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Revisiting the question of audit criteria: IRS reviews process

Prudent taxpayers naturally want to minimize their chances of an IRS tax audit. That is why, in March of this year, we devoted a three-part series of posts to some of the leading red flags that an audit may occur. This series covered such items as unusual tax deductions and failure to report miscellaneous income. It is also generally known that the chances of being audited rise with income.

But in light of the scandal that surfaced in May about the IRS's handling of applications for tax-exempt status, it is natural to revisit the question of the factors that influence which tax returns get audited. After all, even before that scandal broke, the National Taxpayer Advocate had issued a report that found small business owners were more likely than other taxpayers to file questionable returns that could be challenged in an audit.

Thsi finding by the Taxpayer Advocate led to speculation in Southern California and across the country that the IRS would set up criteria to scrutinze tax returns from small businesses more closely.

Based on the Taxpayer Advocate's report, it seemed likely that the IRS would be more likely certain industries and areas of the country for tax audits. The industries under speculation included construction and real estate.

Last week, however, the acting commissioner of the IRS told Congress that the IRS is not using the location or industry of a company, much less political activity, as risk factors in the audit selection process. But the acting commissioner, Daniel Werfel, said the agency is aware of the need for a complete review of this process.

Source: The Washington Post, "IRS chief: Chance of tax audit not affected by a company's industry, location or politics," J.D. Harrison, July 17, 2013