What are the real IRS audit flags???????      This is Why IRS FLAGS,PULLS A Tax Return For Audit


Michael Sullivan   Former IRS Agent Explains the IRS Tax Audit process.


I have to laugh out loud when I read all these articles from so-called experts about real IRS audit flags. They copy and paste from other sites as though they have internal knowledge of the system. Unless you work for Internal Revenue Service know the classification system of IRS audits you’re only truly guessing.

Most of them are very canned responses and a real obvious and are really not at the heart of the IRS audit flags.

As a former IRS agent I’ve read many articles on what IRS tends to do during a tax audit but unless you work the system and understand what the system is you cannot accurately tell people or explain to the people what IRS plans to do tax audits.


The Internal Revenue Service must follow the guidelines of their internal revenue manual.

In this case in a section 4 lays the outline clearly out.

This section clearly spells out what the Internal Revenue Service agent should do in working your case.


They do have a great deal of flexibility but IRS must have a base plan for auditing tax returns.

After years and years of collected IRS data, the Internal Revenue Service knows the items that provide revenue dollars for rates of return on an IRS tax audit.

Let the following be your guide to the items that IRS typically looks at during an IRS audit

As the Internal Revenue Service gets a tax return for an audit it generally has a DIF score or discriminatory index function score.

Usually it is attached and there will be a classification plan sheet regarding the items that IRS has flagged for auditor review.

After the manager or the agent look at the tax returns they can add or subtract to that classification sheet and move and then plan to forward with the tax audit.

As a general rule,the auditor has the ability to go back two years possibly three and ask for the current year tax return to be filed if they think it has audit potential.

The more experienced agents pretty much have their way with tax returns and can do what they want with the audit. Many times a good Practitioner can manage the tax audit hoping that the IRS will not go back before but just audit the given year.

Generally, the IRS selects classifiers who have a broad-based experience in knowledge of the tax laws and current procedure. They use their best judgment and experience to decide what this classification needs to be so they can proceed with the audit and collect the most dollars for the Internal Revenue Service.

It is important to remember that IRS in fact is a business.

IRS does measure the amount of time spent on every case and they looks at net income per return.

IRS generally looks at items they generally find provable results through other tax returns.


The Tax Return Process and examinations


Each tax return that is sent into Internal Revenue Service will have a keypunch operator pension all key items on a return those key items are gross income, adjusted gross income and line items from exemptions and deductions in other audit items that IRS usually dig from.

So basically every item is placed into a computer and the return is scanned based on a certain logarithm formulas to find out which tax returns should be audited because certain flags are present due to falling out of the national norms. The national norms are key factors.

Here is a list of items that the Internal Revenue Service will generally take a close look at because they have found in the past they produce revenue dollars. This is the base list for their classification plan.


Medical Expenses:

The Classifier must consider overall medical, dental etc., expense in relation to the AGI. IRS has a keen sense to what makes sense. If you understand what the available income that a person has to spend, it doesn’t take long to figure out whether they can pay the given expenses that are left, so the income ratio to expense ratio must make good common sense.

High medical expenses for large families, deceased taxpayers, or older taxpayers are usually not productive.


Interest Expenses:

Productive issues could come from payments to individuals, and closing costs on real estate transactions.

Home mortgage interest usually is unproductive unless the payments were made to an individual or if interest is a result of a mortgage greater than the indebtedness limit.


Charitable Contributions:

The agent will check for large donations made to any charitable organization are usually looked at. the auditor always checks to make sure the contributions do not represent tuition, a common trick by taxpayers.

Check for large donations of property other than cash.

Contributions in the form of donated clothing articles, furniture or a car can be worked by correspondence exam. However, if the issue selected involves obtaining appraisals or engineering reports or are complex in nature, it should be classified for field exam to work.

The is BIG: IRS considers the ratio of the contribution to the taxpayer’s total positive income.


Casualty or Theft Loss:


The agent will select cases that show no insurance reimbursement.
The IRS will watch for business assets, valuation methods and statutory limitations.


Miscellaneous Deductions:

IRS will scrutinize large, unusual or questionable items that do not correspond to the taxpayer’s occupation or income level.Select issues that are verifiable in a correspondence audit, such as union dues paid, work clothes etc.


Pension and/or Annuity:


The agent will check whether the taxpayer received a premature distribution from a pension/profit-sharing plan.Also they wull ensure that the amounts are not reported elsewhere on the return. Check whether the distribution qualified as a lump sum distribution.


Unreported Income:

IRS will consider if the income reported on the return is sufficient to support the exemptions and deductions claimed.

IRS must consider the sources of income and any omission of income. Compare income on return to the IRP documents, if available.

If the taxpayer lists his/her occupation as waiter, cab driver, porter, beautician, etc., unreported tip income is a productive issue.

IRS will consider excluded amounts from income such as injury or sick pay, forgiveness of debt, and disability pay.


Moving Expenses:


IRS will check to see if the taxpayer actually moved via IRS research on addresses.
Check for employer reimbursement. Also consider sale of the residence.


Alimony Deductions:


IRS will check to see if the social security number is a valid number.
Also, they will check to see if the recipient has included this income. Credits: Consider the various credits found on the return jointly with other issues selected on the return.




In the last couple years many unscrupulous tax preparers have been putting on returns tax credits that the taxpayer was never qualified for.

IRS started putting many filters in place because they had paid billions and billions of dollars back to taxpayers who never qualified for the credit. So there is a credit warning make sure you qualify.

They charged much larger fees and promised bigger refunds. some actually collected a percentage of the refund that went back to the taxpayer which usually is a sure sign of fraud.

So the IRS now has many filters in place to check all available credits.

Here is a list of the credits that the IRS will look at closely.

Credits include:
Child Tax Credit
Child and Dependent Care Credit
Education Tax Credits – Hope and Lifetime Learning
Premium Tax Credits
Qualified Adoption Credits

Keep in mind this is not a comprehensive list but a base list of what items on your tax return IRS will typically audit.


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Mr. Michael D. Sullivan

Michael D. Sullivan is the founder of MD Sullivan Tax Group. He had a distinguished career with the Internal Revenue Service for 10 years. As a veteran IRS Revenue Officer / Agent, he served as an Offer in Compromise Tax Specialist and Large Dollar Case Specialist.

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