Only a small percentage of all the individual tax returns filed each year will be audited. The selection process is done largely by computer models. These were designed by looking at millions of tax returns and developing “norms.”
If your tax return has numbers that fall very much outside these norms, your chances of being audited increase.
Individual returns are divided into groups based on the type of work you do and the level of income you report. For example: The IRS expects to see a certain amount of itemized deductions on tax returns reporting between $50,000 and $100,000 of income. Doctors with a certain specialty in a given geographic area are expected to report a certain amount of gross income. The groupings, breakdowns, and average dollar amounts are a closely guarded secret by the IRS.
Business returns are grouped by the type of business and their geographic location.
If your income is unusually low or your deductions are unusually high for a given year, you should attach an explanation to your tax return. After the computer selects a return for possible audit, a human being examines the return to see if the computer made a proper selection. Your attached documents may keep you from getting contacted by the IRS.
Congress is alarmed by the IRS estimate that about $450 billion is lost to those who cheat on their tax returns.