I wish I had a dollar for every time I was asked this question. There are several programs IRS administers when selecting tax returns for tax audits. The most common way your return is selected is by the computer scoring method. IRS also changes it’s targeting program from year to year to keep one step ahead of the taxpayer. Also, different regions of the United States have different programs managements chooses. As an example of this, because of the juicing season in Florida there are high number of growers in the Central Florida area. IRS will decide to conduct tax audits among the agricultural industry. Same may be true for Detroit and the automobile industry. IRS also has market specialization programs. IRS has designated tax specialists among its agents that audit the same type of business day in a day out.
How Returns Are Selected for Examination
The IRS selects returns using a variety of methods, including:
Computer Scoring ( the most common ) — Some returns are selected for examination on the basis of computer scoring. Computer programs give each return numeric “scores”. The Discriminant Function System (DIF) score rates the potential for change, based on past IRS experience with similar returns. The Unreported Income DIF (UIDIF) score rates the return for the potential of unreported income. IRS personnel screen the highest-scoring returns, selecting some for audit and identifying the items on these returns that are most likely to need review.
Large Corporations — The IRS examines many large corporate returns annually. If a corporation has over $10 million dollars in gross sales there is a 6% chance of an audit.
Information Matching — Some returns are examined because payer reports, such as Forms W-2 from employers or Form 1099 interest statements from banks, do not match the income reported on the tax return. 1.4 million tax returns are adjusted this way every year.
Related Examinations — Returns may be selected for audit when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for examination. When IRS audits a tax return and you had a business relationship and the IRS found improprieties, they may audit related businesses.
Other — Area offices may identify returns for examination in connection with local compliance projects. These projects require higher level management approval and deal with areas such as local compliance initiatives, return preparers or specific market segments.