The Internal Revenue Service (IRS) is responsible for enforcing the nation’s tax laws. As part of this responsibility, the IRS conducts audits to ensure that taxpayers are complying with these laws. However, the IRS does not have the resources to audit every tax return that is filed. Instead, the IRS uses a combination of automated and human processes to select which tax returns to audit.
Automated Processes
The IRS uses a variety of automated processes to identify tax returns that may warrant further review. These processes include:
- Computerized screening: The IRS uses computer programs to screen all tax returns for errors and inconsistencies. Returns that contain errors or inconsistencies may be flagged for further review.
- Data matching: The IRS matches the information on tax returns with information from other sources, such as W-2 forms and 1099 forms. Returns that contain mismatches may be flagged for further review.
- Statistical analysis: The IRS uses statistical analysis to identify tax returns that are more likely to contain errors. Returns that are identified as being more likely to contain errors may be flagged for further review.
Human Processes
In addition to automated processes, the IRS also uses human processes to select tax returns for audit. These processes include:
- Random selection: The IRS randomly selects a small percentage of tax returns for audit. This process ensures that the IRS audits a representative sample of all tax returns filed.
- Targeted audits: The IRS also conducts targeted audits of specific taxpayers or groups of taxpayers. These audits are typically conducted when the IRS has reason to believe that the taxpayer or group of taxpayers may not be complying with the tax laws.
Factors that Increase the Risk of an Audit
There are a number of factors that can increase the risk of an audit. These factors include:
- Filing a complex tax return: Tax returns that are complex or contain a large number of deductions or credits are more likely to be audited.
- Making errors on your tax return: Errors on your tax return, even if they are unintentional, can increase the risk of an audit.
- Claiming large deductions or credits: Taxpayers who claim large deductions or credits are more likely to be audited.
- Having a high income: Taxpayers with high incomes are more likely to be audited.
- Being self-employed: Self-employed taxpayers are more likely to be audited than wage earners.
What to Do if You Are Audited
If you are audited by the IRS, it is important to respond promptly and cooperate with the auditor. The auditor will request documentation to support the items on your tax return. You should gather all of the requested documentation and provide it to the auditor.
The auditor will review the documentation and determine whether you owe additional taxes. If you do owe additional taxes, the auditor will issue a notice of deficiency. You have the right to appeal the auditor’s decision.
The IRS does not have the resources to audit every tax return that is filed. Instead, the IRS uses a combination of automated and human processes to select which tax returns to audit. There are a number of factors that can increase the risk of an audit. If you are audited, it is important to respond promptly and cooperate with the auditor.
IRS REVIEW VS. AUDIT: Understanding the difference.
FAQ
Does IRS look at every tax return?
Does the IRS review your tax return?
Does the IRS catch every mistake?
How likely am I to get audited by the IRS?
How does the IRS review a tax return?
How Tax Returns Are Selected for Review The most common reason for the IRS to review a tax return is something called the Discriminant Function System (or DIF) score. The IRS uses a computerized scoring model that evaluates your return and gives it a score based on the likelihood that it will need to be changed.
Should I get my tax return flagged for review?
When the IRS opts to take a closer look at your tax return, that can only increase your anxiety level. Getting your return flagged for review doesn’t mean you’ll be audited, but it can raise the odds that Uncle Sam will conclude that the numbers don’t add up. It helps to understand why returns are flagged and what reviews involve.
Do you have to tell the truth about an IRS audit?
In other words, the IRS is simply double-checking your numbers to make sure you don’t have any discrepancies in your return. Sometimes state tax authorities do audits, too. If you’re telling the truth, and the whole truth, you needn’t worry. Nothing is inherently sinister about an IRS audit or state audit.
How does the IRS determine if a return is audited?
The IRS selects random returns and reviews them based upon a statistical sample, comparing the randomly selected return against similar returns and flagging it for audit if discrepancies are found. Indicators of Fraud. A return may be flagged for audit if the Tax Examiner determines that the return contains indicators of fraud.