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Who Does the IRS audit?

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IRS red flags are just a fancy term for the Discriminant Function System (DIF), which is used by the IRS to generate a tax return score. The way it works is pretty simple; the higher the DIF score, the more likely it is for the tax return to be audited. Three different computer systems are used by the IRS to check for different types of red flags, which occur on individual tax returns and small business or self employed tax returns. The most common red flags come from simple mistakes such as missing or incorrect information on your tax return; using tax software to check everything can solve this. Unreported income will also get you flagged along with large swings in income. Something very common for getting flagged is rounding numbers. Some examples of common red flags for small business owners include entertainment deductions, home office deductions and claiming a loss on the business.

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