Preliminary Review of Returns
All business and individual tax returns are reviewed routinely by IRS personnel for simple and obvious errors, such as the omission of required signatures and social security numbers, at one of ten service centers. After this initial review, income tax returns are processed through the IRS Automatic Data Processing (ADP) program. One of the most important functions performed by the ADP program is the matching of information recorded on a return with corresponding data received from third parties. This procedure is referred to as the "information matching program."
For any omitted or incorrect items, the IRS recomputes the tax and sends
an explanation to the taxpayer.
Virtually all returns are checked for mathematical, tax calculation, and clerical
errors during the initial processing of the returns. If an error is discovered
under this "document perfection program," the IRS recalculates the
amount of tax due and sends an explanation to the taxpayer. If the deficiency
is paid within the specified time in the letter (usually ten days), no interest
is charged on the underpayment. However, if the deficiency is not paid within
the specified time, interest is imposed on the unpaid amount for a period
that begins on the date of the notice and demand, and ends on the date of
payment. A taxpayer may not petition the U.S. Tax Court with respect to a
deficiency that results from a mathematical or clerical error. However, other
administrative procedures will allow the taxpayer to contest the summary assessment
without first paying the tax.
One of the most important processes used in selecting returns for examination
is the Discriminant Function System (DIF). Through mathematical analysis of
historical data, this program selects those returns with the highest probability
of containing errors. When the computer selects a return that has a high probability
for an adjustment, as indicated by a high DIF score, an employee at the service
center manually inspects the return to confirm its audit potential. If an
acceptable explanation is not found for the high score, the return is forwarded
to the examination division.
A related program is the Taxpayer Compliance Measurement Program (TCMP). Returns
are randomly selected from different income levels, and every item on the
return is comprehensively audited. The program is designed to furnish the
IRS with statistics concerning the type and number of errors that are made
on a representative sample of individual income tax returns. These statistics
are then used to develop and update the DIF formulas.
In addition to the computerized selection methods, returns may be selected manually for examination. An examination may be initiated, for instance, because of information that is provided by an informant, or because the selected return is linked to another return that is currently under examination. Moreover, some returns are automatically reviewed because the reported taxable income, gross receipts, or total assets exceed a predetermined materiality amount. A return may also be selected for examination because the taxpayer has filed a claim for refund or has otherwise indicated that an adjustment in the original amount of tax liability is necessary. The IRS must give you reasonable notice before contacting other persons, that in examining or collecting your tax liability the IRS may contact third parties such as your neighbors, banks, employers, or employees. The IRS must also give you notice of specific contacts by providing you with a record of persons contacted on both a periodic basis and upon your request. This is effective for contacts made after January 18, 1999.