Question

In addition to outside sources of information (e.g., newspapers, financial statement disclosures, informants, etc.), what programs do the IRS use to identify taxpayers that likely understate their tax liability?

Answer 1

The IRS uses programs such as the DIF, AUR, and CAE to identify taxpayers who may be underreporting their tax liability.

Step-by-step explanation:

The IRS uses various programs to identify taxpayers who may be understating their tax liability. One such program is the Discriminant Information Function (DIF) system. The DIF system uses a computerized scoring system to compare individuals' returns to statistical norms and identify potential discrepancies. Another program is the Automatic Underreporter (AUR) program, which compares the information reported on a taxpayer's return to third-party information, such as Forms W-2 and 1099, to identify potential underreporting.

In addition to these programs, the IRS also has the Computer Assisted Examination (CAE) program, which uses statistical models to identify returns that have a higher probability of containing underreported income or overstated deductions. The CAE program selects returns for examination based on various risk factors, such as income level and industry.