According to the IRS, returns are chosen for examination by computer scoring, information received from third party documentation (W-2, 1099 questionable treatment of an item), information received from other sources on potential non compliance (newspapers, public records and individuals).
A computer program called the Discriminant Inventory Function System (DIF) assigns a numeric score to each individual and some corporate tax returns after they have been processed. If your return is selected because of a high score under the DIF system, the potential is high that an examination of your return will result in a change to your income tax liability.
Your return may also be selected for examination on the basis of information received from third-party documentation, such as Forms 1099 and W-2, that do not match the information reported on your return.
- Not Reporting all Taxable Income
- Data Entry Errors
- Participation in a Tax Shelter
- Rental Losses
- Failure to properly pay household help
- Large travel and entertainment expense
- Discrepancy Between Individual Taxpayers and Corporation Filings Associated to Taxpayer
- Self Employed (not reporting profit in 3 out of 5 years)
- Large charitable contributions
- Home office deductions
- Not Hiring a Reputable Tax Preparer
- Claiming 100% business use of a vehicle
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