanation of a deduction as part of your tax
>return package, it will arouse the agents attention and this item will
>be selected for review. In other words, lengthy explanations should
>not be attached to your tax return. The only time it would be looked is
>after your return was selected for audit by the computer.
>
>HOW ARE BUSINESS RETURNS SELECTED FOR AUDIT?
>
> The process of selecting business returns, such as corporations
>and partnerships, is completely different from individual returns. It
>is much simpler and more human as opposed to the computer selection of
>individual returns.
>
> Business returns are selected completely by hand, no computer.
>Field agents (business auditors) volunteer to work on a temp. detail at
>the service center for the purpose of selecting business returns to be
>audited. There are no set guidelines for the selection process and a
>business return can be selected solely based upon that particular
>agents whim. I have heard of agents selecting returns for audit
>because they had to many staples in them. The returns selected for
>business audit do not have specific areas indicated for audit, the
>examining agent at the local level makes the selection while on the
>business site.
>
> We are now at the conclusion of the selection process performed at
>the regional service center. The next step is for the selected
>personal and business returns to be transferred from the service center
>to the local examining office.
>
>
>WHAT HAPPENS AT THE LOCAL EXAMINING OFFICE?
>
> The personal returns to be audited are assigned to "Office Audit"
>and the appointment clerk sends out the notices to the taxpayer. The
>notices indicate which items are selected for audit and the
>substantiation needed. The taxpayer has ten days to make an
>appointment for the audit.
>
> Office audit agents do not have very much latitude when it comes
>to whether or not the selected items are valid areas of audit. If the
>item is listed to be audited, by god, the agent will audit that area no
>matter how insignificant that particular item may be.
>
> Business auditors, are a different breed altogether. Most have
>had extensive training in accounting and tax, which is a required
>before they are even hired. A business agent has complete latitude in
>selecting what items are to be audited. The agent can also look at the
>return and decide not to audit it. The business is not contacted when
>the return arrives at the local office, they are contacted when and if
>the local agent is ready to start the audit. I have also heard that
>some agents actually don't audit returns because the tax consequence is
>to small or the business location is undesirable. Again, I have also
>heard the the same agent will select more items on the business return
>because there are to many staples or the return is sloppy. No kidding!!
>
>CONCLUSION --- MAKE YOUR OWN.
>
> Like it or not, this is the system of audit selection in the
>United States. There are two ways to approach it. One is to bitch,
>bitch, bitch and get nowhere. The other is to become knowledgeable of
>the system and figure how to deal with it from a position of strength
>and knowledge.
>
> If you choose the second approach, I will be following up this
>educational masterpiece with several more in the future. Check with us
>at " TAX BOARD ", ON LINE, JANUARY 1, 1986. HAVE YOUR COMPUTER DIAL
>714-974 3730.
>
> AL GUTKIN
>
<snip>
===========================================================================
Paul Andrew Mitchell, Sui Juris : Counselor at Law, federal witness 01
B.A.: Political Science, UCLA; M.S.: Public Administration, U.C.Irvine 02
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