Have you ever wondered how the IRS chooses whom to audit? We'd all love to know. After all, the IRS performs hundreds of thousands of audits every year -- about 1 percent of all tax returns in 2012 -- and that number seems to be rising.
The exact method used by the IRS to flag a tax return for an audit, however, is a closely-held secret. We do know that one way is through a computer-based scoring system called the Discriminant Information Function, or DIF. The DIF compares each tax return to the average return among similarly-situated taxpayers. Basically, the program appears to evaluate whether the exemptions, deductions and credits being claimed on a particular return fit within the expected norm.
The exact formulas used in the DIF are confidential, but researchers have been able to spot some trends. What factors could put you at risk for an IRS audit? Here are a few to keep your eye on:
- High income: According to Crain's Wealth, the risk of an audit is higher than average for taxpayers earning more than $200,000 per year -- and higher still for those earning $1 million or more.