Discriminant Inventory Function System

• The IRS puts all of the information on your tax return into a computer program called Discriminant Inventory Function System (DIF). A high DIF makes you more likely to receive an audit than someone with a lower DIF score. For some deductions, such as charitable contributions, the IRS increases a DIF score when you have a higher than normal deduction for your income bracket. In some cases just taking a credit, such as the homebuyer credit, raises the chance of an audit. Making more than $100,000 doubles your chance at an audit. People who make $10,000,000 had an audit rate close to 20 percent in 2010.
  
  

Red Flags

• Always claim income received. If someone issues you a 1099, for instance, the IRS receives this data and compares it to your return. People who take a home office deduction tend to require an adjustment after an audit, often because they use their home office for personal reasons. In general, any deduction on a Schedule C draws attention because the self-employed tend to overvalue their deductions or include personal expenses. Math errors are always a huge red flag as they are easy to spot with computers doing most number-crunching these days.
  
  

Considerations

• If you can prove you deserve to take a deduction, never fear claiming it because of the chance of an audit. However, in cases of tax deductions with a minimal worth you may value the added peace of mind by omitting the deduction from your return. For instance, if you have a small business loss of a $200, you may want to forgo claiming this deduction, because small business losses are a red flag due to the large number of people who try to hide personal expenses in their business.
  
  

Tip

• Hire a tax professional to look over your return or at least some of the riskier deductions. Most tax professionals keep statistics on the average size of a certain deductions for people in your region, which can help you gauge whether you might be a target for an audit. Regardless of which deductions you take, keep records for the transaction. Should the IRS audit your return you have the right to hire someone, such as a CPA or tax attorney, to represent you during an IRS meeting.