The IRS chooses a small number of tax returns each year to audit. Receiving an audit doesn’t necessarily mean that you did something wrong – they can audit you for no reason at all. Even so, it can be very nerve-wracking to receive an audit notice. How does the IRS choose who to audit? Do your odds change based on the tax bracket you’re in?
How the IRS chooses who to audit randomly
The IRS process for choosing who to audit is largely – but not entirely – random. This system chooses a number of typical returns for each tax bracket at random, and uses them to develop norms that they compare other forms to. They then select other returns at random to compare to the norm, in order to see if there are any glaring mistakes that jump out at them.
The odds of getting randomly selected for an audit are extremely low. The number changes year to year, but typically only about 1% or less of returns come up for audit in this way. Your odds of a random audit increase with your yearly income – with the most audits targeting those with an income above one million dollars.
Your odds of an audit also increase if your return involves one of these common triggering factors.
Factors that can trigger an audit
The IRS specifically designed their computer program to flag certain anomalies for human review. More than simple mathematical errors, the system seeks out things that could be indicative of tax fraud or evasion.
For example, you might trigger an audit if your taxable income is unusually low because of an excessive use of deductions. You could also trigger an audit if you or your business reports large transactions in cash. While these things aren’t illegal, they could be indicators of potential crime that the IRS might want to take a closer look at.
Receiving notice of an impending IRS audit might fill your head with images of fines and possibly even jail time. Luckily, IRS audits are very rare, and you can typically resolve them without a hitch – by sending in the requested documentation.