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How the IRS Selects Returns for Audit

In the 1990s, a math professor named Amir Aczel reverse engineered the IRS computer system.  Using an elaborate computer of his own, he crunched the numbers of over 1,000 tax returns.  Turns out, IRS audit selection is pretty simple.  When choosing which returns to audit, the IRS mostly just compares expenses to income.  If you have large expenses relative to income, the computer flags you for an audit.

The professor was even able to pinpoint precisely when this happens.  He then publicized it in a book called “How to Beat the IRS at Its Own Game .”

Professor Aczel’s findings are certainly interesting (the findings are reproduced below).  But they raise even larger questions about the IRS as a whole.  How did one man manage to crack such a large agency’s audit selection system?  And why ultimately, did that system turn out to be so simple?

Welcome to Part 3 of a series which follows your tax return through the IRS.  Today we travel to the machines that lie at the heart of IRS operations.  Computers – very old computers.

Once your return is e-filed or transcribed by hand, the numbers are ultimately crunched by computers at this West Virginia facility.  This is the Martinsburg National Computer Center; a shimmering office building constructed of modern glass.  All that number crunching results in something called a “DIF” score.  The DIF is something of an “Am I Hot or Not” rating for your tax return.  Hot returns (high DIF scores) get reviewed for audit.  Cold ones (low DIF scores) continue to pass on through.

Looking at the Computer Center’s modern design and architecture, one imagines state of the art IT systems doing sophisticated analysis for these DIF scores.  But appearances can be deceiving.  If you want to understand how the IRS really

works under the hood, you have to think a bit more old school.  Really old school.

Take a look at this video .  A spokesperson from the 1960s explains the IRS’s new computer systems.  Nearly 50 years ago, these systems were installed to process millions of tax returns.  They are large, hulking machines that spin reels of magnetic tape .

Watching this video, one naturally presumes that it depicts the IRS of yesteryear.  A bygone era long outmoded by newer technologies.  But you would be wrong.  Unbelievably, the computers in the video are the very same computers that are processing your tax returns today.  That’s right.  When your return is fed into the computer, it is processed by machines built nearly 50 years ago; machines which pre-date Pacman and other arcade classics by nearly a generation.

Having such incredibly antiquated technology poses comical (yet serious) problems at the IRS.  As IRS Commissioner Douglas Shulman recently explained. it is difficult to find programmers for them.  Most have either died or retired.  Meanwhile, Congress is constantly changing the tax laws.  And each change in the law requires difficult reconfigurations of the old systems, which are written in COBOL (an old school computer language).

The antiquated systems ultimately limit what the IRS can do in terms of audit screening.  Probably, this is why Professor Aczel was able to reverse engineer its methodology in the first place.  The systems could not run the kind of sophisticated algorithms that would escape his detection.

Ultimately, the professor came up with the following simple ratios.  They can be expressed as red and yellow zones.  Yellow is when the return is entering the danger zone.  Red is when it hits the critical point where the machine would definitely flag the return for review.

Part of Tax Return

Category: Taxes

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