Tax Nightmare: What Did I Do To Deserve An Audit By The IRS?

Moaning and groaning won’t make it go away when the IRS comes a’calling with an audit. Ask the auditor what you did to deserve such a terrifying experience and you’ll likely be met with a shrug, or perhaps a vague reason involving some kind of forms. So really, why did they pick you?

There are a few reasons your tax return could be chosen for an audit, says Fox Business. And no, it’s not because they just want to mess with your mind.

DIF Scores: DIF stands for Discriminant Function System, which is a method the IRS came up with to rate the potential for change based on past IRS experience with similar returns. Then there’s the UIDIF score, which is the Unreported Income DIF, which scores returns for the potential of unreported income. Because e-filing makes it easier for the IRS to analyze data and trends, they can easily run a few numbers and see if they need to come knocking on your door.

Related examinations: If the IRS finds out a contractor didn’t send out Forms 1099 to subcontractors, it won’t just be the employer’s fault — you need to report income of $400 or more if you’re self-employed, whether you got a 1099 or not.

Specific market segments: The IRS picks on a certain industry every year for compliance examinations. Sometimes it’s foreign trusts with offshore accounts, sometimes it’s lawyers, or even servers in restaurants who might be underreporting tip income. So it could just be your luck to be part of that industry when the IRS chooses it to take a closer look at. Congratulations!

For more reasons why you could be getting audited, check out the source link below.

Why the IRS Picked You to Audit [Fox Business]

Comments

Edit Your Comment

  1. Hi_Hello says:

    what’s the big deal about getting audit? They you have to pay a fee if the audit find you make a mistake? or do you just pay the tax you owe…or even get more money back from stuff you didn’t declare?

    • Bunnies Attack! says:

      I think its just stress… everyone cheats just a *little* on their taxes, even if its underreporting internet purchases for state use taxes. In my case I estimated some business expenses I had because I couldn’t bother digging up receipts (the total was like $50 over a year) but I’d still be nervous that it would be something like that they’d catch me up on and I’d get slapped with a huge fine.

      • phobos512 says:

        Um, no. Nice generalization there though.

        • George4478 says:

          You track every receipt and pay your state-county-city-whatever use taxes for all your online purchases? Impressive.

          • axhandler1 says:

            Yeah, I think most people just don’t realize they are cheating on their taxes when their accountant puts a nice little zero in the “State Use Tax” box. They are though. And it will never, ever, in a million years come back to bite them.

          • DrPizza says:

            Not all of us purchase that many items online. And, almost all of my online purchases fall under my tax exempt status for my farm purchases. Further, I live in a state (NY) where the online companies I use are taxed anyway.

            There are zero falsehoods on my tax return; I have receipts for everything. In fact, I had charitable donations that if I really needed to, I could get a replacement receipt (and have it on record, as I use payroll deduction for those donations) but since I lost the receipt and wanted to get my stuff to my accountant, I’m not claiming those donations. Ditto teacher expenses – I often don’t bother to keep receipts for $5 and $10 purchases. The total of all those purchases is in the hundreds, but I can’t deduct anything, because I don’t have a receipt.

          • msbask says:

            What are you talking about? I live in New York and can’t remember the last thing I bought online that didn’t include tax.

          • tooluser says:

            Not really. Just throw everything in a drawer and sort it out at the end of the year. (Don’t pay your accountant to do the sorting though, you have better use for your funds.)

      • ahecht says:

        Thank god I live in Massachusetts, which has a “safe-harbor” provision for use tax. I just pay a flat amount (about $20/year) to cover all untaxed purchases under $1000 each.

      • katarzyna says:

        I’ve never cheated on my taxes.

    • AcctbyDay says:

      The big deal is that the IRS choses to make your life difficult. They don’t play nice and even if you are right they drag it out. They are like the school yard bully.

    • Hoss says:

      It’s a big deal for even the most honest taxpayer, depending on the level of audit. Think of deductions or tax credits you may have taken over the last three years. The IRS may ask for records you don’t have, and disallow the benefit of those amounts. That might mean you owe on demand a huge amount only because you didn’t follow IRS record-keeping rules. And of course in extreme examples, the big deal is you lose your professional reputation because the findings become public record, and in very rare cases of large-scale fraud you could find yourself in federal prison.

    • dpeters11 says:

      And with the IRS, you have to prove your innocence, not them having to prove guilt.

      To be fair, most audits start out as just mail audits. They ask for something, or tell you that you did the math wrong. You give them what they want, and they go away. It’s the other audits that cause stress.

      • George4478 says:

        I gave them what they wanted and they refused to go away.

        My one mail audit was based on a math error by me that turned into a several month comedy of errors. The IRS could not understand that even though I made money on one stock sale, I lost enough money on others to have a capital loss of $3000. It took multiple letters and, finally, a phone call to IRS Customer Support before they would admit that the tax on NEGATIVE capital gains is $0 and that I owed them nothing. It took over a year to get the audit-closure letter with the resolution.

        • amuro98 says:

          Well, you obviously should have written them a check for -$600 to cover the taxes on the -$3000.

          This would mean the IRS now owes you $600, but hey, the IRS is never wrong, right?

      • TheGreySpectre says:

        The last time I got audited I got a letter form the IRS that said “You screwed things up and paid us too much money, here’s a check for the extra you paid us”

        It’s not always bad.

        • tooluser says:

          They waived less than $5 in interest I owed, because it simply wasn’t worth it to collect it. Thanks, America for your generous contribution of less than $5 to my bottom line!

    • Megalomania says:

      because it’s a massive amount of stress, even if you believe 100% that you did everything right? The moment you get an audit letter, you’re left wondering if you have every piece of relevant documentation going back for years. Even in the best case, you still run the risk that they’ll have some human error on their part and drag you down for months or years while you try to fix their mistake.

      • Kestris says:

        My parents were adited once. Watching my mom stress over whether she had every piece of paper the IRS wanted to see in relation to the taxes was not pretty.

    • Clyde Barrow says:

      Many folk do not understand that the law benefit’s both sides; them and us. I have told many people throughout my life that they should take advantage of the benefits of the law to reduce their tax liability. There is nothing wrong with taking advantage of the law to do this but so many, including many in my family, are brainwashed with this mentality that the IRS is the Nazi Gestapo ready to arrest you at any given moment. There are so many entitlements given to us without the need to cheat.

  2. AcctbyDay says:

    Because you have money for them to take?

  3. Altman says:

    I know this won’t make me popular by saying this, but the IRS is grossly underfunded, and needs a LOT more manpower to enforce tax law and collection. I don’t remember the exact number, but the return on the investment of $1 in the IRS is absurdly high compared to other things the government could be spending money on, I think its probably one of the best ways for the US to generate more income.

  4. CubeRat says:

    What did you do? You exist.

  5. Mark702 says:

    Fuck the IRS. A corrupt government program that funds death and destruction by forcibly taking our own money and using it to fight wars where they send our people off to be blown apart and killed, and other garbage like the TSA, war on drugs that costs billions and is a colossal failure, and much more. Fuck the IRS and fuck the Federal government in general.

    • Misha says:

      Then move.

    • partofme says:

      Misplaced anger much? If all of those policy choices you hate were magically changed to be to your liking, the IRS would still do exactly what it does.

    • Loias supports harsher punishments against corporations says:

      The IRS collect the money, and really does nothing with it. Your politicians are the blame here, not the collectors.

      As stately below, heinous misplaced anger going on here.

    • kathygnome says:

      Somalia, The Libertarian Paradise, awaits you. It’s not like you need a visa. No government, no immigration problems!

    • Clyde Barrow says:

      @Mark702; feel free to move to the other side of our planet at any time. After six months, you’ll be begging to pay your taxes freely,,,with interest,,,on your knees. lol

  6. framitz says:

    I was audited a few years ago, I’m not sure what triggered it.
    I got so confused, I wrote the IRS a letter and asked them to figure it out and send me a bill.
    I received an additional refund check for around $2100 a month later. Case closed.

    I’m sure it is rare that it works out this way.

    • Hoss says:

      It feels like you didn’t take a tax credit that you were eligible to get. If your income wasn’t very much you may have failed to take the Earned Income Credit. Or if you were a student you may have missed a couple credits in that case. You should take a look back at what they found because the credit may apply to multiple years and they will only tell you about the year that they reviewed.

      • framitz says:

        My income isn’t bad, it was a typo on my part that caused the error. I forgot to mention that IRS did send an explanation. Taxes were more complicated than usual that year due to stock transactions.

  7. Loias supports harsher punishments against corporations says:

    The IRS is focussing on the issue of contractor versus employee right now. They are realizing a lot of companies are coding employees as independent contractors to save on taxes, but that in many cases those independent contractors don’t pass the tests to dermine status and really should be employees.

    • webweazel says:

      Correct. Anyone interested in this subject should do a search with:
      “form ss-8″
      and start reading.

      Anyone affected can potentially be re-categorized as an employee, file amended returns for prior years, and get a big chunk of change back from taxes. You can do this even if you are no longer employed by the company. I did a few years ago.

      The employer can be billed for the back taxes owed for each employee affected, and a significant fine from the IRS. They don’t take shenanigans like this lightly.

      One interesting tidbit–if one person of a “group” of employees (say with the same job title or under the same manager) can be re-categorized from contractor to employee, so can the rest of the group.

    • framitz says:

      My employer is extremely careful when it comes to contractors. I started as a contractor, and was converted to full time employee after 15 months. 12 months is our limit for a contractor, even it renewing or hiring would save money.

      I was ‘terminated’ at least once a week during the transition because I was working under an expired contract.

  8. Blueskylaw says:

    “Tax Nightmare: What Did I Do To Deserve An Audit By The IRS?”

    Computer, find me a victim (sound of random person generator humming in backround). Congratulations, you have been chosen to participate in our Income Reducing program, please have a seat, someone will be with you shortly.

  9. StatusfriedCrustomer says:

    They scan returns for too many “round” numbers, so maybe it’s wise to contribute to charities in amounts like $1,022 or $253. Don’t use too many 7’s, 8’s, and 9’s either, because there is a “digit frequency test” that they use also. The numbers 0, 1, and 2 should be most common.

  10. buddhalite says:

    You are flat wrong. I am a tax professional who has had to defend his own and client’s taxes through the most rigorous of audits. You have to prove nothing – the IRS must prove that they have information otherwise that states you are NOT eligible for a deduction or credit. Until they present evidence, there’s nothing you have to defend. It’s just like court – until they prove you can’t you don’t have to prove you can. In fact, unless a specific allegation has been made, I start at the meeting with no documentation at all – until I find out what they want. You have to play it smart – not the other way around.

  11. MonkeyMonk says:

    I got audited a few years ago for exactly the related examinations reason listed above. A contractor didn’t send me a 1099-MISC and because the work was done back in January I had forgotten about it when tallying up my income for the year.

    The entire audit consisted of a letter from the IRS telling me they knew of the income and I needed to pay it (which I did.). Took about 5 minutes to resolve.

  12. Hungry Dog says:

    To answer the question in the title. You were born. That is why.

  13. dush says:

    D – Discriminate
    I – Function
    F – System

    I – Is
    R – Not
    S – Smart

  14. sirwired says:

    “Because e-filing makes it easier for the IRS to analyze data and trends, they can easily run a few numbers and see if they need to come knocking on your door.”

    This is 100% incorrect. Conventionally-filed returns simply get scanned and/or typed into the system, after which they are completely identical to e-filed returns.

  15. kosmo @ The Soap Boxers says:

    “you need to report income of $400 or more if you’re self-employed, whether you got a 1099 or not.”

    Actually, you’re supposed to report all income. It’s just that the person paying doesn’t have to send a 1099 if the amount is less than $400.

    • Bsamm09 says:

      $600 is 1099 threshold. $400 is SE tax. Do have to report all income though.

      • kosmo @ The Soap Boxers says:

        Yeah, that seemed wrong when I wrote it :)

        I hate Mondays.

        Oh, it’s Thursday?

    • huadpe says:

      If you are self employed and have no other income, and your self employment income is under $400, you do not need to file a 1040.

      http://www.irs.gov/individuals/article/0,,id=96623,00.html

      • kosmo @ The Soap Boxers says:

        True. But that’s only the case if you have no other income at all. I’d guess that it’s fairly uncommon that someone would have less than $400 of self-employment while also having not even a dollar of any other type of income.

  16. Jen says:

    Where is the Tax Cat?

  17. lovemypets00 - You'll need to forgive me, my social filter has cracked. says:

    We were audited in 2001. I have no idea why. I had to take a vacation day from work, drag all of our records, including bank records, receipts from my husband’s job, a copy of our return to the Federal Building in the next county. It was so scary. Long story short, I had filed the wrong schedule – I filed a schedule C-EZ instead of schedule C. So the auditor helped us file the revised return. We didn’t owe anything, they didn’t owe us.

    I will tell you if you’re hiding money, like getting cash from somewhere and depositing it to a bank account, that’s not a good plan. We had to show where all deposits came from, so if you’re selling drugs on the side, use the cash to buy gas, groceries, stuff like that. Don’t start depositing the money to your checking account! The agent said people either give you money as gifts, or you earn it, steal it, or get it through criminal activity.

    • tooluser says:

      So essentially what you are saying is that a government employee got to go poop on you for no good reason. And you put up with it. And now you spread their propaganda in public for them.

  18. Sad Sam says:

    We were audited a few years ago. The IRS was right, the CPA I paid a lot of money to and trusted to do our taxes was wrong and claimed a deduction we were not entitled to. End result, we had to pay the IRS back taxes, plus interest, plus we had to pay the stupid CPA to help us with the audit. It was a horrible, stressful and expensive mess.

    Ever since then we get extra scrutiny from the IRS. Every year we get some type of mail from the IRS, turns my stomach each time.

    • sirwired says:

      I’m surprised the CPA didn’t give you your money back since he screwed up. Even the most basic tax software package will provide someone represent you in the audit for free (no matter the reason), and cover interest and penalties if it was a software error.

  19. nickmoss says:

    The worst audit they can conduct, and one which I had to endure, was not mentioned. That is the Taxpayer Compliance Measurement Plan audit. A few people are selected at random each year for this torture. The selection is a fraction of a percentage of the returns received on a given day.

    You must document every line on your return. Have children; bring in the birth certificate for each child, along with a school record to prove they are still alive. Can’t claim to be married without producing the license, signed by the official who conducted the ceremony. You even have to provide your own birth certificate. All documents certified, of course.

    It was worse than my time in Vietnam. Six months of agony. And it was nothing personal. The revenue agent was completely dispassionate. As it was explained to me, this audit is just to see how well the average taxpayer is following the IRS rules. Nothing more.

    I ended up owing nothing. But I still wait, even if I am due a refund, until April 15th to file, as that is the day on which the pool they draw from is the largest. And yes, you can be selected for another TCMP audit even if you had one the year before. It’s not like a normal audit, where you can get out of it if you had an audit in the last three(?) years and were found to not owe any additional taxes.

    • Cerne says:

      That sounds like so much fun. What a great way for the government to let you know who’s really in charge. By the people, for the people my ass.

      • Clyde Barrow says:

        “It was worse than my time in Vietnam” —— Now that’s bad. I remember a lot of you guys coming home back then and none of you were happy campers.

    • sirwired says:

      Errr… the compliance audits aren’t chosen from a pool of taxpayers that happened to file on a particular day. You are just as likely to be chosen if you file on January 15th as you are if you file on April 15th.

      And yes, they suck. But the IRS needs to collect that information somehow.

      • tooluser says:

        No, they don’t. They need to respect the Liberty of all American citizens.

      • nickmoss says:

        In 1975, the revenue agent told me they sampled .02% of the returns by date of receipt. I know that the TCMP was replaced by the NRC in 1987, but I’m still not taking any chances.

  20. Draw2much says:

    I’m pretty sure our audit started because we applied for the First Time Homebuyers Credit. People were abusing the credit, and so the IRS was playing “catch up” by auditing people who had applied for it. We were legit and did all the paperwork correctly, but we got audited for it anyway.

    That Audit took over a year to finish. We had to go to Tax Court in the end to get things cleared up. The reason it took so long was because the IRS was so slooow to respond to anything we sent them. It’d take them a month to get to our paper work and then another month to get around to replying. :-/

  21. VashTS says:

    I heard through a professor at college, he IRS was secretly started by a group of bankers who wanted extra money to invest in their personal interest or so the rumor goes. And since bankers and government go hand in hand, that’s how the IRS was formed and why they are a private company with unlimited power.

  22. PortlandBeavers says:

    I don’t have any inside knowledge, but I think it’s sort of common sense. If you are in a high-income profession, there’s more money to go after, therefore a higher audit risk. Own a business where there’s not not much reporting to the IRS by the people paying you? Yup. Have a high proportion of deductions relative to your income? Did you get a tax form for gambling winnings and net the whole thing down to zero with losses? You had better be prepared to prove it.

    I think if it ever happens to me and I can settle it for an amount I can afford, I’d just pay it and move on whether I agree with it or not. But if it seems like I’m in for the financial equivalent of a full body cavity search, some money paid to a good lawyer would be well spent.

    Most IRS employees are just government workers hoping to get through the day, get through the year and eventually collect their pension. If you treat them OK and don’t blame them for getting picked, it will go a long way. The criminal division is a little different, as those guys are more gung-ho. But that division is pretty small and is has its hands full with the bigger fish.