How does the IRS decide which taxpayers to audit?

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Your return doesn't fit "the norm". Why was my return selected for audit? When returns are filed, they are compared against “norms” for similar returns. The “norms” are developed from audits of a statistically valid random sample of returns. These returns are selected as part of the National Research Program which the IRS conducts to update return selection information. The return is next reviewed by an experienced auditor. At this point, the return may be accepted as filed, or if based on the auditor’s experience questionable items are noted, the agent will identify the items noted and the return is forwarded for assignment to an examining group. Upon assignment to a group, the return is reviewed by the manager. Items considered in assigning a case are: factors particular to the area such as issues pertaining to construction, farming, timber industry, etc. that have specific factors and rules that apply. Based on the review, the manager can accept the return or assign the return to an auditor. The assigned auditor again reviews the return for questionable items and either accepts it as filed or contacts the taxpayer to schedule an appointment. http://www.irs.gov/businesses/small/article/0,,id=219636,00.html Audit Witchcraft? There are many old wives’ tales about what does and doesn’t trigger an audit, but the latest IRS stats are worth a look. The IRS has pulled back the shroud on audit rates in its 2010 Data Book, providing important clues about your chances. The numbers reveal some surprising percentages. Only about 1.1% of 142,823,105 individual income tax returns were audited in 2010, up slightly from a year ago. Does high income mean you stick out from the pile? Not necessarily. In fact, a whopping 30% of returns audited claimed the earned income tax credit (EITC). By definition those are lower income returns, not exceeding $35,535 ($40,545 married filing jointly) with one qualifying child .. But rising income generally means rising risk. If you had non-business income of $200,000 to $1 million, you had a 2.5% chance of audit, increasing to 2.9% if your return showed business activity. But if your income tops $1 million, the audit rate was 8.4%, way up from 6.4% in 2009. For business returns (except farms) showing total gross receipts of $100,000 to $200,000, 4.7% of returns were audited. If you exceeded $200,000 in gross receipts, audit rates dropped to 3.3%. Only 0.4% of returns with farm (Schedule F) income were audited. There are also some interesting points about offsetting adjustments and deductions. If your adjusted gross income (AGI) is between $100,000 and $200,000, you had a 0.71% chance of audit. It jumps to a 1.92% audit rate for AGI of $200,000 to $500,000. The audit rate jumps to 6.67% for AGI between $1 million and $5 million. Business tax returns fared better than individual returns. Only 1.4% of small corporations with total assets of $250,000 to $1 million were audited. The rate rose to 1.7% for assets of $1 to $5 million, and to 3% for assets of $5 to $10 million. Over $10 million in assets, the audit rate jumped to 16.6%. For partnership and S corporation returns, the audit rate was 0.4%. http://blogs.forbes.com/robertwood/2011/03/17/whats-your-irs-audit-risk/ Apr 04 11, 11:43 PM