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How does the IRS decide which taxpayers to audit?

An IRS audit can seem like it came out of the blue. “Why me?” is a common question for individuals and businesses facing federal scrutiny into their income tax returns.

The IRS has several ways of selecting the tax returns it chooses to audit. These include:

  • Computer scoring. Returns get screened by computer software called the Discriminant Function System, or DIF. The system assigns individual “scores” that rate returns for potential for unreported income, when compared with similar tax returns from the past. The higher the DIF score, the more likely that IRS agents will select it for an audit.
  • Information matching. Another possible reason a person gets audited is because information on payer forms, like the Form W-2 from his or her employer, does not match the information given on the tax return.
  • Tax avoidance transactions or foreign accounts. The IRS may investigate taxpayers for abusive tax avoidance practices. Evidence of these transactions could trigger an audit.
  • Related examinations. Even if a taxpayer’s return does not seem suspicious on its own, the IRS may select it for audit if the taxpayer is somehow connected to others who are being audited, like business partners or investors.

An audit can be time-consuming, invasive and stressful. The IRS will likely ask many questions in its quest to obtain evidence against you. Perhaps the best thing someone being audited can do to protect themselves is to hire a tax attorney. The lawyer can act as a buffer between the agency and the taxpayer, for example by appearing on the taxpayer’s behalf during the audit appointment.

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