How Does the IRS Verify the Accuracy of a Tax Return?
It has been stated that the Internal Revenue Service expects to handle more than 140 million tax returns by the end of May 2020. A lot of statistics and numbers are involved here, and they all need to be examined closely. So, how does the Internal Revenue Service ensure that each and every one of those tax returns is complete and correct? Obviously, with the assistance of a computer.
Because the Internal Revenue Service (IRS) has pushed back the deadline for submitting personal tax returns for 2020 to May 17, the filing date for this year will be different than in previous years.
In the Discriminant Function System, there is a system that discriminates against people.
Known as the discriminant function system, the IRS computer is comprised of three separate systems that work together to process tax data. The system evaluates each tax return that is received and provides a score based on the information included within it. The higher the score given on a tax return, the more probable it is that the IRS will be able to recover a few more dollars from the taxpayer if the return is re-examined by the agency.
It’s unlikely that one or two little isolated errors would land you in a lot of trouble since the scores are the product of a large number of elements picked up by all three computer components and taken into account collectively. A tax return, on the other hand, that has a significant number of anomalies when compared to other taxpayers in comparable financial situations would almost certainly get a high score, and it will most likely be sent to an IRS employee for additional human evaluation.
An audit may be conducted as a consequence. An audit may only be initiated by an employee, and initiating one entails a lengthy procedure. The discriminant function system is not capable of initiating an audit on its own initiative..
Find out how soon you will find out if you are selected for an audit by the IRS by reading this article.
For personal tax returns filed in 2020, the IRS has extended the deadline to May 17, 2019.
What methods does the Internal Revenue Service use to verify earnings?
One of the computer components – the unreported income discriminant function system – is especially designed to predict the probability of certain forms of unreported income being reported on a taxpayer’s income tax return. Instead of earned money from a job, this is revenue from other sources, such as investments and self-employment income.
Do you think it will focus on that one little project that an independent contractor agreed to do in return for a cash payment and then soon forgot about? That’s not going to happen, I promise you. Discrepancies between the information returns received by the IRS – all those various 1099s that must be submitted by banks, brokerage firms, and anyone who remits more than $600 to an independent contractor – and what the taxpayer with that Social Security number actually reports on his or her tax return will be picked up by this software.
W-2 Verification: What is the IRS’s process for doing so?
Disparities in reported employee income will also be detected by the discriminant function system. Employers are required to give W-2 forms to their workers at the end of the year, which detail how much they earned and how much was deducted from their paychecks for different taxes over the previous year.
A copy of each W-2 must also be sent to the Internal Revenue Service (IRS). For the most part, then, you may be secure in the knowledge that the IRS is aware of any paychecks you received during the year.
With the Protecting Americans from Tax Hikes Act of 2015, the deadline for companies to submit their W-2 forms to the government was brought forward a month, providing the Internal Revenue Service (IRS) a little more time to compare them to their workers’ tax returns.
So, does the Internal Revenue Service scrutinize each and every W-2 tax return? Yes, to a large extent.
Find out more about tax audits, including what they are, why you are audited, and what happens if you are audited by the Internal Revenue Service.
Changes to the W-2 Form
As a result, the Internal Revenue Service (IRS) made a modification to certain W-2 forms starting with the 2017 filing season to assist in the verification process of crosschecking income reported on tax returns versus income received to the same taxpayer and recorded on a W-2 form. If you work for a major firm that employs a payroll service provider, you may see a 16-character verification code in box 9 of your W-2 income tax return.
For the IRS’s convenience, if you e-file your tax return, you should provide this number with your return to make their work a bit simpler. It says that if you do so, the processing of your return would be expedited, albeit it is unclear how much faster the procedure will be.
The number is intended to verify that a W-2 is “genuine,” but it also serves as a convenient method to compare W-2s to tax returns when used in conjunction with an employee’s Social Security number, which is required by law.
Without that verification number, or with it, the IRS now checks the information on a tax return against information on a taxpayer’s W-2 or series of W-2s before issuing a tax refund to that individual. Taxpayers may anticipate to get a notification from the IRS inquiring as to why their information does not match up, rather than a refund of any unpaid taxes or a refundable tax credit if their information does not match up.
Other Red Flags should be considered.
Tax returns may have a variety of issues, and undeclared income is simply one of them. A great deal of further verification and checking is done by the IRS, and it relies on a number of suggestions to determine whether it should take a closer look at a certain taxpayer even if the discriminant function system does not raise any red flags about him or her.
If you haven’t made a single mistake on your tax return, you may be picked out for more scrutiny. Similarly, if someone who sent you money did something illegal, it is possible that your return may be drawn into the conflict by the very fact of its existence. However, if your company is accused of doing anything improper and all you did was take a paycheck, you may find yourself in this situation. This occurs most often with business partners, investors, and independent contractors.
Afterwards, there are those “John Doe” summonses to contend with. Because the individual taxpayers who are impacted by them may not even be aware of their existence, this may be extremely difficult to deal with successfully.
Escaping Tax Penalties Through Fraudulent Tax Avoidance
For identifying tax evasion frauds, the IRS has developed a radar system that is very accurate and precise. The organization conducts frequent investigations into businesses that sell or advertise any form of service that even suggests the possibility of evading taxation.
It will issue these summonses to various businesses, such as credit card companies, that work with or contract with the company. It will demand a complete list of any consumers who have enlisted the company’s services or made payments to them, as well as any associated records, from these businesses and consumers.
It is reasonable to suppose that the Internal Revenue Service will examine their tax returns more closely to verify that they were not successful in evading any taxes that were owed to them.
There are a few of additional elements that the discriminant function system will pick up on that seem to be innocuous. If you use rounded figures on your tax return, the computer may raise an alert to alert you. In all probability, you were not paid precisely $18,000 by your employment, and you were not paid exactly $22,000 by your side gig.
A more accurate range would be $18,290 to $22,990. This figure should be verified against numerous W-2s and 1099s, according to the discriminant function system, in order to discover what the numbers truly were. This is because the rounded numbers are most likely not accurate.
Tax Deductions and Tax Credits are two types of tax benefits.
Despite earning $60,000 per year, the majority of taxpayers do not contribute $30,000 to a qualifying charity and claim a tax deduction for that amount. Unless they’re especially kind and philanthropic, they’re unlikely to give away more than a few thousand dollars from their profits. This kind of problem will also cause the discriminant function system to raise an eyebrow.
If you and your ex-spouse both list your kid as a dependant for tax purposes, the Internal Revenue Service (IRS) will almost definitely notify you of the matter, even if it was a completely innocent error caused by a breakdown in communication. In order to ensure that the same person does not appear on more than one tax return, the discriminant function system verifies the Social Security numbers of everyone who is listed as a dependant.
You had a certain amount of income.
Because, let’s face it, the Internal Revenue Service will be more likely to collect extra tax dollars from someone who makes six figures per year than from someone who just scrapes by on $20,000 per year. If you earn a lot of money, you may want to talk to your tax preparer about your situation.
If your reported income drops from $250,000 last year to $25,000 this year, the Internal Revenue Service (IRS) may decide to take a deeper look at your circumstances as well. When most individuals in your field make $100,000 per year, but you claim to have earned just $50,000, the same rules apply. If this is not your first year in company, the discriminant function system may need the assistance of a human employee to determine why.
Is there a limit to how many times the IRS may audit you?
So, how long do you have to sweat it out, worried about whether or not the Internal Revenue Service will find anything wrong with your tax filing? The statute of limitations for a possible audit is three years in most cases. This may be extended to six years in a number of circumstances, such as if your reported income is more than 25% more or lower than your actual income for the year in which the extension is requested.
Taxpayers are contacted in a variety of ways by the Internal Revenue Service.
If the Internal Revenue Service chooses to take a closer look at your tax return because it couldn’t verify any information, you can very much bet on one thing: an IRS agent will not pick up the phone and call you, at least not without first establishing contact with you via another means.
Even if someone calls you and claims to be from the Internal Revenue Service, it’s probable that they are a scam artist since this is the first time you have heard of an issue.
There’s little doubt about it: the Internal Revenue Service adores the good old United States Postal Service. All of the company’s first communications with taxpayers are conducted via the postal service. You will not get an email from the agency in this case.
Although it is possible that you may get a phone call or possibly a visit from the IRS at a later date, phone calls are normally used as follow-up contacts after a notice has been delivered to you by the government. Moreover, the Internal Revenue Service will not knock on your door unless the situation is exceptionally severe or the sum in question is rather substantial.
Pay Attention to Impersonators of the Internal Revenue Service (IRS).
It is unlikely that the IRS will contact you after delivering a notification, and it will never inform you how to make payment for any extra tax payable as a result of a clerical error on your income tax return. Over the phone, a legitimate representative will not ask for your debit card number or credit card number, and it will not instruct you to go out and purchase a gift card in a certain amount and deliver the card to a particular address.
If someone rings your doorstep and claims to be from the Internal Revenue Service, chances are he isn’t the genuine article either. A pocket commission, as well as an HSPD-12 card, should be sufficient proof that he is in fact in possession of a pocket commission.
These types of identification are your legal right, and you have the right to walk away if you don’t obtain what you ask for. And that’s not even taking into consideration the fact that you’ve probably been anticipating him for quite some time due to the IRS’s continuous attempts to contact you about a very severe matter.
It’s possible that you’ve gotten a suspicious email or received a phone call from someone posing as an IRS agent. If this is the case, you may report it to the IRS by calling 800-366-4484 or sending an email to phishing@irs.gov if you received a questionable phone call. What you should do about the person who is standing at your door without two pieces of identification is contact 911.
