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Texas cattle ranchers audited by IRS issue dire warning to Americans: 'They want to get you'

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  • TheDan

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    DIFF score
    I'd definitely like to learn more about this. Know of any good sources to read about it?
    When does that progress so far that it triggers a society-wide rejection of the entire idea of voluntary compliance?

    If we hit that point, we're all well and truly screwed.
    ...or freed. Only the beneficiaries of government control and largess would be screwed.
    Gun Zone Deals
     

    benenglish

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    I'd definitely like to learn more about this. Know of any good sources to read about it?
    At one time, the DIFF Score genesis was treated like nuclear launch codes. It was a number and while you could get a sense of whether it was low or high, seemingly no one had any idea how it was specifically calculated.

    I know what office is responsible for it, though, so when I get back to the house I'll check some old notes and see if anything is now published openly. I feel sure it is but I also feel sure it will take some digging to find.
     

    Sasquatch

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    If this does not instill fear into you…



    I realize these are compliant role players, I wanna see what these schlubs would do with a resistant role player, especially an armed resisting role player. None of those "Speshul Agunts" are intimidating, nor do they look like they're terribly well suited for physical confrontation. The arrestees, on the other hand, at least looked like they could hold their own for 20 or 30 seconds, and run more than the 40 feet to the door.
     

    benenglish

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    Fastest way to learn anything is to say something incorrect on the internet ;)

    Man, my memory is going. It's been too long since I've worked with this stuff.

    It's not "differential". It's "discriminate".

    So I've filled the last two pages with errors by relying on my memory instead of double-checking everything before I post.

    Just for the record, then, it's "Discriminate Function" system score, or "DIF score."

    I'll try to do better.
     

    benenglish

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    I'm not so sure. The question revolved around how returns get selected for audit and the role automation will play in the future.

    So, let's start with the basics and some history.

    For decades, as long as tax return information has been kept on computers of any sort, the normal way returns have been selected for audit is via the differential function score (DIFF) of the return. For every type of taxpayer and every general sort of situation, there's a statistical average of the way the returns look, of the entries on every line. Those statistical models are updated all the time by an entire function dedicated to the task, the Statistics of Income office (SOI). There are far more ways that SOI compiles data than just averaging tax return entries but that's getting into the weeds.

    In sum, every time a new return is filed, it's automatically scored and the more the DIFF score deviates from average, the more likely for the return to be selected for a potential audit.

    That's the normal way. There are probably a thousand things beyond just a basic statistical model that can increase your DIFF score. If your
    previous year return needed an audit, if you're taking deductions known to have high potential for abuse, if you're using types of credits that are commonly abused, if you used a bad preparer, etc. (Your return can also be manually pulled for audit for lots of reasons but that's beyond the scope of this post which will be, no matter how hard I try, much longer than anyone wants to read.)

    AI advances make DIFF scores more and more useful, more and more accurate. That's great. Your high DIFF score gets your return sent out to some group of humans in an office near you. There are always far, far more returns sent out for audit than can ever be audited. When the paper returns arrive at an office, an experienced Revenue Agent or a Tax Compliance Officer group manager will look them over. The vast majority get a "There's not enough here to be worth the trouble" determination so they get boxed up and returned to files. (There's a whole process for that but that's getting a bit far afield.)

    The returns that a human thinks are worth working are then assigned and the audit starts. They have priorities assigned to them and low priority cases, even after assignment, might not be audited if workload is too high. Those go back to files in dribs and drabs all year.

    It's important to understand that there are different levels of audit.

    If you get a basic notice that says you made a math error, technically that's an audit. But almost nobody contests those because, well, it was just a math error. You pay it and go ahead on.

    Very simple returns can go through a correspondence audit where you get a letter saying "We need more information to allow this to process..." and you provide the information. Those notices will also say something to the effect of "If you agree with our suspicions and don't want to bother with this, pay this much." But the presumption is that you'll reply, somehow. Often, it was just a missing form or something that's easy to resolve. If you fight a corr audit because it's enough money and you think the IRS is wrong, you can go back and forth through the mail for a while but if no agreement is reached it will go out to the field offices and a human will work the audit.

    Notice that in this historical landscape, the conflict always winds up with you talking to a human being if you don't agree with the computer notices you've gotten.

    I think things should stay that way.

    What I fear is that the new reporting requirements will result in much more authoritative corr audits where the case is not sent to the field but, instead, the agency will have so much faith in their algorithms that they will issue a final report and tell you to take it up with the tax court.

    Now, docketing tax court isn't hard. The court bends over backwards to accommodate anyone who wants to fight the IRS. You can write your first filing with the court in crayon on toilet paper and they'll put you on the docket. When you go on to the docket, the Appeals Division automatically gets a case and tries to resolve it before the case must go to court. However, time is short. You and the IRS must reach an agreement before it gets to court which is 90 days after the date of the imaginatively named 90-Day Letter containing your final report.

    <ETA: The previous paragraph is over-simplified to the point of error. Any CPAs reading this should feel free to roast me for it but I can't come up with a more correct version without using 5000 more words.>

    That's not much.

    Automation has the potential to compress all these time frames and force people to fix things quickly. That's not bad, specifically, but we all know what happens when you rush a bureaucracy; people get run over.

    The question in my mind is "Do we want more audits?" The obvious answer is yes, of course, because the law should be obeyed. But is that really the case? The economy and the government function with a certain amount of fudge factor built into the tax enforcement process. We narrow that factor and we'll be creating unintended consequences I can't even begin to list.

    We'll never hit the ultimate in tax enforcement where when you file a fraudulent tax return on April 15 a computer catches it and on April 16 a group of Revenue Officers shows up and starts towing away your cars.

    And we shouldn't want that. We might want to be a little closer to that but no one who understands the first thing about human nature wants to achieve such a thing. The voluntary compliance upon which the entire tax system relies would crumble.

    So maybe AI will make it possible for more tax cheats to get caught and be forced to pay more for more and more minor transgressions, all trucking along at the speed of technological advancement.

    When does that progress so far that it triggers a society-wide rejection of the entire idea of voluntary compliance?

    If we hit that point, we're all well and truly screwed.
    The first half of this post would have been better done by simply linking here.
     

    benenglish

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    I'd definitely like to learn more about this. Know of any good sources to read about it?
    For a bit of scholarly background, try reading two and a half pages here, starting at the top of page 12.

    I have some problems with the paper as a whole, but it's a start.

    Like I indicated before, the nuts and bolts of how the actual numbers are calculated isn't exactly something the IRS shines a light on. For example, this is a quote from a large accounting firm web site:

    ...your return will be evaluated based on your “DIF” score, a set of IRS formulas known as the “Discriminate Function System.” About three-quarters of all returns audited are selected by the DIF computer, which compares deductions, credits, and exemptions with the norms for taxpayers in each income bracket.

    ... these formulas are kept very secret by the IRS ...

    Well, no shit. I'm crawling all over the Statistics of Income sources I can find publicly and I'm not coming up with much for you. I have some old Official Use Only docs that shed more light on the score but the IRS can sometimes be a little prickly about posting that stuff publicly. I was a bit reticent to even publish the fact that the Law Enforcement Manual existed (which isn't a problem since it's acknowledged in the published Internal Revenue Manual) and include an investigative threshold figure. The amount was so out of date no one should take notice and I'm secure with that.

    But seriously digging into DIF and publicly posting what I can put together? The more I do, the more I'm having second thoughts about that.

    In fact, I started to pick up the phone and call someone in the center where the work is mostly done and then I stopped. It hit me that that facility is, well, downright creepy in the way they handle security, both physical and infosec.

    Mind if I just leave it at what I've posted thus far?
     
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    Sasquatch

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    In fact, I started to pick up the phone and call someone in the center where the work is mostly done and then I stopped. It hit me that that facility is, well, downright creepy in the way they handle security, both physical and infosec.

    Mind if I just leave it at what I've posted thus far?


    See, this makes me even less warm & fuzzy that this agency is more than doubling its size. Government agencies are, at best neutral, at worst, despicable doesn't begin to describe them. The IRS is probably uniformly hated by everyone, rich or poor, democrat or republican, libertarian or authoritarian - except when they can weaponize the agency against their foes - which is exactly what I see happening here. I mean - the IRS is the agency that put Al Capone behind bars when others couldn't.

    I'd much prefer we transition to a tax code that can fit on a napkin, that doesnt' require the individual tax payer to prepare a return every year and guess (accurately or not) how much they owe and navigate the myriad of regulations, exemptions, credits and shelters. I'd rather put the 70 some thousand IRS employees already on the payroll out of work, than add 87 thousand more. I'd rather see fewer audits, with no armed, LE sworn agents. Then again - if I had my way, I'd dismantle almost every federal agency and strip away every one of their police powers, except for the US Marshal Service. Agencies could have non-sworn investigators that could compile a case to present it to a US Attorney for criminal referral, and the USMS could handle arrests authorized by the US attorney or when a warrant is duly issued by a court.
     

    SrsTwist

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    I'm not so sure. The question revolved around how returns get selected for audit and the role automation will play in the future.

    So, let's start with the basics and some history.

    For decades, as long as tax return information has been kept on computers of any sort, the normal way returns have been selected for audit is via the differential function score (DIFF) of the return. For every type of taxpayer and every general sort of situation, there's a statistical average of the way the returns look, of the entries on every line. Those statistical models are updated all the time by an entire function dedicated to the task, the Statistics of Income office (SOI). There are far more ways that SOI compiles data than just averaging tax return entries but that's getting into the weeds.

    In sum, every time a new return is filed, it's automatically scored and the more the DIFF score deviates from average, the more likely for the return to be selected for a potential audit.

    That's the normal way. There are probably a thousand things beyond just a basic statistical model that can increase your DIFF score. If your
    previous year return needed an audit, if you're taking deductions known to have high potential for abuse, if you're using types of credits that are commonly abused, if you used a bad preparer, etc. (Your return can also be manually pulled for audit for lots of reasons but that's beyond the scope of this post which will be, no matter how hard I try, much longer than anyone wants to read.)

    AI advances make DIFF scores more and more useful, more and more accurate. That's great. Your high DIFF score gets your return sent out to some group of humans in an office near you. There are always far, far more returns sent out for audit than can ever be audited. When the paper returns arrive at an office, an experienced Revenue Agent or a Tax Compliance Officer group manager will look them over. The vast majority get a "There's not enough here to be worth the trouble" determination so they get boxed up and returned to files. (There's a whole process for that but that's getting a bit far afield.)

    The returns that a human thinks are worth working are then assigned and the audit starts. They have priorities assigned to them and low priority cases, even after assignment, might not be audited if workload is too high. Those go back to files in dribs and drabs all year.

    It's important to understand that there are different levels of audit.

    If you get a basic notice that says you made a math error, technically that's an audit. But almost nobody contests those because, well, it was just a math error. You pay it and go ahead on.

    Very simple returns can go through a correspondence audit where you get a letter saying "We need more information to allow this to process..." and you provide the information. Those notices will also say something to the effect of "If you agree with our suspicions and don't want to bother with this, pay this much." But the presumption is that you'll reply, somehow. Often, it was just a missing form or something that's easy to resolve. If you fight a corr audit because it's enough money and you think the IRS is wrong, you can go back and forth through the mail for a while but if no agreement is reached it will go out to the field offices and a human will work the audit.

    Notice that in this historical landscape, the conflict always winds up with you talking to a human being if you don't agree with the computer notices you've gotten.

    I think things should stay that way.

    What I fear is that the new reporting requirements will result in much more authoritative corr audits where the case is not sent to the field but, instead, the agency will have so much faith in their algorithms that they will issue a final report and tell you to take it up with the tax court.

    Now, docketing tax court isn't hard. The court bends over backwards to accommodate anyone who wants to fight the IRS. You can write your first filing with the court in crayon on toilet paper and they'll put you on the docket. When you go on to the docket, the Appeals Division automatically gets a case and tries to resolve it before the case must go to court. However, time is short. You and the IRS must reach an agreement before it gets to court which is 90 days after the date of the imaginatively named 90-Day Letter containing your final report.

    <ETA: The previous paragraph is over-simplified to the point of error. Any CPAs reading this should feel free to roast me for it but I can't come up with a more correct version without using 5000 more words.>

    That's not much.

    Automation has the potential to compress all these time frames and force people to fix things quickly. That's not bad, specifically, but we all know what happens when you rush a bureaucracy; people get run over.

    The question in my mind is "Do we want more audits?" The obvious answer is yes, of course, because the law should be obeyed. But is that really the case? The economy and the government function with a certain amount of fudge factor built into the tax enforcement process. We narrow that factor and we'll be creating unintended consequences I can't even begin to list.

    We'll never hit the ultimate in tax enforcement where when you file a fraudulent tax return on April 15 a computer catches it and on April 16 a group of Revenue Officers shows up and starts towing away your cars.

    And we shouldn't want that. We might want to be a little closer to that but no one who understands the first thing about human nature wants to achieve such a thing. The voluntary compliance upon which the entire tax system relies would crumble.

    So maybe AI will make it possible for more tax cheats to get caught and be forced to pay more for more and more minor transgressions, all trucking along at the speed of technological advancement.

    When does that progress so far that it triggers a society-wide rejection of the entire idea of voluntary compliance?

    If we hit that point, we're all well and truly screwed.
    Thanks! Good info!
     

    SrsTwist

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    My concern is that I'll automatically get audited because I'm in the 'gig economy'. I think gig workers are going to be singled out for special attention. There's cash tips that frequently go unreported. They're rare because almost everyone tips through the gig platform apps. But the IRS might well just assume there's more and set some unrealistic reported cash tips threshold as an audit trigger. And IRS agents have stated on social media that the IRS is just generally suspicious of the whole gig economy thing. When the IRS doesn't like something it tends to focus on it. I don't want to be the subject of that focus.
     

    benenglish

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    When the IRS doesn't like something it tends to focus on it.
    It would be more accurate to say the IRS tends to focus on things it doesn't understand. That's why it formed it's first crypto research group over a decade ago. It formed it's first employee leasing study group over 25 years ago. In both cases, the subject of investigation hadn't even begun to enter the average public consciousness.

    Eventually, they'll know enough about gig workers to write industry-specific audit guides. Expect that to take time.
     

    Sasquatch

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    It would be more accurate to say the IRS tends to focus on things it doesn't understand. That's why it formed it's first crypto research group over a decade ago. It formed it's first employee leasing study group over 25 years ago. In both cases, the subject of investigation hadn't even begun to enter the average public consciousness.

    Eventually, they'll know enough about gig workers to write industry-specific audit guides. Expect that to take time.

    The whole "employee leasing" thing was interesting when I entered the towing industry nearly 20 years ago. We were not directly employees of the company - in fact, two companies I worked for (caveat, managed by the same person) used an employee leasing middle man. They did this to save money - the towing companies, when going thru leasing (Barret Business Services, for what its worth) agency, did not carry workers compensation insurance (state mandated in Oregon to cover any employee) nor did they have to pay benefits, etc. They also didn't have to handle unemployment claims, because to fire you, they were simply releasing you from the permanent-lease scenario. You were still technically a BBSI employee, and BBSI would send you to some office to stuff envelopes (or at least they had to request it) and if you balked and said "no" then you were terminated for-cause, and you were almost gauranteed to have an unemployment claim denied.

    They simply charged IIRC, a 20 or 25% premium over the wages of the leased employee. Eventually the guy I worked for decided that, after a rate increase, it was no longer advantageous to be "leased" - so he terminated BBSI's relationship and we became permanent party employees with all the benefits (ha!) and disadvantages therein.

    I'd never heard of employee leasing before going to work in towing. I'd heard of contractors and temp agencies, but the whole "permanent leased employee" scheme was a new one.
     
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