Understanding IRS Audits: Triggers and Randomness

Are you more likely to be audited by the Internal Revenue Service (IRS) if you pay all of your taxes, or someone who doesn't pay any taxes at all? This is a common question, and the answer may surprise you.

Random Audits and Triggers

Contrary to popular belief, the returns that are audited are chosen entirely at random by a computer system. However, this doesn't mean the IRS doesn't have its ways to increase the likelihood of an audit. There are specific triggers that can lead to a closer examination of your tax return.

Triggers for an Audit

Several factors can trigger an IRS audit:

Multiple Jobs and Businesses: If you work for multiple companies or own several businesses, your chances of an IRS audit are much higher. The IRS will not only review your business returns but also the returns of all employees, including managers and board members. Significant Income Changes: Any drastic changes in your tax returns can raise red flags and trigger an audit. For instance, if there are sudden spikes in your income, it may flag your return for further scrutiny. Contact with Former IRS Employees: Personal or professional connections with former IRS employees can also increase your risk of an audit. If you have an accountant who worked for the IRS or had knowledge of audit triggers, they might intentionally maneuver your return to stay below the threshold. Long-Term Financial Instability: Frequent changes in your financial situation, such as bankruptcies or frequent loan defaults, may also trigger additional scrutiny.

IRS Audit Perspective

While the IRS follows a random selection process for audits, this doesn't imply that tax compliance is irrelevant. The IRS has specific guidelines to prevent discrimination and ensure fair audits. They cannot target taxpayers based on their income or tax payments alone, as this would be considered profiling. Instead, they focus on the number of jobs and businesses a person is involved in.

IRS Perspective on Tax Compliance

According to a former IRS Tax Examiner, it's not the amount of taxes paid that matters; rather, it's the number of jobs and businesses you're involved in. The rationale behind this is simple: the more businesses you're associated with, the more potential there is for financial discrepancies.

For example, if you are on the board of directors of five different companies, you are six times more likely to be audited compared to someone employed by a single company. This is because the IRS reviews not only your business returns but also the returns of all employees and stakeholders involved in those businesses.

Key Takeaways

Randomness vs. Triggers: IRS audits are largely random but can be influenced by specific triggers such as multiple jobs, significant income changes, or connections to former IRS employees. No Discrimination Based on Income: Income levels or the amount of taxes paid do not influence the likelihood of an audit. Instead, the focus is on the volume of businesses and jobs a person is involved in. Preventing Audits: While complete avoidance of audits is nearly impossible, being aware of potential triggers can help minimize your risk. Consistent and accurate tax reporting can also prevent unnecessary scrutiny.

Conclusion

Understanding the triggers for an IRS audit can help you take proactive steps to protect yourself against unnecessary scrutiny. While random audits do occur, knowing the common reasons for audits can help you make informed decisions and support your compliance efforts.