Question

For the following tax returns, identify the method the IRS likely used to select the return for audit.

1) Dan made a mistake in adding his income on his tax return.
2) Juanita failed to report her salary from her 2nd job on her tax return.
3) Michael and Venita deducted a relatively large amount of travel expenses on their tax return for their business. The travel expense is large relative to other taxpayers in similar businesses with similar levels of income.
4) Paul and Melissa recently went through a very nasty divorce. One of the issues was Paul's less than forthright accounting of his income in determining the appropriate level of alimony.

Answer 1

The IRS selects tax returns for audit based on computational errors, underreporting of income, large or uncommon deductions, and referral due to reported discrepancies. These selections can be triggered by automatic systems, document matching, comparative analysis, or referrals from other proceedings such as divorce.

Step-by-step explanation:

The Internal Revenue Service (IRS) may select tax returns for audit through various methods which could be influenced by factors listed in the hypothetical scenarios provided. For instance:

• Dan's error in adding his income would likely be caught by automated computer systems designed to detect mathematical inaccuracies.
• Juanita's omission of income from her second job could be identified through document matching programs, as employers are required to send copies of W-2 forms to the IRS that would reveal any discrepancies in reported income.
• Michael and Venita's large travel expense deductions may flag a comparative analysis system, where their deductions are compared to norms for similar businesses and income levels, thereby potentially triggering an audit.
• Finally, in Paul and Melissa's case, allegations made during divorce proceedings could potentially lead to a referral for audit if the information disclosed indicates potential non-compliance with tax laws.

While the IRS has a 2 percent chance of auditing a tax return for individuals earning more than $25,000 per year, this rate is per annum over a 20-year period, and selection for audit might not solely be random but can also be based on specific triggers or red flags in the tax returns such as substantial errors, underreporting of income, or large, uncommon deductions relative to peers.