IRS Secret DIF

The IRS Secret DIF Audit Selection Formula

by James S. LaHam, CPA, Senior Tax Partner

We recently talked about your actual chances of being selected for an IRS audit.

In this segment we are going to discuss how the IRS makes their audit selections. They use a secret formula known as “DIF,” which stands for Discriminatory Inventory Function. It scores your tax return for its potential to raise your taxes and has a pretty good track record as 80% of the returns selected result in more taxes.

We have figured most of the factors that are prevalent in the formula and listed them below:
  1.  If your itemized deductions exceeds 35% of your adjusted gross income (especially if you have a higher than average charitable contributions), you will score higher.
  2. If you file a Schedule C, Small Business Schedule, and your business deductions exceed 63% of the gross income, you will be more at risk.
  3. High income taxpayers in general score higher (especially those over 1 million of gross income).
  4. Significant wages combined with Schedule C losses, or losses from partnerships and S-Corporations reported on Schedule E will ring up a higher score.
  5. Self-prepared and incomplete returns prepared carelessly will score highly.

The actual truth of the matter is that the formula is really a common sense, yet scientific, approach to selecting returns for audit, that really is not all that mysterious.

Don’t take an audit personally. Remember that the IRS is usually only interested in financially successful taxpayers, so take it as an unsolicited compliment.