Preparing Your Tax Return to Avoid Getting a Letter From the IRS

Green check marks on a checklist, suggesting everything is good to go

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The Internal Revenue Service doesn't leave much to chance. It has a computer program for a watchdog that's known as the Discriminant Inventory Function System or DIF for short. DIF scans tax returns and flags them for further scrutiny by an agent based on how the IRS thinks your tax return should look. The computer will automatically send you a letter asking for more information if this occurs.

Nobody wants to receive one of these letters. Even if it's relatively innocent—maybe you transposed a couple of digits in a Social Security number—you're sure to experience a moment or two of panic when you see the return address on the envelope. And if it's not so innocent, you could be facing a full-blown audit

But both big and little glitches can be avoided by doublechecking your tax return before you submit it. 

What the IRS Is Looking For

First, it helps to understand what sort of thing catches the attention of DIF. Some are pretty obvious. Did you report the income from all your W-2s and 1099s? The IRS receives copies of these from the parties that issue them to you so the computer knows how many are attributable to your Social Security number. 

The computer scans Social Security numbers as well. If a number appears on two separate returns—which would happen if both you and another taxpayer claimed the same person as your dependent—DIF will throw up a flag. The second parent to claim the child would typically be the one to receive the computer-generated letter because this is the return that triggered the computer. 

But the IRS program goes still further. It also scans information on returns looking for what the IRS feels are the most common abuses of the law. If one or more of your deductions differs from that claimed by most other people in your same economic circumstances, DIF will flag your return. You'll receive a letter and your return will be put into a pile for an agent to look at. This could happen if you claim $40,000 in charitable donations when you only earn $45,000, Most taxpayers do not give away almost 90 percent of their earnings.


The IRS Computer Runs on Auto-Pilot

All this results in literally millions of notices—yes, millions—going out each year. As National Taxpayer Advocate Nina Olson explains, "The IRS program exists solely to conduct examinations with little or no human involvement. Notices and letters are sent automatically via the computer program without specific contact information ... These letters notify taxpayers that their refunds have been frozen, deductions have been disallowed, that further information is required to verify the return and more."

How to Protect Yourself

Mistakes happen, so be alert for them, particularly if yours is complicated return. Review your completed return with an eye for every little detail not just once, but twice. 

Tax preparation software can be a big help. If you take your time, study the accompanying tutorial, and answer all the program's questions honestly and properly, the software will almost invariably get the big issues right. It knows what you can claim based on the information provided and what you cannot. And, of course, using a tax professional can be a huge safeguard. 

But this still leaves the little stuff up to you, like doublechecking Social Security numbers and all other figures you enter into the program, and making sure your ex hasn't already claimed your child as her dependent. And all that information you give to a tax professional so he can prepare your return has to be correct. 

If you decide to handle your tax return yourself without the help of software, make sure you can substantiate all the deductions you're claiming. You should have proof of all you spent. As for those tax credits you claimed, make sure you understand them. Be sure you really do qualify. 

Double Check Those 1099 Forms If You're Self-Employed

Make sure you've accounted for all your tax documents, every W-2 and 1099. Did you do work for anyone who did not send you a corresponding tax document for the income after the first of the year, either as an employee or as an independent contractor? Contact that company or entity and find out why.

1099-MISC forms are often issued in the name of an independent contractor instead of his or her business entity. If you've incorporated recently, you might not have alerted the clients you work with so you'll receive a 1099 under your own Social Security number rather than the corporation's tax ID number. So check the names on those forms so you can be sure which entity—you or your corporation—must claim the corresponding income, or contact your client and ask for an updated, correct form. 

The Final Step

OK, now you've checked, doublechecked, and triple-checked. You should still make sure you haven't made any of the most common, simpler mistakes. The IRS circulates a Checklist of Common Errors When Preparing Your Tax Return that you can review and check for any possible missteps you've made. 

NOTE: Tax laws change periodically and the above information may not reflect the most recent changes. Please consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.