HOw the IRS determines who will get an Audit

If you have received a notice that you are going to be audited by the IRS, don’t panic. There may have been several reasons for the selection. Perhaps an employee was angry and called you in, or your type of business may be a test selection for your area to compile data on the average amount of deductions etc. Generally however, audits are determined by a computer system and calculated by a numerical number. You have the right to ask why you were selected for an audit.

When the IRS receives your filing, the information is placed in a computer. The computer then uses a secret formula to “score” your return. While we don’t know exactly what formula is used, we do know some of the items that could make your “score” go up. Think of the score as a percentage that the computer gives back showing the likely hood of a mistake or cheating. Most of the time, the higher scores are a result of how far above or below average each line item is. For example, your score may go up if you have reported a lower than average gross profit margin compared to other businesses in your industry. Other items that can make your score go up include a high auto expense, high business use of automobiles, the number of automobiles used in your business, high travel and entertainment deductions and little or no profit from business operations.

Interest has recently been added to the high-risk audit item. Interest can be claimed as either business or personal use. The IRS has added that, which results in an IRS auditor assuring that the interest was in fact business and not personal.

It simply comes back to the higher the number; the more deductions that you have that vary from the average or norm. When this is computed, the IRS sees a greater chance for an error on that return. The returns with the highest numerical score get chosen first for the audits.

Remember that it is your right to know why you are being audited. Aside from the computer numerical system, there are other reasons that you may be getting audited. It could be an informant; your relationship with another audited taxpayer, being part of a targeted special group, or part of an IRS trial such as auditing all employers who use contract labor.