How Does the IRS Select Returns for Audit?
1. The Machine. The IRS reviews most returns by computer. They give returns numeric scores based on certain items which may be high, out of line, or questionable. They have an algorithm which can identify the returns which have the highest potential to have a successful audit. Most audits come from this process. There you go, blame it on the machine again.
2. Matching Information. The IRS matches up all those pieces of paper everyone files. 1099's and W-2's mostly. If what is reported on the paper doesn't add up to what you have on your return, you will probably get a note from your friends at the IRS.
3. Tax Shelters. People with tax shelters or other tax avoidance transactions are ripe for audit. The IRS now spends time identifying promoters and participants in tax shelters. Once they find a tax shelter, they generally get the records and audit everyone involved. If you are going to use tax shelters….better add in the cost of defending the tax result in your ROI.
4. Bad People Around You. Your return can get audited when they involve issues and transactions with others who had their own issues with the IRS. They go looking for related parties. Remember, bad apples poison the barrel.
So, hang out with good people, don't invest in tax shelters, make sure you have all those little pieces of paper, don't piss off the machine, and you won't get audited.