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How does the IRS determine who they will audit?

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There is really no practical way for us as taxpayers to tell. Of course, many audit files are ones that are red-flagged by computers due to discrepancies in reporting on the forms, or severely out-of-range values for income/deductions, etc. Even an honest mistake by your employer on FICA with holdings on your W2 may lead to an audit. However, it is no surprise that with the volume of returns processed each year, even egregious errors are more likely to go unpunished than audited.

Many audits are also more or less "random," selected by IRS computers or perhaps agents, but as any tax attorney will say, they tend to be selected from those with reporting discrepancies.

There are occasional statements by the IRS that they are "targeting" middle-class, or upper-class, or rich taxpayers for any given tax cycle. There is no real reason not to believe them, but in 2002 a widely circulated news article has claimed that the IRS has had more significant budget and personnel cuts than any time in several decades, and statistically your chances of being audited are significantly lower now than they would have been just 5-10 years ago.

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