Differential Income Factor Method [DIF Method] Law and Legal Definition

Differential Income Factor method (DIF Method) refers to the method used by the Internal Revenue Service (IRS) to find out the tax returns to be audited. In DIF method, each tax return filed with the IRS is allotted a score depending upon the amount of income reported and the kind and amount of deductions claimed. The score allotted to the filed tax return is called the DIF score. If the DIF score for a tax return exceeds a particular threshold for income reported on the return, IRS will add such tax returns in the pool of returns for auditing. The higher the expenses relative to the income, the higher will be the DIF score.