Since the IRS can audit only a small percentage of the returns filed, it has developed a method for selecting those with the highest probability for error. Its computers apply mathematical formulas to all returns, using what is called a "discriminant function system," dubbed DIF for short. Certain items on the return are scored and the higher the total score, the greater the possibility of a tax audit. DIF-selected returns are then screened by classifiers. Here are some of the things they look for.
* The size of the item: a $5,000 unusual expense out of $25,000 income is significant, but $5,000 out of $200,000 is not.
* The nature of the item: classifiers notice, for example, air-travel expenses on an office manager-s return.
* Miscues: showing an item wrong; not completing a schedule; taking an expense on a business schedule that would normally be itemized; taking business expenses without showing income, or a large number of stock sales without reporting dividend income.
* Profit out of line for the type of business or profession
* Taxpayer's address, or deductions for real-estate taxes and mortgage interest, suggest a higher mode of living than reported income
* Income too small to support the number of exemptions claimed
* Classifiers have a number of statistical hints to help catch errors if you sell stocks and bonds, own real estate, take employee expenses, or invest in tax shelters.