How Does the IRS Choose Who to Audit?
Each year, millions of people worry about getting audited by the IRS. While all of these people have a chance of being audited, some are more likely to be audited than others. The IRS uses four methods to determine which returns will be selected for additional examination.
Every tax return is run through a computer system that matches the return against other information such as W-2s and 1099s. If the information doesn’t match up, either because the filer left a form out of their tax return or entered different numbers, a human IRS employee will review the return.
In most cases, the IRS will simply send a bill for any additional tax owed. In others, it may send a letter asking for more explanation about why the return doesn’t match the other information. If the error is large or unusual, the IRS may choose to audit the entire return.
The IRS computers also compare each tax return against the returns of others in the same profession or income bracket. Taxpayers who report income well below the typical average or deductions that are well above the typical average may be flagged for further review.
There is nothing wrong with having a correctly completed return that doesn’t match the averages. The IRS is simply playing the odds on which returns are most likely to have underreported taxes.
If a review of one taxpayer finds underreported taxes, the IRS will often audit related taxpayers. Related taxpayers include the following.
- A business return and the owner’s personal return.
- Partners in a business even if the audit relates only to personal returns.
- Spouses filing separately.
- Parents and dependent children.
These types of audits typically focus on transactions between the related taxpayers but may expand to the entire returns if the examiner believes it is warranted.
The IRS also selects tax returns for audit at random. Every tax return has at least some chance of being selected, but the odds increase with the complexity of the return and the amount of reported income. The exact selection process is secret because the IRS doesn’t want tax evaders to be able to game the system.
Because you can never avoid an audit, you should always strive to pay as little in taxes as legally possible rather than taking steps like skipping deductions to try to avoid an audit. If you complete your taxes accurately and keep good records, you won’t have to worry about an audit even if you are selected.