When Your Tax Return Is Flagged for Review

Filing taxes can be stressful. 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 finds that your numbers don’t add up. It helps to understand why returns are flagged and what reviews involve. If you’ve got a complicated tax situation, it may be wise to work with a financial advisor with tax expertise.

How Tax Returns Are Selected for Review

The IRS commonly reviews tax returns based on a system called the Discriminant Function System (DIF) score. This is a computerized scoring model that evaluates your return and assigns a score indicating the likelihood of errors or required adjustments. The score is determined by comparing your return to similar ones filed in previous years. Another model, the Unreported Income DIF (UIDIF) score, assesses the probability that you may have underreported your income.

Tax returns with high DIF or UIDIF scores are more likely to be flagged for review. Triggers for a high score include reporting significantly higher or lower income than the previous year, claiming unusually large business deductions or omitting required forms like a 1099.

Additionally, the IRS randomly selects a small percentage of returns for review. These are compared against a sample of “normal” returns to identify potential discrepancies.

What an IRS 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

An advisor and client review a tax return flagged for review.

There are several different scenarios that can play out when your tax return is flagged for review.

Obviously, the best outcome is for the IRS to find that your information is correct and process your refund. However, 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. Just know that you’ll have to pay 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 review up to six years if they find a serious error.

Bottom Line

Being selected for a tax return review doesn’t mean it’s time to 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. The IRS may determine that your information is correct and process your refund. However, the government could verify your information and determine that you owe more in taxes, or worse, order a full-fledged audit.

Tax Planning Tips

If you need any help, don’t hesitate to reach out to a financial professional. A tax accountant can help you with issues directly related to your tax return, but you may prefer to work with a financial advisor who can take a holistic approach to your overall financial picture. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Preparing is key to avoiding tax issues. Use SmartAsset’s free income tax calculator to see in advance what you may end up owing, so you are prepared in advance rather than risking a surprise.