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View Full Version : Does every tax return get looked at by an actual person?


bouv
02-11-2009, 12:42 PM
Since I just e-filed my federal taxes yesterday, and already got an email today saying it was accepted by the IRS and in a day or so I can look online at the status of my refund, I got to wondering:

Is every single tax return filled out looked at by a real-live IRS employee? Or do a large percentage of them, especially ones like mine (single, no dependents, no house, no investments, just used a 1040-A) get sent through a machine that goes "bing bang boom" and voila, a check gets written up?

And for that matter, how much do they check certain things? I had to deduct both interest paid on student loans AND money spent on tuition and fees for 2008. Now, my student loan interest was on a 1098-E and sent to the IRS by my loan companies, so AI can see how if I lied on that, they could check. By the tuition and fees? I got a 1098-T (I think that's the form...), but on both that form and the other one I have to fill out (8917?) it says how the number in the boxes on 1098-T aren't necessarily what I paid, I just have to fill in what I paid anyway. So...how do they check that? I mean, I could have said I paid more (up to $4000, since that's the max I could deduct anyway according to 8917.) I mean, I said the real amount, but who's to know?

CookingWithGas
02-11-2009, 02:35 PM
I did some consulting to the IRS for a couple of years on excise tax. I don't know everything about how they work but did get exposed to various things in their IT infrastructure. My impression is that the vast majority of returns are processed by computer. Some (maybe all) are subject to automated "audits" which are things like checking your income against the W-2 that your employer submitted, or your interest against the 1099 that your bank submitted. There is probably some proportion that are checked by hand, but certainly not every return. And some of those are selected for a face-to-face audit, based on criteria that the IRS doesn't want you to know.

suranyi
02-11-2009, 03:08 PM
Since I just e-filed my federal taxes yesterday, and already got an email today saying it was accepted by the IRS and in a day or so I can look online at the status of my refund, I got to wondering:

Is every single tax return filled out looked at by a real-live IRS employee? Or do a large percentage of them, especially ones like mine (single, no dependents, no house, no investments, just used a 1040-A) get sent through a machine that goes "bing bang boom" and voila, a check gets written up?

And for that matter, how much do they check certain things? I had to deduct both interest paid on student loans AND money spent on tuition and fees for 2008. Now, my student loan interest was on a 1098-E and sent to the IRS by my loan companies, so AI can see how if I lied on that, they could check. By the tuition and fees? I got a 1098-T (I think that's the form...), but on both that form and the other one I have to fill out (8917?) it says how the number in the boxes on 1098-T aren't necessarily what I paid, I just have to fill in what I paid anyway. So...how do they check that? I mean, I could have said I paid more (up to $4000, since that's the max I could deduct anyway according to 8917.) I mean, I said the real amount, but who's to know?

Every return goes through two automated processes. One checks the return against any forms required to be sent to the IRS, such as W-2s and 1099s. The other runs a secret algorithm that crunches some numbers and determines how likely it is that you owe more tax than you actually say you owe, and how much more. (In other words, how likely it is that you are trying to cheat on your taxes.) It results in a numerical score. If the score is high enough, your return is kicked out of the pile and a human will take a look at it. The human will make the final call as to whether you will be audited.

Ed

Hi, Neighbor!
02-11-2009, 03:54 PM
Why can't we just have machines calculate our returns or how much we owe without having us fill out paper work and sending it in?

02-11-2009, 04:28 PM
[QUOTE=suranyi;10814136The other runs a secret algorithm that crunches some numbers and determines how likely it is that you owe more tax than you actually say you owe, and how much more. (In other words, how likely it is that you are trying to cheat on your taxes.) It results in a numerical score. If the score is high enough, your return is kicked out of the pile and a human will take a look at it. The human will make the final call as to whether you will be audited.[/QUOTE]The secret algorithm does a lot of work with general group tendencies, for example, people of your age, gender, race, location tend to donate x% of their income to their church. If your return claims a significantly higher percentage donated, that will increase your score and make it more likely you will be audited.

But they also have records on each person that they take into account, too. I had a very religious friend who donated a flat 20% of his income to his church. He got audited one year, and that was the item the auditor concentrated one. But since he had done all donations through checks, and had a receipt from the church, he had no trouble proving these donations. The auditor then told him that the IRS would mark his record, so that he would not be audited in the future -- "at least, not for this reason". And that is correct, he still gives a larger than normal donation to his church, but has not been audited by the IRS since then.

I don't know if this is part of the automated algorithm, or if after a return is kicked out with a high score, a human checks the record and sees that this person was previously audited for this same reason, and decides not to do another audit.

DrDeth
02-11-2009, 04:59 PM
I don't know if this is part of the automated algorithm, or if after a return is kicked out with a high score, a human checks the record and sees that this person was previously audited for this same reason, and decides not to do another audit.

Your later supposition is the correct one. It gives you a two year "free ride". ymmv.

Ok, if a return has to be "entered" a Real Live Person enters it. They check for nothing other than gross ommissions, like no W2, no signature, etc. The Computer checks for math errors, etc. If there is an error, a notice is sent out. This is not an audit.

"IRP" or "URP" auto matches w-2 and 1099 vs your return. Any ommission that would result in a deficiency of over $10 (this number changes, ymmv) results in it being kicked out for a brief look-at by a RLP then a notice/bill is sent out. This is not an "audit", but if you appeal, then they will re-check. If the difference is large, it may result in a "real audit".

Sometimes they do a "correspondence audit"; if there is one simple thing being looked at, say your dependents. This is a "real audit", but sometimes it is done by a lower-graded "para-professional" not a "real tax auditor". Some IRS nabob could find that a lot of students are over-claiming their "tuition and fees" and they'd just select a bunch of returns with those deductions on them.

The "secret algorithm" is called "DIF". Most audits are "DIF-select". The computer kicks out a certain number, and those are scrutinized by senior auditors, who decide if they really are deserving of an audit- this works out to about half of those kicked out. Note that in a "real audit" they are aiming at a "deficiency" of around $1000 or more.

So, if your 1040 ScdA saves you only a couple hundred bux over the standard deduction, your chances of being audited are almost nil.

Pretty much, other than a few red flags, the IRS takes you at your word. If you claim you spent $1000 on charitable contributions, and that works out to a reasonable % of your income for that year, and you list "American Red Cross" instead of "Al-Queda destroy the great satan fund*", you're OK. But your deductions need to be within or less the average for your income group, or your chances go up. CCH actually prints what the average deductions are for each main category and income group.

I want to stress this doesn't mean you can just make shit up and throw it on your return, even if that makes it a low % for your income. That's fraud. But it does mean that you and your tax professional may take advantage of the Cohan rule for a few deductions you may not have all the recipiets for.

Cohan vs. Commissioner, 39 F. 2d 540 (2d Cir. 1930)

* that would be one of those "red flags'.:p

Driver8
02-11-2009, 05:03 PM
Why can't we just have machines calculate our returns or how much we owe without having us fill out paper work and sending it in?That is a pretty good question.

At some level, there is no technical reason why it can't be done. I haven't had to file taxes in South Africa for many years, but I am told that the SARS has recently introduced electronic filing where the information from forms that they already have on file (for example, the South African equivalent of W2s from employers) is already filled in. If your taxes are simple all you need to do is review for errors and submit. If you have more complicated deductions you can fill in those details.

In the US electronic filing is done through third party companies (this year I did it through TurboTax), but even in that environment I don't see why they couldn't implement some sort of pull mechanism to retrieve all this data. The government should have an incentive to make filing as easy and error-free as possible. The US tax code is extremely complicated, and many people will have additional sources of income and deductions that the IRS cannot be aware of unless you explicitly tell them, but a lot of the information they really do have on file already from the W2s and 1099s that companies you do business with.

DrDeth
02-11-2009, 05:18 PM
Why can't we just have machines calculate our returns or how much we owe without having us fill out paper work and sending it in?

How would the IRS know how much your charitable contributions are? Or that your shiftless brother who earns nothing is now sleeping on your couch and now your dependent? Or that you had a casualty loss? Or what your business deductions are?

Driver8
02-11-2009, 05:46 PM
How would the IRS know how much your charitable contributions are? Or that your shiftless brother who earns nothing is now sleeping on your couch and now your dependent? Or that you had a casualty loss? Or what your business deductions are?It is true that it cannot be 100% automated. But a lot of it can be, as the IRS does already have W2 and 1099 information. Many taxpayers would basically just need to check for errors. Others will have most of their information already filled in.

DrDeth
02-11-2009, 05:54 PM
It is true that it cannot be 100% automated. But a lot of it can be, as the IRS does already have W2 and 1099 information. Many taxpayers would basically just need to check for errors. Others will have most of their information already filled in.

Sure, but let us say you won $5000 gambling. The IRS sends you a form filled out without that. You could claim you were in the clear, and you'd at least know that the IRS didn't know. But today if you file your return without that, then they got you.

Apex Rogers
02-11-2009, 06:06 PM
With all this talk of much of the process being computerized, how does this work for mailed-in hand-written returns? I'm assuming the first step of the process (unmentioned) is a typist entering the returns into a computer, correct? Or has OCR advanced so much that it works for whatever random handscrawl it might be presented?

psychonaut
02-11-2009, 06:30 PM
Why can't we just have machines calculate our returns or how much we owe without having us fill out paper work and sending it in?That's exactly what they do in some countries. In the UK, for example, there's no need for most people to file a tax return; the tax office does it automatically based on the wage/salary income reported by one's employer, interest income reported by one's bank, etc. Self-reporting is necessary only for the self-employed, those with rent income, etc.

Mama Zappa
02-12-2009, 12:01 AM
It is true that it cannot be 100% automated. But a lot of it can be, as the IRS does already have W2 and 1099 information. Many taxpayers would basically just need to check for errors. Others will have most of their information already filled in.
It's not flawless however and the timing might be off.

Personal examples:
1: As an employer of a household employee (nanny) I have to do a W-2 each January. I give that to the nanny before the end of January to satisfy the IRS requirements.

BUT - I don't have to submit that information to all the assorted agencies until (IIRC) the end of February. As it happens, I do the stuff online and submit it instantly but if I did it via mail, it'd be a few weeks later before it got processed. The nanny might be ready to file her return on February 1, but the government wouldn't know the figures.

2: I've been swapping emails with the bank handling one of the IRAs from my mother. They screwed up when the CD matured and I switched it to a money market - resulting in my apparently having a very large amount of unexpected taxable income, and penalty. They've fixed this - and when I asked about corrected reporting to the IRS, I was told they don't send the 1099-R info to the IRS until March anyway.

3. Unavailability of information online needed to accurately calculate some things (e.g. selling stock you've held for many years - the government has no clue what your basis is. I imagine they largely take your word for the gains, as long as it isn't outrageous).

If we had to pull everything from the government files, I'd have to wait until March for my refund, and this would be *after* inputting a lot of stuff manually.

So - I can see *someday* having them do it all automatically, but I think we're a long way away from that.

ctnguy
02-12-2009, 07:19 AM
At some level, there is no technical reason why it can't be done. I haven't had to file taxes in South Africa for many years, but I am told that the SARS has recently introduced electronic filing where the information from forms that they already have on file (for example, the South African equivalent of W2s from employers) is already filled in. If your taxes are simple all you need to do is review for errors and submit. If you have more complicated deductions you can fill in those details.

I used this system ("e-filing") this year and it was remarkably easy. The SARS website generates some kind of clever PDF file for you; all the information that they have from IRP5 and IT3b (the equivalent of W2) forms is included in the form already. All you have to do is indicate any other income and any deductions.

I suspect that it is made possible because the SA tax laws are considerably less complicated (for individuals at least) than the US tax code.

DrDeth
02-12-2009, 12:09 PM
With all this talk of much of the process being computerized, how does this work for mailed-in hand-written returns? I'm assuming the first step of the process (unmentioned) is a typist entering the returns into a computer, correct? Or has OCR advanced so much that it works for whatever random handscrawl it might be presented?

Yes, you are correct. As I said "Ok, if a return has to be "entered" a Real Live Person enters it."

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