Question

During an interview with an IRS official on Dateline, the interviewer asks, "So how do you decide which Forms 1040 get audited and which do not?"

a. Complete below the hypothetical IRS response to the question posed by Dateline.

"The IRS does not reveal the details of its audit selection process, so the interviewee should keep his or her comments within the agency's policies. Tax returns for audit are chiefly selected by use of the (Data identification factor/ discriminant individual factoring/ discriminant inventory functioning) (DIF), which projects the amount of (profit/ revenue/ tax credits) the IRS will gain from pursuing tax returns."

b. Classify each of the following as either "Yes" would probably result in an audit and "No" probably not.

• Information from informants and whistleblowers. • Self-employed individuals with substantial business income and deductions. • Information returns are in substantial agreement with the income reported on the taxpayer's return. • In a year subsequent to an audit that led to no assessment. • The filing of a refund claim by the taxpayer. • Information from other sources, such as other Federal agencies, state and local government audits, and general media items. • Sensitive areas such as excessive deductions for tax-sheltered investments.

Answer 1

Solution:-

a. Complete below the hypothetical IRS response to the question posed by Dateline:-

"The IRS does not reveal the details of its audit selection process, so the interviewee should keep his or her comments within the agency's policies. Tax returns for audit are chiefly selected by use of the discriminant inventory functioning (DIF), which projects the amount of revenue the IRS will gain from pursuing tax returns."

b. Classify each of the following as either "Yes" would probably result in an audit and "No" probably not:-

Information from informants and whistleblowers	Yes
Self-employed individuals with substantial business income and deductions	No
Information returns are in substantial agreement with the income reported on the taxpayer's return	Yes
In a year subsequent to an audit that led to no assessment	No
The filing of a refund claim by the taxpayer	Yes
Information from other sources, such as other Federal agencies, state and local government audits, and general media items	Yes
Sensitive areas such as excessive deductions for tax-sheltered investments	No

Explanation:-

Other means by which tax returns are selected for audit include the following:-

• Information from informants and whistleblowers.
• Claims for refund.
• A mismatching of the tax return with information returns.
• Special IRS programs that target the tax returns of a certain industry, a certain tax return item, or a certain taxpayer group.
• Information from other sources, such as other Federal agencies, state and local government audits, and general news items.