Audit Risk Meter™

[Roland Slugg]

The IRS uses ...

... a computerized return grading method it calls the "DIF system" ... DIF stands for "differential." (DIF stands for "DIscriminant Function," as correctly pointed out by ED SMITH below. -RS) It's supposedly based on a finely tuned and highly sophisticated computer program that "scores" every return that's processed, assigning numeric values to many (if not all) line items on returns. The ones with the highest DIF scores are then selected for audit at the start of each annual audit cycle ... around September each year. (I'm sure more are added after the October 15th final filing deadline.)

The IRS guards its DIF program and formulas as carefully as KFC guards its 11 secret herbs and spices (or is that Coca~Cola?), but frankly, I think it's a joke. I've had bullet-proof clients selected for audit that resulted in "no change" RARs, and I've seen many returns go unaudited even though they contain large, egregious mistakes ... mistakes that can often be seen by looking at nothing but the return itself. I'm sure all of you have as well. Based on my experience the IRS more often than not goes looking for gold where there is no gold, and when it does happen to stumble into a gold mine, its people often look in the wrong places.

[joanmcq]

To efile, most if not all software will require that the name and EIN of the 1099-Misc is entered in an appropriate place, but that is not on the EIN section of the C. You could simply put the income on the Sch C, since the poster did not mention getting a 1099, or any kind of documentation for the income. Maybe he was trying to enter the income as wages, as he did mention the software would not let him efile without a W-2, and if there is no W-2 and the person is not an IC, you file a substitute W-2.

[erchess]

The software I used last year and the year before

did not require that the 1099s be entered for a Schedule C. I usually just totaled the 1099 and non 1099 income that the taxpayer reported to me and put the figure right down on Schedule C. The only time I entered the 1099s was when all the income the taxpayer was reporting came from them. If he told me he got one dollar that was not on a 1099 he put in my hand, then I did not enter any 1099 info into my computer. I efiled every return I did last year.

[ED SMITH]

... a computerized return grading method it calls the "DIF system" ... DIF stands for "differential."

This is a very common idea that DIF stands for differential. It does not. It stands for
Discriminant Function.

"I.R.S. computers select returns for audit based on a "dif score." "Dif" is I.R.S.-speak for a statistical technique called discriminant function, which divides returns into those likely to produce more tax money after an audit and those the I.R.S. will ignore. Each return filed is assigned a dif score. A bit more than 2 percent, those with the highest scores, are sent to audit clerks who decide whether to initiate an audit; fewer than 1 percent are actually audited. " from NYT Jan 11, 2008.

[winnie]

charitable contributions

Thank you for that posting on client not wanting to deduct contributions. Just copied it and emailed to a client that I have not been able to convince to take the deductions. Maybe your idea will convince him!

[JohnH]

Tell him this as well

He should render unto Caesar ONLY what Caesar is entitled to - not a cent more....

[Golden Rocket]

Under the regs and protocols currently in effect, and those of last year, that return could have been filed electronically. Maybe ProSeries or the backend e-file vendor has some additional restrictions that I don't know about. BMK

Yes Koss they did. It was integrated with a bank product. My friend told me the RAL bank would not accept the RAL application without an information return, and that was why they couldn't e-file. I don't know why you couldn't e-file without a RAL, but maybe the two are so inexorably entwined that their tax shop considers them in unison.

By the way, I am also "Nashville" when I do consulting work at a customer's PC. Just in case you were wondering why GR is answering your post.

[Fuzzy Faced Leader]

It seems to me that giving the odds of audit (risk meter) would move into the realm of contingency refunds. A shrewd taxpayer could maximize the refund, and also minimize the audit risk. Since this possibility exists, TT is assisting in filing fraudulant tax returns. This could be very interesting.

[Kram BergGold]

Karnac

Jesse,
One audit was over a huge Schedule C loss. The other one was a Schedule C with a large home office. I am averaging 1-2 face to face audits per year and 1-2 paper audits these days. I do a lot of Schedule C returns. Only one has had a significant finding against my client.

[joanmcq]

Erchess, I was referring to the fact that if you enter a 1099, you have to enter the EIN. Of course you can just total the gross receipts. However, I think the IRS computer is matching 1099 info in efiles, and if you don't enter the 1099s a CP2000 could be forthcoming. I have seen CP2000s where the income on the 'missing' 1099 was completely covered by the reported income on the Sch. C. Easy to fix, but any notice is a pain.

[Zee]

How to view the TT audit meter?

I guess you have to purchase TT, huh? How many test returns can you process?

[DonPriebe]

The IRS doesn't get any EIN info on 1099-MISC

I was referring to the fact that if you enter a 1099, you have to enter the EIN. Of course you can just total the gross receipts. However, I think the IRS computer is matching 1099 info in efiles, and if you don't enter the 1099s a CP2000 could be forthcoming.

Some evening when you're trying to fall asleep, take a look at Pub 1346, which is the document that specifies the format of data that are transmitted to the IRS in an e-file. Your software may require a EIN on a 1099-MISC, but there is no format specifed that transmits that information to the IRS. Similarly, if you enter EIN information on a 1099-INT or 1099-DIV, that data is also NOT transmitted to the IRS. In contrast, the EIN on a 1099-R IS transmitted.

[Koss]

TurboTax

I guess you have to purchase TT, huh? How many test returns can you process?

TurboTax is a consumer product. The basic version costs about $40.

It is not designed for tax professionals; it does not allow electronic filing with an EFIN. The consumer can file electronically, and Intuit is the ERO. The price includes the fee to file one federal return electronically. The software will allow the consumer to prepare and print an unlimited number of paper returns. This is how most consumer software works.

Using the software in a professional context would be a violation of the consumer licensing agreement.

The software firmly locks out the fields that are used to identify a paid preparer. So if a professional uses the software, in violation of the license, it can only be done in two ways:

- Prepare and print paper returns, fill in the paid preparer section by hand, and file the returns by mail, or

- File the returns electronically, paying the consumer fee for each one filed after the first one (which was included in the purchase price), and leave the paid preparer fields blank, which is a pretty serious violation of IRS regs. If you get paid to prepare the return, you have to sign it. If you file it electronically with consumer software, there is no way to sign it.

With that being said, if your intent is just to test the audit meter for research purposes, you can buy the consumer software for $40 and prepare as many fictitious returns as you want, without ever filing them or printing them.

Burton M. Koss
koss@usakoss.net

[Koss]

Render unto Caesar...

He should render unto Caesar ONLY what Caesar is entitled to - not a cent more....

And our coins and notes do not bear an image of the commissioner of Internal Revenue

[LMAO]

BMK

[joanmcq]

The firm I work for has the software because we do audit representation for taxpayers that self-prepare, and most of them use TT. That is also why I have opinions on what the IRS should audit if they want to maximize returns, because I see what people that self prepare are sending in!