The Internal Revenue Service (IRS) conducts audits to ensure that taxpayers are complying with tax laws and reporting their income and expenses accurately. While some audits may appear random, the IRS actually uses specific criteria to select tax returns for review. This article will explore the factors that the IRS considers when selecting returns for audit and provide tips on how to reduce your risk of being audited.
How the IRS Selects Returns for Audit
The IRS uses a computer program called the Discriminant Function System (DIF) to score tax returns and identify those that are most likely to contain errors. The DIF considers a variety of factors, including:
- Income: Taxpayers with high incomes are more likely to be audited.
- Deductions and Credits: Taxpayers who claim large deductions or credits are more likely to be audited.
- Self-Employment: Self-employed taxpayers are more likely to be audited than wage earners.
- Business Expenses: Taxpayers who deduct business expenses are more likely to be audited.
- Prior Audit History: Taxpayers who have been audited in the past are more likely to be audited again.
Random Audits
While the IRS primarily uses the DIF to select returns for audit, it does conduct a small number of random audits each year. These audits are used to ensure that the DIF is working properly and to identify taxpayers who may be underreporting their income.
Reducing Your Risk of Audit
While there is no guaranteed way to avoid an audit, there are steps you can take to reduce your risk:
- File an accurate tax return: The most important thing you can do to reduce your risk of audit is to file an accurate tax return. Make sure to report all of your income and expenses, and be sure to keep records to support your deductions and credits.
- Avoid common audit triggers: Some common audit triggers include claiming large deductions or credits, being self-employed, and having a prior audit history. If you fall into one of these categories, be especially careful to document your income and expenses.
- Respond to IRS inquiries promptly: If you receive an IRS inquiry, respond promptly and provide the requested information. Ignoring IRS inquiries can increase your risk of audit.
IRS audits are not random. The IRS uses specific criteria to select returns for review, and taxpayers who meet certain criteria are more likely to be audited. However, by following the tips outlined in this article, you can reduce your risk of audit and ensure that you are complying with tax laws.
Episode 17: Are Audits Random?
FAQ
How likely is a random IRS audit?
How do they pick who gets audited?
Does everyone get audited at some point?
How will I know if I get audited?
Why are random audits important?
Assuming that regulators are not able to audit all entities of interest, random audits allow every potential person or firm subject to audit to have a similar probability of being audited. Second, random audits by government agencies are effective policy tools to encourage regulatory compliance.
What are the chances of a random audit?
“The chances of a random, full-blown audit are relatively minimal. Most audits are triggered by missing info (like a forgotten W2), incomplete forms, your numbers being totally out of whack, or sometimes, good ol’ random luck of the draw. The best way to prevent these triggered audits is by making sure you don’t cut any corners.
What is a random audit?
One random audit of particular interest is the Federal Election Commission’s (FEC) random auditing of campaigns for the U.S. House of Representatives and U.S. Senate following the 1976 elections. The FEC made a series of decisions in its rollout of the audits. First, it decided to do random audits in the first place.
What is an example of a randomized audit?
Examples include audits of financial records by the U.S. Securities and Exchange Commission, random audits of lobbying disclosures by the U.S. Government Accountability Office (GAO), audits of federal taxpayers to assess compliance with the Internal Revenue Code, and randomized review of Board of Veterans’ Appeals opinions for quality control.