The prospect of being audited by the IRS is rather frightening, and many taxpayers do not know what to expect in a potential tax audit. However, only around 1 percent of people who file taxes are audited, and there is a great deal of confusion about what makes an audit likely. When filing a tax return, it is important to understand what the IRS looks for when deciding who to audit.

The DIF System

The IRS uses automated scoring known as the Discriminant Information Function (DIF) System to analyze tax returns. This system compares people’s incomes in a geographic area and looks at factors such as family size, how income is earned, and real estate property values to find any discrepancies that may require an audit. The IRS also uses an Unreported Income DIF (UIDIF) score to analyze whether a person is likely to have any income that was not reported correctly.

When you learn that your business’ sales tax records are being audited, there are certain steps you can take to make the process go smoothly and to handle the tax audit properly. There will be many times during the sales tax audit process that you have questions, and it is best to seek assistance of a sales tax lawyer who can advise you of your obligations under the law as well as what options are most strategic for you and your business.

Understanding Audit Purposes

The California State Board of Equalization administers the sales tax audit. The audit’s purpose is to determine if you have paid the proper amount of sales tax.

Four words that strike fear into the hearts of individuals and businesses alike are: "You are being audited." The thought of an audit raises images of being grilled by the auditor like a witness being cross-examined.

However, an audit doesn't have to be like that, and if you are prepared for it, you can help ensure that the process is completed with a minimum amount of time and trouble. Here are some tips to assist you in the event that the IRS or a state revenue agency selects you for an audit.

1. Keep good records.

Many people-and even many small businesses-tend to get so caught up in the hustle and bustle of everyday life that they neglect to maintain solid records showing legitimate business expenses. The idea of managing and filing mountains of receipts, invoices, and other similar documents can be daunting, but if you start today and keep on top of this regularly you can avoid the hassle of going through shoeboxes of receipts trying to show the auditor what is-and is not-relevant to your bottom line .

According to news reports, many physicians who waited till April 13 to file taxes may have become victims of tax fraud.

Many doctors have reported being surprised when they attempted to file the taxes on April 15, and found out that their taxes had already been filed. Filing fraud taxes on behalf of another person is a simple tax fraud scheme that is fairly common. In these schemes, the person then pockets the refunds that the victim was eligible for.

This scheme is fairly simple to operate. The fraudster will access a company's W-2 database, which provides all the data about employees of the firm, their earnings, as well as personal data. With all that information, a person can find it very easy to file returns on behalf of the employee. In fact, some fraud schemes use fraud software that actually automates fraudulent and tax return filing. Some payroll systems are much more vulnerable to hacking than other types of systems.

The Internal Revenue Service has, for weeks now, been embroiled in a controversy that alleged that some of its top officials were involved in unfair scrutiny of Tea Party groups in tax matters. Lori Lerner, the official who was the subject of an investigation into the matter by Congress, recently retired.

The Internal Revenue Service recently released a statement, saying that Lerner has retired, effective immediately. Lerner served as the agency's former director of exempt organizations.

Since May, she had been placed on administration leave. An internal agency board was soon due to begin the process of firing her, based on breach of duties and mismanagement.