How Does The IRS Determine Who Gets Audited?

Taxes are already a stressful time for many people, and no one enjoys getting extra attention from the Internal Revenue Service (IRS), especially through an audit. There are few other situations that can cause more anxiety in taxpayers, and it is reasonable to wonder why they have been selected.

But just how does the IRS determine who gets audited? Here are some of the ways it picks which tax returns to examine.

Chosen By The Computer

One method, and perhaps the most common, is through a computer score. The IRS looks at every single return through its computer screening process, which assigns two ratings to each. One score indicates the potential for errors in the return, and the other is the potential for unreported income.

Returns with high scores in either are set aside for a potential audit by a human reviewer. Not all of these flagged returns are audited, though, because there is just not enough manpower to do so every year. So, sometimes the selection comes down to random luck.

Being Connected to Another Review

Another way a taxpayer could be selected for an IRS audit is by having a connection to another taxpayer. This typically happens to businesses and partners, but it is also possible with private individuals.

This audit is triggered when there is a discrepancy between two filings. For example, Taxpayer A reports a payment made to Taxpayer B as a gift (which is not taxable), but then Taxpayer B reports this payment as a business expense. Both of these cannot be correct, so the agency will audit both to determine the correct reporting.

Targeted Examinations

Finally, the IRS may conduct audits when it learns about certain schemes that taxpayers may take to avoid paying what they owe. Sometimes this happens when a whistleblower alerts the agency about some creative accounting. At other times, it is because there is a new or unfamiliar way of transacting, such as cryptocurrencies, that the IRS wants to monitor.

Call Our Attorneys and Learn How to Avoid an IRS Audit

It is important to remember that being audited does not necessarily mean there’s an issue or that you will be penalized or criminally charged; sometimes it is just a check to make sure everything is correct. Working with tax controversy attorneys at the Dayes Law Firm may help avoid discrepancies and lower the chances of being selected for an audit. If you do happen to be selected for an audit, we can also help you address the situation and potentially suggest solutions to satisfy your tax obligations.