US Business Tax Audit Risk Assessment Aid
How the IRS Selects Returns for Audit
The IRS uses a variety of methods to select tax returns for examination (audit). These include:
- Computer Scoring (DIF Score): A mathematical formula compares your deductions, credits, and income to averages for similar taxpayers. A higher score may indicate a greater likelihood of error.
- Information Matching: The IRS matches information reported by third parties (like employers via W-2s, businesses via 1099s, banks via 1099-INT/DIV) with the income you report. Discrepancies can trigger audits.
- Related Audits: If a business partner, investor, or related entity is audited, your return might also be selected.
- Random Selection: Some returns are chosen purely at random for examination under the National Research Program (NRP) to measure tax compliance.
- Specific Compliance Projects: The IRS may focus audit efforts on specific industries or types of transactions each year.
While random audits happen, many audits are triggered by something specific on the return that stands out or doesn't match third-party information.
Common Audit Triggers:
Certain items or characteristics on a tax return are more likely to attract IRS scrutiny. Being aware of these factors can help you ensure proper reporting and documentation.
- Unusually large deductions compared to income or industry averages.
- Reporting significant losses, especially for multiple years.
- Operating a cash-intensive business.
- Claiming 100% business use of a vehicle without clear documentation.
- Taking questionable business expense deductions (e.g., extensive travel, meals, entertainment without detailed logs).
- Discrepancies with 1099 forms or other third-party reporting.
- Foreign bank accounts or foreign-sourced income (requires specific reporting).
Understanding these potential triggers is the first step in assessing your own return. This tool will help you identify which factors might apply to you.
Review the list of potential audit risk factors below and check any that you believe may apply to your business's tax return based on its characteristics and how you file. Then click "Assess Risk".
Potential Audit Risk Factors:
Selecting a factor here indicates it *may* be present on your return or in your business operations. It does not automatically mean you will be audited.
Disclaimer: This is an Estimation, Not a Prediction.
This tool provides a qualitative estimate of potential audit risk based on commonly known factors. It cannot access IRS internal systems, calculate your actual DIF score, or predict whether your return will be selected for audit. Many returns are audited for reasons not covered here, including random selection.
Do not rely on this tool as a guarantee of audit risk or absence thereof. Your actual audit risk is determined solely by the IRS.
The best way to manage audit risk is to keep meticulous records, accurately report all income and expenses, understand deduction requirements, and consult with a qualified tax professional.
This tool provides educational information on potential tax audit risk factors. It is not tax advice or a substitute for professional tax preparation.