Accounting Articles > Ethics:

Red flag fraud detected in using aggressive accounting

The Internal Revenue Service has a fraud detection system which they are constantly refining.

They have never, to my knowledge, disclosed exactly how it works. If they ever told us, people would probably find a way to beat it.

What I have learned is that given your geographic location, and your type of business, statistical analysis is done against all of the returns that match your business type which are geographically close to you. If you have income, expenses, or positions taken on your return that are not statistically similar to others during the analysis, then that portion of the return is red-flagged.

At this point in the fraud detection process, the return is sent to an individual at The IRS. Their job is to make a determination. They can consider the red flag immaterial, and let it pass. They can send out a letter proposing a change to the return. You would then have the ability to substantiate the original position on the return proving that it should not be changed.

Or the agent can recommend the return for audit. At this point, you or your representative will be forced to explain and substantiate the entire return to an auditor. Many times this leads to many additional years of tax returns being opened up for examination.

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