A:

While the U.S. Internal Revenue Service (IRS) conducts some of its tax audits using random selection based on a statistical formula, a large number of tax returns are selected based on matching documents and related examinations that reveal discrepancies worth pursuing by the IRS.

Tax Audit Process

The IRS selects thousands of tax returns for comprehensive checks for any mistakes or fraudulent activity. The IRS uses three principal methods to select returns for further audit. The first method involves random selection and computer screening based on a statistical formula that is developed against norms for similar returns. The second method involves document matching, where the IRS selects a tax return for audit based on records that do not match; for example, if the amounts of income reported on Form W-2 or Form 1099 do not match with what a taxpayer shows on his tax returns. Finally, the IRS can select a tax return if there is an examination involving a transaction to which a selected tax return is related, such as a parent who claims a standard deduction for a dependent, while the dependent claims a standard deduction on his tax return too.

After the IRS selects a tax return for an audit, it is passed along to an experienced IRS auditor, who looks over the return. If no issues are noted, the tax return is deemed as filed; otherwise, it goes to an IRS examining group. A manager of an examining group reviews the tax return and may assign it as filed if there are no issues or return it to an auditor with issues noted. After that, an auditor may either accept it, schedule an appointment or send a notice to the taxpayer with tax liability corrections.

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