The IRS and various state revenue departments use the terms audit, examination, review, and notice to describe various aspects of enforcement and administration of the tax laws.
[3] The following are examples of documentation that the IRS may request: receipts, invoices, bank statements, and cancelled checks.
A good practice is to organize these documents by their tax year, and to provide the total amount summary in addition to the detailed transaction.
Examinations of documents are conducted either by mail or in a taxpayer’s home, business, or an accountant’s office.
Employers and financial institutions, among other organizations, are required by law to send documentation (W-2's and 1099's, for example) to the IRS.
If the DIF score is high enough (i.e. a large amount of oddities or discrepancies are found), that tax return may be selected for examination.
The formulas the IRS use to create the DIF software and analysis are a closely guarded secret.
[7] Filed tax returns are also subjected to an evaluation called the UIDIF, or the Unreported Income Discriminant Index Function System.
The practice was suspended for a short time in the early 2000s amid criticism that the audits were too burdensome and intrusive.
[3] Below are the audit rates from the IRS website data for 2018 individual income tax returns.