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                HOW TAX RETURNS ARE SELECTED FOR AUDIT

                                  BY

                  Al Gutkin, Sysop of "THE TAX BOARD"
                            714 - 974 3730



THERE ARE TWO TYPE CATEGORIES OF AUDITS

     1. Personal tax return audits - done at the IRS office.
     2. Business Audits - done  at  the taxpayers place of business  or
                          the  accountants  office,   if  the  taxpayer
                          chooses.

PERSONAL TAX AUDITS

     Personal  tax returns can be selected for audit by three different
methods.   I  will  discuss these methods first as there  is  a  second
process  the  tax  return goes through before you are  notified  of  an
audit.

     The  first method is the DIF score method (see paragraph below  on
DIF  score).  Every personal tax return is given a DIF score when it is
processed  through the IRS computer.   The higher the score,  the  more
chance of an audit.

     Several months after the return is filed the District Director, of
your  residential  area,  makes up a budget of  available  manpower  to
perform  audits.   This  includes the number of audits he  expects  his
district  to accomplish during the next year.   Based upon the  budget,
the IRS computer automatically selects from the highest DIF scores down
until  enough  return  have  been selected to  to  satisfy  the  budget
requirements of the district.

     The  second  method  comes  from the  Adjustment  Section  of  the
computer center.   This is the mistake section.   If you make a mistake
in  addition or completion of your tax form the computer can't  process
it  without  Human help.   Thus,  your return gets passed over  to  the
Adjustment  section  for  correction.   If they can't figure  out  your
mistake, It's referred for Audit.

     The third method is The Special Project Method.   Also a  computer
method of selection.   If the IRS determines that there is tax abuse in
a specialized area,  the computer searches the data base for deductions
in  that  particular area and bango,  the whole lot is  audited.   This
method  can  also be used for certain types  of  occupations,  such  as
doctors, tax preparers etc.
     Example...   The IRS passed laws regarding Offices in the Home and
Personal Computers.  If the IRS determined that in 1985 most tax payers
didn't  heed the rules  (proper way of listing the deduction) or failed
to segregate the computer from other items listed on form 4562.   There
will be a project to audit tax returns for which there is an  (assumed)
incorrect business deduction.


DEFINITION OF DIFF SCORE.

     Every  five  years the IRS runs a program called TCMP  (  taxpayer
compliance  measurement  program).   The purpose of this program is  to
monitor  the results of taxpayer audits.   This type of audit  is  very
much  in-depth.  As the agent must fill out an extensive  questionnaire
concerning  each  audit and the results.  The computer  audit  division
compiles  the  results of the agent's reports with an eye for areas  of
non-compliance with the tax laws (big adjustments).   The IRS computers
are then programmed to evaluate returns filed in subsequent years based
upon the this criteria. Thus the diff score of three digits is assigned
to  every  return as it is processed through  the  IRS  computer.   The
higher the score the more likelihood of an audit.

WHAT HAPPENS NEXT.  AFTER YOUR RETURN IS SELECTED.

     After  your return is selected for audit,  by any of  the  methods
above,  a  real live Human Being looks at it.  Agents usually volunteer
for this duty.

     The agent has no idea why the return was selected,  this is kept a
secret.   He  or She then has to look over the returns and select three
items  to be examined.   The computer may have given the return a  high
score  because  of one item,  however,  the agent  must  select  three.
Hence,  some  taxpayers are are asked to prove areas of deduction  that
are  small or obviously correct.   In addition,  if you,  the taxpayer,
included  a  lengthy  explanation of a deduction as part  of  your  tax
return package,  it will arouse the agents attention and this item will
be selected for review.   In other words,  lengthy explanations  should
not be attached to your tax return. The only time it would be looked is
after your return was selected for audit by the computer.

HOW ARE BUSINESS RETURNS SELECTED FOR AUDIT?

     The  process of selecting business returns,  such as  corporations
and partnerships,  is completely different from individual returns.  It
is much simpler and more human as opposed to the computer selection  of
individual returns.

     Business  returns  are selected completely by hand,  no  computer.
Field agents (business auditors) volunteer to work on a temp. detail at
the service center for the purpose of selecting business returns to  be
audited.   There  are no set guidelines for the selection process and a
business  return  can  be selected solely based  upon  that  particular
agents  whim.   I  have  heard of agents selecting  returns  for  audit
because  they had to many staples in them.   The returns  selected  for
business  audit  do not have specific areas indicated  for  audit,  the
examining  agent  at the local level makes the selection while  on  the
business site.

     We are now at the conclusion of the selection process performed at
the  regional  service  center.   The next step  is  for  the  selected
personal and business returns to be transferred from the service center
to the local examining office.


WHAT HAPPENS AT THE LOCAL EXAMINING OFFICE?

     The  personal returns to be audited are assigned to "Office Audit"
and the appointment clerk sends out the notices to the  taxpayer.   The
notices   indicate   which  items  are  selected  for  audit  and   the
substantiation  needed.    The  taxpayer  has  ten  days  to  make   an
appointment for the audit.

     Office  audit agents do not have very much latitude when it  comes
to whether or not the selected items are valid areas of audit.   If the
item is listed to be audited, by god, the agent will audit that area no
matter how insignificant that particular item may be.

     Business  auditors,  are a different breed altogether.   Most have
had  extensive  training in accounting and tax,  which  is  a  required
before they are even hired.   A business agent has complete latitude in
selecting what items are to be audited.  The agent can also look at the
return  and decide not to audit it.  The business is not contacted when
the return arrives at the local office,  they are contacted when and if
the  local  agent is ready to start the audit.  I have also heard  that
some agents actually don't audit returns because the tax consequence is
to small or the business location is undesirable.   Again,  I have also
heard the the same agent will select more items on the business  return
because there are to many staples or the return is sloppy. No kidding!!

CONCLUSION  --- MAKE YOUR OWN.

     Like  it  or not,  this is the system of audit  selection  in  the
United  States.  There are two ways to approach it.   One is to  bitch,
bitch,  bitch and get nowhere.  The other is to become knowledgeable of
the  system and figure how to deal with it from a position of  strength
and knowledge.

     If  you choose the second approach,  I will be following  up  this
educational masterpiece with several more in the future.  Check with us
at " TAX BOARD ",  ON LINE,  JANUARY 1,  1986.  HAVE YOUR COMPUTER DIAL
714-974 3730.

                                AL GUTKIN