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Have questions? Email Send your question to jmansfield@smartasset.com

Ask Our Taxes Expert

Have a question? Ask our Taxes expert.

Have questions? Email Send your question to jmansfield@smartasset.com

What Happens When Your Tax Return Is Flagged for Review?

Filing taxes can be stressful and when the IRS opts to take a closer look at your tax return, that can only increase your anxiety level. Getting your return flagged for review doesn’t mean you’ll be audited, but it can raise the odds that Uncle Sam will discover that the numbers don’t add up. It helps to understand why returns are flagged and what reviews involve. As these matters get complicated, you might want to used SmartAsset’s SmartAdvisor matching tool to get paired with a financial professional who can provide you with expert guidance on your tax needs.

How Tax Returns Are Selected for Review

The most common reason for the IRS to review a tax return is something called the Discriminant Function System (or DIF) score. The IRS uses a computerized scoring model that evaluates your return and gives it a score based on the likelihood that it will need to be changed. To determine this score, the model compares your return to similar returns that the IRS received in past years. A second model, the Unreported Income DIF (or UIDIF) score, rates your return on the probability that you didn’t fully report your income.

Returns that receive a high DIF or UIDIF scores are more likely to be pulled aside for review. Factors that could trigger a high score include having a substantially higher or lower amount of reported income compared to the previous year, claiming excessive deductions for business expenses or leaving a 1099 form off your return.

It is also worth mentioning that the IRS does randomly select a small percentage of tax returns to review each year. The randomly selected returns get compared to a sample of “normal” returns in order to see if there are any discrepancies.

What a Review Involves

If the IRS decides that your return merits a second glance, you’ll be issued a CP05 Notice. This notice lets you know that your return is being reviewed to verify any or all of the following:

  • Your income
  • Your tax withholding
  • Tax credits you claimed on your return
  • The withholding claimed on your Social Security benefits
  • Schedule C income
  • Claims for household help

At this point, you’re not expected to do anything. The IRS will attempt to verify whatever information triggered the review. In the meantime, you won’t be issued a refund if you’re expecting one. If you owe taxes, you will still need to pay by the tax filing deadline to avoid a penalty.

How long the review process takes depends on what information the IRS needs to verify. If you don’t hear anything within 45 days from the date of the initial notice, however, you can follow up to see what happened to your refund.

Potential Outcomes of a Tax Review

What Happens When Your Tax Return Is Flagged for Review?

There are several different scenarios that can play out when your tax return is flagged. The best thing you can do is hope for the best and plan for the worst. Obviously, the best outcome would be for the IRS to find that all of your information is correct and process your refund.

The IRS could verify your information and determine that you owe more in taxes. If it’s a difference of only a few hundred dollars, that may not be problematic. But if it’s several thousand dollars, you could find yourself in a financial bind. Applying for an IRS installment agreement can give you time to pay it off, but you’ll be stuck paying penalties and interest until the balance is wiped out.

Finally, there’s the chance that the initial review could lead to a full-scale audit. In that case, the IRS would look at every aspect of your return to determine whether you’ve reported your income properly and paid the appropriate amount of tax. The IRS can go back through three years’ worth of returns, or up to six years if they find a serious error.

The Bottom Line

What Happens When Your Tax Return Is Flagged for Review?

When it comes to the IRS, playing it straight and keeping a low profile is best. If you get selected for review, the key is to not panic. If you’re worried about the possibility of an audit, getting all of your income statements, receipts and other tax-related documents organized during the review process can save you some time and headaches.

Photo credit: ©iStock.com/Nicolas McComber, ©iStock.com/Minerva Studio, ©iStock.com/michaelpuche

Rebecca Lake Rebecca Lake has been writing about the nuts and bolts of personal finance for nearly a decade. She is an expert in investing, retirement and home buying topics. Her work has been featured on The Huffington Post, Business Insider, CBS News, U.S. News & World Report and Investopedia. As a homeschooling mom of two, she's always looking for ways to make the most of every dollar.
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