Ask An Accountant-How Does IRS Determine Who To Audit?

 

Although tax season is over, tax questions arise year round.  My husband is an experienced accountant and will be answering questions sent to me at with the subject line “Ask an Accountant”.  See previous questions and answers HERE

Question:

My sister and law, brother in law and my husband all recently got letters from the IRS asking for all of this documentation from previous tax years. For my sister in law they are requesting information for 3 years, for my brother in law 2 years and for my family one year. We all get your taxes done by the same person. They are asking for copies of children’s birth certificates, marriage licenses, etc. How and why does the IRS determine to audit individuals?

Answer:

There are many circumstances surrounding the IRS audit selections.  The IRS enters all tax return information into a software shortly after they receive the return and the software performs some calculations to determine reasonableness of the return compared to prior years and other tax returns similar.  The returns are allowed a certain “variance” from the norm.  If the return falls outside of this variance, it is “flagged for audit”.  Another circumstance would be if there are several partner/member/shareholders of a business considered a”pass-through” entity that business return is amended or audited, then partner/member/shareholders may also be audited to reflect the changes on the business return.  Another instance, if you were to prepare your return with whole, round numbers (i.e. expenses listed as Auto Expense 4,000; Professional Fees 8,000 etc..this is an immediate “red flag” (I have seen this more than once).  There may be a blatant error on the return, or an error not so obvious at first glance.

It is a little reassuring that you only received a letter, and not a personal visit from the IRS.  If you provide copies of the documentation requested, and cooperate fully, you should have no problem other than if the return was prepared incorrectly.

*Please keep in mind this post is for informational purposes only and answers given are very general.  Do not rely on this column for definite tax answers as many things depend on individual circumstances.  Please contact your personal accountant or financial advisor for your particular situation.

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