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Any taxpayer will be happy to know what will catch the attention of the IRS enough for them to subject you to an audit. Over the years, tax returns are mostly processed by computerized systems. The general idea is that the programs simply detect anything that is considered 'out of the ordinary', and when each tax return is compared to the statistical average, or what is considered normal when the group is examined as a whole, it treats that difference as a flag. This flag increases the chances that such particular tax record will be audited. After the computer flags the tax record, it will be manually rechecked by an IRS employee, depending on the extent of the discrepancy that the IRS computer found. In some instances, the IRS computer will simply print out a notice that will delivered directly to the taxpayer.
Audit flags will certainly increase your likelihood of being audited. There are several easily avoidable audit flags that the IRS seems to deal with regularly. One of the easiest to avoid is turning in sloppy tax returns that are also incomplete. You may want to ensure that your tax returns are nearly perfect with both the math calculations and the information provided. If there are miscalculations found in your tax return, it will then be sent to an actual IRS agent who would have to manually review it. Electronically filed returns are less likely to have this kind of mistake as the system has a built-in math checker.
Not reporting all of your earnings to the IRS will do you no good. Basically, anyone who gives you a W-2 or 1099 also sends a copy to the IRS. This explains why the IRS has an accurate record of everything you earn and if you try to outsmart them by not giving them complete reports, you are certainly up for an IRS audit. Miscellaneous income, dividends, and interests must always be reported as part of your income so you won't have problems with the IRS.
Also prone to an IRS audit are taxpayers who report that they are either making a great deal less or a great deal more than the industry norm. Statistics suggest that almost 5% of all taxpayers get an audit every year for this reason. In addition, those who are earning more than $100,000 yearly have 5 times more chances of getting an audit.
If your tax record shows extreme fluctuations in your income level, that will again be considered as an audit flag. The IRS takes notice of this because they believe that most people do not have such large differences in income levels. Usually they will think that you have underreported your income at one point or another.
As surprising as it may sound, even having too many round numbers on your tax return can raise an audit flag. For instance, most transactions aren't exactly $1,000 or $500. Having this kind of numbers would make the IRS think that you have been rounding up too many transaction records and you are certainly up for something. This will, at least, prompt the system to force an actual IRS agent to recheck your tax return.
There are still a lot of audit flags out there and the ones mentioned above are just the most common ones. Knowing what to be careful about will certainly help you in avoiding an IRS problem.
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