What does the IRS's DIF system evaluate?

The IRS's DIF (Discriminant Function) system is designed to evaluate the probability of under-reporting tax liability on individual tax returns. This system uses statistical models to identify returns that appear to have discrepancies or anomalies compared to norms based on similar taxpayers. By analyzing input variables, the DIF score helps auditors prioritize which returns may warrant further scrutiny, ensuring that the IRS can effectively allocate resources to examine returns that are most likely to have errors or omissions.

Understanding this system's purpose is crucial for taxpayers and tax professionals alike, as it sheds light on the IRS's approach to identifying potential noncompliance. Knowing that the DIF system aims to evaluate under-reporting risk can help taxpayers accurately report their income and deductions, thereby reducing the likelihood of audits and potential consequences associated with under-reporting.