Getting audited by the IRS is rarely anyone's spot of tea — unless, of course, you're the auditor. But at least our IRS "plays fair" and uses your actual return to decide whether to audit you. Not so for the folks at Her Majesty's Revenue and Customs Service across the pond!
Here in the former colonies, the IRS uses statistical analysis to find most of their audit targets. Every return gets a super-secret score called a Discriminant Information Function, or "DIF." The higher your DIF, the more potential the IRS sees for bringing in additional taxes in an audit. So, with limited resources available for auditing returns, the IRS naturally strives to audit the higher-scoring returns first. (It's like why Willie Sutton robbed banks — because that's where the money was!) Generally, small businesses organized as sole proprietorships face the greatest chance of audit — as high as 4% or more — because they have the greatest opportunity to under-report income and overstate deductions.
