Over the years, the Internal Revenue Service has developed resources known as the IRS Audit Selection Process to select the returns for an income tax audit. The best known system is the discriminant index function (DIF) system. This system, which the IRS has relied upon for years, uses mathematical formulas to rate returns based on their potential for having a tax problem.
The Treasury Inspector General for Tax Administration (TIGTA) has found that the DIF-selected returns have high no-change rates. A no-change audit is when you have substantiated all of the items that the IRS was reviewing during the tax audit, and they find that there are no changes in the return. For background, the IRS can propose changes that the taxpayer agrees with, or the IRS can propose changes the taxpayer disagrees with. The TIGTA found that for all small businesses, 50% of partnerships and 62% of S-Corporations that had a federal tax audit were found to have no changes in Fiscal Year 2011. This means that the IRS is spending large quantities of time and resources on tax audits that are proving to be unnecessary.
The IRS tax audit system needs to be improved and more productive. The system currently is a burden to compliant taxpayers who happen to score high in the DIF system. The IRS has taken what the TIGTA has suggested under advisement. If you are selected for an IRS tax audit, a New York Tax Attorney can help guide you throughout the entire process so it is not as painful as it could be and lower tax bill you will pay.