Annual Filing Season Program

[Bees Knees]

IRS has just put some teeth into this "voluntary" program. Beginning in 2016, if you are not an EA, Attorney, CPA, or AFSP certificate holding, you can't represent your client in an IRS audit.

Forget about the Loving case, the IRS has the authority to regulate those who "represent" their clients before the IRS. If your tax client gets audited, and they want you to represent them in the audit, you are subject to IRS regulatory authority.

It should be noted that the DIF scores that pick tax returns for audit have always been lowered for returns prepared by tax professionals. My guess is this scoring will be updated so that returns prepared by non-IRS approved preparers will have a higher chance of audit than those prepared by EAs, Attorneys, CPAs, and AFSP certificate holders.

Voluntary? Technically yes, but once IRS starts to audit your clients and you didn't get your AFSP certificate of completion for the year, your client isn't going to be happy you can't help with his/her audit.

[DaveinTexas]

I wonder about your DIF score comment

Where or from what source are you drawing from regarding the IRS applying a lower DIF score if a professional prepares the return? I have never heard that before......until now.

[Bees Knees]

Where or from what source are you drawing from regarding the IRS applying a lower DIF score if a professional prepares the return? I have never heard that before......until now.

Years of being in the business and listening to former IRS auditors doing tax seminars on audits, and reading articles on how to lower your chances of audits.

Do a google search and read some articles on the subject. A number of them mention this.

[FEDUKE404]

DIF scores get weighted merely due to use of a professional preparer ?

Years of being in the business and listening to former IRS auditors doing tax seminars on audits, and reading articles on how to lower your chances of audits.

Do a google search and read some articles on the subject. A number of them mention this.

I would tend to have the same question as DaveinTexas.

If you, or anyone else, can provide a definitive source stating that the DIF score for a filed tax return will be modified, based solely upon whether the return was self-prepared or professionally prepared, I would love to see that source. (And it might be somewhat useful for any future business advertising! )

Granted, I might envision a scenario where some IRS subjective differences could perhaps occur once a return has already been picked by a "bad" DIF score for review, based upon the "vibes" or whatever of a self-prepared TurboTax return versus that prepared by a CPA. But that would be more in the overall perspective range as opposed to a "DIF scoring issue."

FE

[David1980]

If you, or anyone else, can provide a definitive source stating that the DIF score

Is there a definitive source for anything affecting the DIF score? I was under the impression they don't officially make known what contributes to the DIF. Leaving the unofficial sources, such as prior IRS employees and such?

[JON]

Ultra Tax

gives you warnings on itmeized deductions in comparison to AGI if greater than the national average, that is one part of the DIF. For a few years in the 90s they were supposed to not be using the DIF with as much confidence as they used to, but now it is evidently back. At an audit if you ask why selected they are supposed to tell you it it was because of the DIF.

[Lion]

ProSystem fx

Yes, ProSystem fx also has excellent diagnostics. It also has some boxes with various reminders as I enter in particular fields. And, of course, from within any line/box/entry I can receive Help or Look Up or Federal/State Instructions or CCH's Master Tax Guide or Explanations or IRC or Regs or a long list of other tax preparation advice depending on the topic. I read all the diagnostics and then dig deeper if needed. You never know when you're a bit too tired and something seemingly simple or usual to that client is now a bit different or the law a bit different, so you need to take a closer look.

[FEDUKE404]

Consideration of average numbers on Schedule A

gives you warnings on itmeized deductions in comparison to AGI if greater than the national average, that is one part of the DIF. For a few years in the 90s they were supposed to not be using the DIF with as much confidence as they used to, but now it is evidently back. At an audit if you ask why selected they are supposed to tell you it it was because of the DIF.

Many (most?) personal tax software packages offer such a comparison.

Several years ago I even had one client (I was working at a storefront place whose name goes unmentioned) to return to the office and *REQUEST* that all of his Schedule A deductions be increased to match the national average amounts. (He had talked to "a friend" who had TurboTax on his computer.) You cannot make this stuff up. . .

As for getting a "better" DIF score merely when using a professional preparer, I guess I'll just have to chalk that up to "I read it on the internet, so it must be true." Not to be confused with those "tell all your friends" warnings I frequently receive.

FE

[Bees Knees]

I would tend to have the same question as DaveinTexas.

If you, or anyone else, can provide a definitive source stating that the DIF score for a filed tax return will be modified, based solely upon whether the return was self-prepared or professionally prepared, I would love to see that source. (And it might be somewhat useful for any future business advertising! )

Like I said, do a google search. In just a few seconds, I came up with hundreds of websites that all say the same thing. Your DIF score may be lowered by hiring a professional.

Just a quick google search found the following. There are many more than these:

http://www.rmsaccounting.com/PDFs/audit-defense-tcmp-dif-scores.pdf

• DIF Scores Count
Apart from the TCMP program, your return will be evaluated based on your "DIF" score, a
set of IRS formulas known as the "Discriminate Function System." About three-quarters
of all returns audited are selected by the DIF computer, which compares deductions,
credits, and exemptions with the norms for taxpayers in each income bracket.
While these formulas are kept very secret by the IRS, you can count on having a higher
audit probability if you fall into certain categories or report certain things on your tax
return.

... 5. No preparer or a problem preparer. If you have a complex return and prepared it
yourself or if your return was prepared by someone on the IRS's problem preparer list,
you are more likely to be audited.

https://ttlc.intuit.com/questions/1486074-do-audit-chances-increase-when-filing-a-final-partnership-tax-return

3. DIF Scoring - Every tax return filed is given a discriminate function (DIF) score. The score is based on secret calculations developed by the IRS to identify returns with the highest likelihood of tax change on audit. The DIF score increases for various items on a return (such as Schedule C or auto expenses) and decreases for other items (such as using a paid preparer). IRS classifiers review high DIF-score tax returns, select those that will be audited and decide which items on the tax return will be audited.

http://financedad.com/tips-to-decrease-your-chances-of-getting-audited-by-the-irs-and-scammed-by-tax-preparers/

3. DIF Scoring
The IRS scores every tax return with a discriminate function (DIF) number. It is based on secret calculations they use to identify income tax returns with the highest likelihood of tax change on audit. The DIF score increases for various items, such as Schedule C or auto expenses, and decreases for other items (such as using a paid preparer). IRS classifiers review high DIF score tax returns and select which ones and which items will be audited.

http://www.businessadvisorslv.com/uploads/How_to_Avoid_a_Small_Business_Tax_Audit.pdf

Reduce your “DIF” score. The IRS selects many returns for audits by using a secret scoring system based on a Discriminant Inventory Function (DIF) score. This highly confidential scoring system is based on the IRS’ experience with taxpayers with certain credits or deductions within certain income levels. For filers with higher than average charitable contributions or business expenses, it could increase the chances of an audit. More simply put, tax returns with more red flags tend to score higher and are more likely to be subject to an audit. And while it’s impossible to actually know one’s DIF score, incorporating as many of the following tips is widely believed by many tax experts to lower it.


Hire a professional. Tax laws seem to change and get more complex every year. The money, time and headaches saved by bringing in a professional tax preparer could more than pay for itself. Plus, they can point out numerous tax breaks and other ways to save owners may not know about. Even for those with taxes that are relatively straightforward, getting professional advice can go a long way to help minimize the risk for an audit. But choose a pro wisely. If the IRS believes a preparer is prone to taking too many unwarranted deductions on their clients’ returns, then all the preparer’s clients may be at risk for an audit.

[FEDUKE404]

Better DIF score with a preparer

I might add that years of working in the business with other experienced professionals has opened my eyes as to how the IRS audits returns. I have experienced situations where a client tried to represent himself during and audit and found the IRS throwing out deductions and increasing the tax due. The client calls me and complains about how unreasonable the auditor seems. I get involved with the audit, cite a few court cases and regulations, and the auditor caves in. Now its a no change audit.

This doesn't just happened to me. I know numerous professionals who do audits and they all say the same thing. The IRS auditors are less likely to insist on an increase in tax during the audit once a competent professional is involved. This isn't arrogance. Its fact. And we have several former IRS auditors who participate on this message board that can confirm a (competent) professional involved with preparing a return and representing a client means it is less likely to result in an increase in tax during an audit than when a taxpayer self prepares and/or self represents himself/herself during an audit.

This is not just a rumor, a tale told by your barber or hairdresser. The IRS has a better track record finding additional tax on self prepared returns than when they are prepared by a professional. And the IRS knows this. That is why in all likelihood, the DIF score is going to reflect that fact.

No need for a curriculum vitae summary or posting "observations" from other web sites. (Well, some kudos offered for not using any Wikipedia sources.)

It is obvious that certain items shown on a tax return may certainly have a negative impact on the (supposedly) ultra-secret DIF score. To a certain extent, that almost falls into the "common sense" area. With or without any issue of "how" and/or "by whom" the return was prepared.

Still unanswered is whether tax return A will get a "better" DIF score if there is someone signing off with a PTIN, versus getting a "worse" DIF when the identical tax return A is self-prepared and submitted to the IRS.

I'll stop at that. I really have much better things to do with my time, especially before someone here "complains" ----- BTDT.

FE

[Golden Rocket]

Better results on an audit

There is such a mystique surrounding a DIF score that I'm not even going to pretend to know a DIF from a BIF.

All I can vouch for is due to my own personal experiences and those of others whom I know in this business, the taxpayer is at a distinct advantage if (s)he has a tax professional to represent. A couple of my know-it-all clients went without me and got steamrolled because they thought the auditors were just "good ole' friends and neighbors." One of them was plundered so badly the IRS decided to audit the next year and get a second helping. I went with him and the audit was settled with no adjustment.

[New York Enrolled Agent]

No need for a curriculum vitae summary or posting "observations" from other web sites. (Well, some kudos offered for not using any Wikipedia sources.)

That made me laugh out loud.

While the sources all say the DIF is highly secret, they all seem to have "insights" into the secrets.

Bees - You are an enormous source of knowledge but just let this one go.

[Roland Slugg]

I would not be so presumptuous as to start a reply by saying, "What Bees Knees was trying to say was ..."

However, my take on his original comment was simply this: There are four main categories of people who prepare tax returns for others: Attorneys, CPAs, EAs and other, non-licensed individuals. The first group, lawyers, can pretty much be eliminated; I have never known a lawyer who prepared tax returns (except F-706's once in a while), and I have never seen a tax return that had been prepared by one. So that leaves CPAs, EAs and other, unlicensed persons. There is no question that most CPAs and most EAs who prepare tax returns for a fee do a very good job ... and a very conscientious one. They are educated in taxation, they take CE courses, they use sophisticated tax prep software, and, except for lone-wolfers, their work is carefully reviewed and quality-checked for content, accuracy and completeness by another experienced tax preparer. Also, all the CPAs and EAs I know would avoid preparing and signing a return for someone if it didn't pass the "smell" test. We have a license to protect, and that is worth more than any single client.

So it should not surprise anyone that CPA and EA prepared returns get lower DIF scores than returns prepared by unlicensed preparers or by taxpayers themselves. It isn't that the IRS "assigns" a lower DIF score to CPA/EA prepared returns, or reduces a return's DIF score by, say, 20% because it was prepared by a CPA or an EA. (But see final comment below.) Such returns get lower scores naturally because they are cleaner and more accurate ... the vast majority of the time. From everything I have read, the IRS's DIF scoring is a very complex and sophisticated program. It's been around a long time ... at least forty years ... and I'm sure it's being tweaked and improved all the time. As such, it just doesn't find as much in most returns prepared by a CPA or EA to cause their scores to run up very high.

Having said all of this, I will acknowledge that it may even be possible that the IRS's DIF program may, indeed, reduce a return's DIF score by a certain amount ... number or percentage ... if it was, in fact, prepared by a CPA or EA. If so, that's because the IRS has learned by auditing such returns that the factors that produced the high DIF scores were almost always ones with legitimate explanations and documentation. In turn, the IRS has sensibly built that experience into its DIF scoring programs and protocols ... because it knows it can! The IRS wants to collect tax as efficiently as possible and doesn't want to waste its time panning for gold where it knows there is no gold.

[mastertaxguy]

Irs auditing preparers? Will it matter if you have an afsp designation....

1. An earlier post on this thread from FEDUKE mentioned
"If you, or anyone else, can provide a definitive source stating that the DIF score for a filed tax return will be modified, based solely upon whether the return was self-prepared or professionally prepared, I would love to see that source. (And it might be somewhat useful for any future business advertising!")
2. About 9 years ago, I became aware that when IRS audits (examines or whatever) a taxpayer return they are also auditing the preparer.
3. With modernized e-file and such, IRS can determine how many education credits, for example, or 2106 forms you submitted and also whether the amounts are likely to be accurate.
4. Much of my practice deals with taxpayer, and tax-preparer, representation.
5. When you read about preparers who are suspended or disbarred, or prosecuted, by IRS it is usally the result of an audit of the preparer's work by looking at taxpayer returns for anomalies (EVEN IF THE TAXPAYER IS NOT SUBJECT TO AUDIT) and not necessary the preparer's own return. They do this now with fradulent EITC claims of course, did with phony first time home buyer claims and are doing this with fraudulent non refundable AND refundable education credit claims. They do move, however, like molasses flowing uphill on a cold day.
6. There was a situation in Michigan some years ago where deputy sheriffs in Detroit area counties were claiming unusually high 2106 expenses on returns prepared by a suburban preparer. Before IRS did the first audit, they pulled from their data files all the returns the preparer, and his predecessor (who sold him the business) had done for 6 prior years.
7. While IRS was auditing the deputies and assessing substantial deficiency notices and the like it was auditing the tax preparer. Eventually, he pled guilty to aiding and abetting filing of false tax returns (but was allowed to continue to taxes so he could pay his restitution). The guy who sold the practice (on installments) also as convicted and part of his sentence was to do "charity" returns where he lived (outside of Michigan). Both were the subject of DOJ news releases. [If you attend an AES Seminar, they had an item 4 years ago about a CPA firm in New York which specialized in federal 'security' services like FBI, Secret Service, etc and was claiming deductions for taxpayer of an "unusually high and imaginative nature."]
8. I represented several of the deputies on audit and continue to do their returns. When I asked an RO about whether the preparer was being 'invesetigated' his response was to the effect that he was not allowed to discuss "the ongoing investigation of both of them" (referring the preparer and his predecessor). [Some of these returns had "more than 25%" errors so they went back 6 years.]
9. The point: when they audit your client, they are auditing you. Doesn't matter if you are CPA, EA, RTRP, ACTS, AFTS, or AFSP.

[FEDUKE404]

Audits on the periphery

....
9. The point: when they audit your client, they are auditing you. Doesn't matter if you are CPA, EA, RTRP, ACTS, AFTS, or AFSP....

Agreed, although there is often a somewhat "chicken or the egg scenario" in play.

Several years ago I had a new client contact me, as she had some "reservations" about how her returns had been prepared the prior couple of years. She had gone to a local legend, who had quite a reputation for coming up with big refunds. (Included with her angst, she had apparently begun to hear of several clients of her preparer having to make some unexpected visits to IRS offices. . .) Many of his clientele were involved in the automobile sales business, and he was able to rain money from heaven for them by (among other things) creative uses of Form 2106.

My new client prior returns involved no such entries (a friend told her about "Joe," and she likely would not have had a "bad" DIF score based upon the filed tax returns per se, but there were obviously ... to me ... some apparently fraudulent actions occurring). She had also provided me, along with copies of her most recent returns (common practice for us all) the "receipts" which....let's just say did not match the return too well. I told her she was likely in a serious pickle and to seek some legal advice.

Long story short: The preparer ran out of luck (assumed to be from some very bad DIFs even with a PTIN helpful fudge factor????), and the IRS smelled blood. The IRS eventually audited ALL of his clients they could, within SOL, to include my potential new client. (She and I never crossed the "I told you so" bridge, but it was pretty much a mutual understanding of what likely was coming.) Not only did the preparer lose his car salesmen income, he ended up doing a considerable amount of hard time in the "big house."

As mastertaxguy noted, it just takes a few computer entries to pull up the returns each of us has prepared in recent years. All the more reason to try to keep our tax noses clean, and not to be afraid to show a client the door. (And in a related matter, many of us now chosen to shun most EITC returns.)

Getting a bit back to thread topic: The tax returns of my new client likely (and who can really, factually, say otherwise?) had a reasonably good DIF score. Heck, she may have even had a "better" DIF score with the professional preparer check box marked based on some comments made here? Either way, I doubt if the client's returns would have ever rattled anyone's tree in the IRS barring being victim of a "random" audit. I doubt if she ever had a bad DIF score (unless IRS perhaps IRS does a "redo" with crooked tax preparer factor entered?). She (and others) were likely put through the wringers not because of what was ON her tax return but rather because of who PREPARED her tax return.

Just my 2¢ addition to this conversation.

FE