How the IRS Selects Audits

There no fool-proof way to avoid an IRS audit, but you can reduce the risk if you follow a few simple rules.

1. Errors: The number one reason the IRS audits a tax return is errors on the return. There are two errors you must avoid: math and matching.
2. Math Errors: Math errors are going the way of the dinosaur due to the heavy use of computer software to prepare tax returns.
3. Matching Errors: Matching errors are on the rise, however. A matching error is where the IRS has different information than you reported on the tax return. Missed interest and dividend income top the list. Missed sales of stocks and mutual funds run a close second. In my office I saw a tax return audited due to missed mortgage interest. The IRS assumed if the taxpayer was so sloppy as to miss deductions, there could be unreported income to.

Income over $100,000 and a sole proprietor business also increases your chances of getting selected for audit. Reducing errors is an easy way to lower audit risk; income is a different story. I'll keep the higher income and take my chances.

If you have a small business, consider organizing as a partnership or S corporation. This can cut your audit risk by over 75%.


To learn more about the IRS audit selection process, click here: IRS Tax Audits: The Selection Process



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