Who is most likely to be audited?

Free Car Insurance Comparison

Compare Quotes From Top Companies and Save

secured lock Secured with SHA-256 Encryption

UPDATED: Jul 16, 2021

Advertiser Disclosure

It’s all about you. We want to help you make the right legal decisions.

We strive to help you make confident insurance and legal decisions. Finding trusted and reliable insurance quotes and legal advice should be easy. This doesn’t influence our content. Our opinions are our own.

Written By: Jeffrey JohnsonUPDATED: Jul 16, 2021Fact Checked

Discriminant Inventory Function

According to the Internal Revenue Service (IRS), tax returns are selected for audit by using a computer program called the Discriminant Inventory Function (DIF) system. This system gives each tax return a numerical score. Nearly all tax returns that receive a high DIF score are audited because the IRS believes that there is a good chance that after auditing high DIF score tax returns, there will most likely be a change in the amount of tax owed by the taxpayer.

While the IRS does not provide very clear information on how DIF scores are calculated, we do know that the DIF system compares your tax return to tax returns of other taxpayers in your income bracket. Assume Mary reports an income of $50,000 on her tax return, but then also claims charitable donation deductions totalling $10,000. Mary will most likely receive a high DIF score because it is unusual for taxpayers in her income bracket to donate 20% of their income. Also, the DIF system also compares how much income you report and how much income others in your neighborhood report on their tax returns. For example, if you live in an affluent area where the average income of the taxpayers is $200,000 a year and you report an income of $30,000, it will also cause you to receive a high DIF score.

Income Source

A high DIF score is not the only way to get audited; there are some taxpayers who are at high risk for being audited given their source of income. Taxpayers that are self-employed at high risk for being audited or by the nature of their job are at high risk for being audited because the IRS is suspicious that self-employed taxpayers deduct personal expenses by labeling them business expenses on their tax returns. Other taxpayers such as waiters and those who work in the gaming industry are also at a high risk for being audited because they earn income mostly in cash. Most recently, the IRS has been on alert for taxpayers that might be involved in committing financial fraud. Taxpayers who use offshore credit cards, have very high incomes, investors in abusive schemes, and those who fail to include certain sources of income are also at risk for being audited because the IRS is carefully monitoring their activities. The IRS can also audit taxpayers based on information received by third parties. For example, if your tax return does not match the information on your W-2 or Form 1099, that increases audit risk. Information from public records, newspapers, or anonymous sources can also cause the IRS to audit you if they suspect your return may contain inaccuracies.

While some taxpayers may be concerned about the possibility of being audited, the IRS does not have unlimited time to audit taxpayers. Under federal law, the IRS has only 3 years from the date the tax return was filed to conduct an audit.    

Get Legal Help Today

Find the right lawyer for your legal issue.

secured lock Secured with SHA-256 Encryption

Editorial Guidelines: We are a free online resource for anyone interested in learning more about legal topics and insurance. Our goal is to be an objective, third-party resource for everything legal and insurance related. We update our site regularly, and all content is reviewed by experts.

Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

Full Bio →

Written by Jeffrey Johnson
Insurance Lawyer Jeffrey Johnson

Get Legal Help Today

Find the right lawyer for your legal issue.

secured lock Secured with SHA-256 Encryption