Audit Triggers: Patterns That Draw Regulatory Attention
An audit can be unsettling, but being selected for review does not necessarily mean a taxpayer has done something wrong. The Internal Revenue Service uses several methods to identify returns for examination, including computerized screening, random selection, and comparisons with information reported by third parties. Understanding these patterns can help taxpayers recognize why accurate, well-supported reporting matters.
Information That Does Not Match
One common reason a return may receive additional attention is a discrepancy between information reported by a taxpayer and records submitted by employers, financial institutions, or other third parties. Forms such as W-2s and 1099s can be compared with information on a tax return. Unresolved differences may lead to questions or further review.
However, not every mismatch results in a full audit. Some discrepancies may instead be addressed through correspondence or other verification procedures.
Unusual or Inconsistent Reporting
The IRS can also use computerized systems to compare returns with statistical norms and other compliance information. Some returns are selected through statistical formulas that compare them with similar returns. An examination may also occur when a taxpayer’s return is connected to business partners, investors, or other taxpayers whose returns have been selected for review.
Inconsistent figures, unsupported deductions, or significant differences from surrounding financial information can create additional questions. A particular deduction or reported amount is not automatically improper simply because it is unusual, but taxpayers should be able to explain and document the figures they report.
Claims, Referrals, and Other Information
An examination can also begin when the IRS receives information suggesting potential noncompliance. Information may come from public records, individuals, or other government agencies. The IRS evaluates information for reliability and accuracy before using it as part of an examination or investigation.
Certain claims can receive additional review as well. Refund claims and requests for abatements, for example, may require further examination depending on the circumstances.
Keeping Your Records in Order
There is no checklist that guarantees a return will avoid an audit. The IRS notes that some returns are selected randomly, meaning an examination does not necessarily indicate an error or dishonest reporting.
The practical approach is to report income and deductions accurately and retain records supporting the information filed. Receipts, statements, invoices, employment records, and other documentation can make it easier to explain a return if questions arise.
Good recordkeeping is also useful when dealing with broader financial and legal matters. Professionals such as a Ventura bankruptcy lawyer from Tenina Law may need accurate financial records when reviewing a client’s circumstances, although bankruptcy matters and tax audits involve different legal processes.
Ultimately, taxpayers cannot predict every audit trigger. Maintaining accurate records and ensuring that reported figures can be substantiated is a more reliable strategy than attempting to avoid specific patterns that may attract additional scrutiny.
