Filing taxes can be stressful. When the IRS opts to take a closer look at your tax return, that can only increase your anxiety level. Getting your return flagged for review doesn’t mean you’ll be audited, but it can raise the odds that Uncle Sam will conclude that the numbers don’t add up. It helps to understand why returns are flagged and what reviews involve. If you’ve got a complicated tax situation, it may be wise to work with a financial advisor with tax expertise.
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The most common reason for the IRS to review a tax return is something called the Discriminant Function System (or DIF) score. The IRS uses a computerized scoring model that evaluates your return and gives it a score based on the likelihood that it will need to be changed. To determine this score, the model compares your return to similar returns that the IRS received in past years. A second model, the Unreported Income DIF (or UIDIF) score, rates your return on the probability that you didn’t fully report your income.
Returns that receive high DIF or UIDIF scores are more likely to be pulled aside for review. Factors that could trigger a high score include having a substantially higher or lower amount of reported income compared to the previous year, claiming excessive deductions for business expenses or leaving a 1099 form off your return.
It is also worth mentioning that the IRS randomly selects a small percentage of tax returns to review. The IRS compares these returns to a sample of “normal” returns to see if there are any discrepancies.
If the IRS decides that your return merits a second glance, you’ll be issued a CP05 Notice. This notice lets you know that your return is being reviewed to verify any or all of the following:
At this point, you’re not expected to do anything. The IRS will attempt to verify whatever information triggered the review. In the meantime, you won’t be issued a refund if you’re expecting one. If you owe taxes, you will still need to pay by the tax filing deadline to avoid a penalty.
How long the review process takes depends on what information the IRS needs to verify. If you don’t hear anything within 45 days from the date of the initial notice, however, you can follow up to see what happened to your refund.
There are several different scenarios that can play out when your tax return is flagged. The best thing you can do is hope for the best and plan for the worst. Obviously, the best outcome is for the IRS to find that your information is correct and process your refund.
The IRS could verify your information and determine that you owe more in taxes. If it’s a difference of only a few hundred dollars, that may not be problematic. But if it’s several thousand dollars, you could find yourself in a financial bind. Applying for an IRS installment agreement can give you time to pay it off. Just know that you’ll have to pay penalties and interest until the balance is wiped out.
Finally, there’s the chance that the initial review could lead to a full-scale audit. In that case, the IRS would look at every aspect of your return to determine whether you’ve reported your income properly and paid the appropriate amount of tax. The IRS can go back through three years’ worth of returns or review up to six years if they find a serious error.
If you get selected for review, don’t panic! If you’re worried about the possibility of an audit, getting all of your income statements, receipts and other tax-related documents organized during the review process can save you some time and headaches. The IRS may determine that your information is correct and process your refund. However, the government could verify your information and determine that you owe more in taxes, or worse, order a full-fledged audit.
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Rebecca Lake, CEPF®Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children. Rebecca also holds the Certified Educator in Personal Finance (CEPF®) designation.
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