How to avoid an audit by the IRS

Audits have declined in recent years, owing to a loss of 30 percent of the IRS’ enforcement staff since 2010. In fiscal year 2016, the agency says it audited nearly 1.2 million tax returns, or just 0.6 percent of the total.

Seven out of 10 audits were conducted after a notice like this:

DEAR TAXPAYER,
SOME OF THE INFORMATION THAT YOU PROVIDED TO US DOES NOT AGREE WITH THE INFORMATION WE RECEIVED FROM OTHER SOURCES.
— THE INTERNAL REVENUE SERVICE

 

Focus on richer taxpayers
In recent years, the tax collector has been focusing on the wealthy. If you earn $10 million or more, you have a roughly 1 in 5 chance of getting audited. But for most taxpayers, the odds are less than 1 in 100.

Here’s the breakdown:

Percentage of individual returns audited in 2016
Size of adjusted gross income Returns audited
No adjusted gross income 3.25%
Under $25,000 0.8%
$25,000 – $49,999 0.49%
$50,000 – $74,999 0.41%
$75,000 – $99,999 0.52%
$100,000 – $199,999 0.62%
$200,000 – $499,999 1.01%
$500,000 – $999,999 2.06%
$1,000,000 – $4,999,999 4.6%
$5,000,000 – $9,999,999 10.46%
$10,000,000 or more 18.79%

Source: Internal Revenue Service Data Book, 2016

What’s the DIF?

In addition to a filer’s overall income, other figures can attract auditors’ attention.

A return can be selected for audit via the IRS’ computer-scoring system known as Discriminant Information Function, or DIF. The DIF looks at deductions, credits and exemptions, with norms for taxpayers in each of the income brackets.

The actual scoring formula to determine which tax returns are most likely to be in error is a closely guarded secret. But it’s no mystery the system is designed to screen for returns that could put more money in the U.S. Treasury.

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