How Does the IRS Select Returns for Audit?

Although the IRS does not have a set list of items that a return can be audited for, there are some general items that may make a return more likely to be audited.
  1. The IRS may audit or make an adjustment to a return when the information reported to the IRS by employers, banks, etc. does not match the information reported on the tax return
  2. One or more IRS “red flag” items are on a return:
    • Home office deduction
    • High itemized deductions
    • Multiple years of Schedule C losses
    • High auto or travel deductions
    • Rounded numbers on a return
  3. Large changes or fluctuations with a return from year to year.
  4. Audits of related returns. For instance, if your business is audited, your personal return may subsequently be audited based on changes made to the business return.
  5. Random selection. The IRS does audits for statistical purposes. These are done at random and generally require the taxpayer to substantiate all/most items on their tax returns.
  6. Possible tax fraud, tips to the IRS, or information reported from State or local compliance.

As a taxpayer, it is your responsibility to provide documentation and authority supporting the items and positions taken on your return. The IRS generally has three years from the date the return was filed to assess additional tax. However, that can be extended to 6 years in cases where more than 25% of the income was not reported, and indefinitely for a return where there is fraud.

It is important that you keep all of your records in a safe, dry place. It is also advisable to keep duplicate copies of records in different formats (electronic and print versions) and different locations in case one set gets destroyed. It is often very difficult and expensive to try to get prior years’ statements in the year of the audit in order to attempt to create your records.

If you are thinking about filing a return that has an item you believe may result in a future audit, you should contact a CPA or Tax Attorney prior to filing to ensure that you are taking a proper position on the return. If you later receive notice of audit, you should again contact a CPA or Tax Attorney to represent you before the auditor.