How does the IRS determine who gets audited?

Answer 1

Government Tax agencies such as the IRS and Revenue Canada use "flags' to identify potential candidates for an audit. Given your age, job and geographical location there are certain things that would stick out more than others and possibly trigger an audit.

Example: You live in an area where the average income is 75K, but you declare 200K, that would trigger a flag which an agent would review and figure out if an audit is required.

There are hundreds of examples but the short of it is that as long as you stay within the general average of those in your area there won't be any reason for them to do an audit.

Answer 2

There are several ways.

1. Random sample. The dreaded "Taxpayer Compliance Audit." You'll be required to prove EVERYTHING on your return. This is a small fraction of all audits but they are the worst.

2. Statistical analysis. The IRS has statistical information on what typical taxpayers report for deductions based on their gross income. If your return falls outside these averages your likelihood of an audit increases dramatically.

3. High income. If you earn more than about $100k a year you are much more likely to be audited.

4. Prior audits. If you've ever been audited and the IRS disallowed something or adjusted your tax liability upwards for any reason you are much more likely to be auditied again.

Most audits are a non-event actually. The IRS has a question on your return and they send you a letter asking either for an explanation or proof of the item in question. If you provide a satisfactory explanation or the requested documentation by the deadline the case is closed. Pretty painless. I've had 2 of those over the years.

I also got called in twice back in the early 80s due to abnormally high employee business expense deductions. The first time I actually walked out with a refund since I had overlooked a few things that were legally deductible. The second time they did disallow an item that was questionalble but dropped it as the additional tax was only about $25.00 and not worth the time to pursue according to the auditor.