Avoiding an Audit by Filing an Extension

published February, 2007

Rumors of avoiding an audit by filing on extension are greatly exaggerated

The IRS selects returns for audit based on three criteria: The “DIF” Score, Randomly, and Document Matching. None of these methods have anything to do with the date you file. 

The DIF Score (Discriminate Index Function—now that you know what it stands for, is it any clearer?) is a “secret” statistical analysis of returns based on income and other factors—The IRS has and idea of what they expect you to be reporting based on your income. They won’t reveal their criteria for obvious reasons.

Sometimes “your number is up” and you get audited for no other reason than random selection. It’s not personal. It keeps people honest.

Document matching is where they take the 1099s and W-2s and whatnot, and match them to what you’ve reported. No problem if you report more income than appears on your 1099s, but it is a problem if you report less.

For stock sales, the IRS only gets the “sale” amount, they don’t get the cost—so the IRS is going to presume you bought your stock for $0 unless you report differently, so you need to report, even if you had a loss on sale of stocks. It can take the IRS up to three years to match documents, but they usually get around to it.

We at Tax Buddha recommend you report ALL your income, even if you don’t think you’ll get caught. “Missing 1099s” have a notorious way of appearing after the fact—for example when the person who paid you gets audited. You’re looking out for yourself when you report completely, plus, it’s the law.

If you actually do forget and find a 1099 or some other document after the fact, let us know so we can file an Amended Return for you. It is much better to discover your own mistake and take action to correct the error than to have the IRS discover it. You’re not going to jail if you’ve made an error. Of course if you forget that million dollars of income, the story might be different.