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4.1.3.2
(10-24-2006)
DIF Overview
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This chapter discusses sources of DIF returns.
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DIF (Discriminant Function) is a mathematical technique used to score
income tax returns as to examination potential. These formulas were developed
based on available NRP data. Each return measured under DIF receives a DIF
score. Generally, the higher the score, the greater the audit potential. The
highest scored returns are made available to Examination upon request.
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DIF mathematical formulas are confidential and for official use only.
The DIF score assigned to a return should not be disclosed.
4.1.3.2.1
(10-24-2006)
Types of DIF Returns
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The following types of returns are computer scored under the DIF System:
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Individual Returns
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Corporation Returns
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S Corporation Returns
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Partnership Returns
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Fiduciary Returns
4.1.3.2.2
(10-24-2006)
Individual Returns
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All individual returns are computer scored under the DIF System. DIF
returns are generally ordered in bulk, but some returns are delivered to Examination
as Automatics for manual screening without a return order being placed. These
returns are identified as Automatics by the use of Audit Codes. Audit Codes
can be found on Form 5546, Examination Return
Charge-Out Sheet. These Audit Codes are listed in IRM
4.19.1.2.6, Form 1040 Individual Returns Scored by DIF System (Audit
Code Definitions)
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Correspondence (CORR) returns are certain individual low and medium
non-business returns that are conducive to correspondence examinations. Returns
identified as "CORR"
will not be ordered by Area offices
without prior written approval from the PSP Territory Manager.
4.1.3.2.3
(10-24-2006)
Corporation Returns
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Corporation returns having no balance sheet or assets under $10,000,000
are computer scored under the DIF System. Formula numbers are used to identify
the asset classes when ordering corporate returns on
Form 6897, Corporation Returns Orders . High asset returns, activity
codes 219 through 225, are not DIF scored and are delivered automatically
to Classification at the Ogden LMSB Campus. The Corporation DIF System includes:
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Miscellaneous corporate returns are also not DIF
scored. These returns may be sample ordered. These returns could be classified
by screening them in the Statistics of Income (SOI) Division located at the
Campus before shipment to SOI at the Ogden Campus. Miscellaneous corporate
returns include:
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Certain corporation returns are identified as Specials
. These returns are delivered to Examination for screening without
a return order and are identified by Audit Codes. These Audit Codes are listed
in IRM 4.19.1.2.7, Form 1120, U.S. Corporation
Income Tax Return.
4.1.3.2.4
(10-24-2006)
S Corporation Returns
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S Corporation Returns having assets under $10,000,000 are computer scored
under the DIF System. The S Corporation System includes:
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Certain S corporation returns are identified as Specials.
These returns are delivered to Examination for screening without a
return order and are identified by Audit Codes. These Audit Codes are listed
in IRM 4.19.1.2.8, Form 1120S, U.S. Small
Business Corporation Income Tax Return.
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