The Tax Audit

• The IRS conducts tax audits to confirm the details of your tax return and verify the amount of income, expenditures and deductions reported on those returns. According to the IRS, approximately 1 percent of taxpayers get audited annually. However, these statistics vary depending on income level and type of employment. The IRS uses three different types of audits depending on the amount of revenue involved in the audit, correspondence, office and field. Correspondence audits are the most common type of audit. In this type of audit, the IRS will mail you a letter notifying you that it wishes to review your financial statements.
  
  

Selection Process

• The selection process starts with IRS computers that assign scores to individual tax returns. The higher your score, the higher the probability that the IRS will select you for an audit. Computer scoring uses two systems -- a discriminant function system and an unreported income analysis. IRS employees then review the returns selected by the computer models and determine the specific returns to audit.
  
  

Audit Red Flags

• Certain factors increase your chances of selection for an IRS audit. These factors include underreported income and self-employed status. Additionally IRS audits commonly focus on high-income taxpayers, abusive tax shelters and corporations. Additional factors that can flag your return and increase your chances of an audited include excessive itemized deductions, claiming a child tax credit or first-time home buyer credit, prior tax audits, losses claimed on investments or rental property and complex business or investment transactions.
  
  

If the IRS Audits You

• If the IRS audits your tax return, you will need to prove to the IRS the accuracy and legitimacy of your tax calculations by providing supporting documentation. In the many cases tax audits will result in additional tax liability. However, in the rare event that the IRS audit finds that you overpaid your taxes, you will receive a refund. In many cases, the IRS wins audits because of a lack of supporting documentation or bad record keeping, not because taxpayers attempted to defraud the IRS.
  
  

Preparing for an Audit

• If the IRS choses your return for a tax audit, you will need to organize your financial records to support the items questioned by the IRS. You will typically want to seek an assistance of a tax professional such as a certified public accountant or tax professional. Having a tax professional represent you can help you better understand your rights and obligations during the audit process. However, these professionals can never guarantee you a positive outcome for your IRS audit. Taxpayers also always have a right to appeal the IRS' audit decision.