What Triggers an IRS Letter or Audit?

IRS audit rates remain historically low. According to the 2022 General Accounting Office, .25% of all individual returns were audited in 2019 versus .90% in 2020. Letters for matching errors or return discrepancies are much more common. So how does the IRS check returns and decide who gets a letter or audit?

IRS Matching Program

The IRS has a matching program. They receive copies of all W-2s, 1099s, K-1s, and other tax documents. The program checks the income reported on your tax return against its database. For example, if the IRS has a 1099 for interest not reported on your return a letter is headed your way. If you agree with the income adjustment and pay the corrected tax that’s generally the end. Keep copies of all forms received and provide to your tax preparer.

The same goes for estimated tax payments. Make certain estimates reported are correct. It’s great to supply check copies as sometimes it’s very easy to transpose numbers. If the reported tax payments don’t match IRS records, you are guaranteed to get a letter. If they are correct and you made an error just pay the corrected balance due – but not before verifying they are indeed correct.

IRS Computer System

The IRS scans every return they receive through a system designed to detect anomalies. This computer system is called the Discriminant Information Function (DIF). The system is designed to compare a return to data compiled from similar returns. For example, it’s unlikely (or rare) someone earning $50,000 annually would have $40,000 of contributions. If a return is flagged by DIF, a human agent reviews the return.  If you did donate $40,000 and have the documentation, by all means, deduct the contributions.

Generally, the IRS has three (3) years from the filing date to audit. If there is a matching discrepancy you generally be noticed via letter within 3-4 months if the return was filed electronically.

If you have questions or concerns, contact your Dent Moses advisor.