An audit is arguably the most dreaded outcome of the tax filing process, and the situation carries with it some unsettling mystique. The standard nightmare has Internal Revenue Service agents with badges showing up on your doorstep, or the agency — seizing smorgasbord-style — the bulk of your personal assets. Experts in the field, however, say audits contrast greatly from their thriving myths.
“Audits are something most people should not be afraid of,” says Sandy Zinman, tax committee chairman for the National Conference of CPA Practitioners. “A lot of times the government just doesn’t want to do these audits.”
In fact, Zinman says, one of the most enduring tax audit myths holds that an audit is a common occurrence. He says audits are generally “a lose-lose situation” for the IRS because they require a lot of resources and because of the negative image audits project onto the IRS.
“Historically, only about 1 percent of filers get audited. That’s a real small percentage,” said financial adviser Thomas Jensen, owner and managing partner of Vaerdi LLC in Portland, Oregon. The IRS did not respond to questions regarding specific details of its auditing process, including its total number of audits.
Jensen said the IRS uses a system called the discriminate information function to determine what returns are worth an audit. The DIF is a scoring system that compares returns of peer groups, based on similar factors such as job and income. If a person’s financial data differs significantly from those established by his peers, the system gives that return a high DIF score. A high DIF score raises the chances that the filer will be audited, Jensen said.
Although the IRS audits only a small percentage of filed returns, there is a chance the agency will audit your own. The myths about who or who does not get audited — and why — run the gamut.