How The IRS Decides To Audit You: A Tax Expert Explains

Forbes

31-03-2025

How does the IRS decide which tax returns to audit? In this Q&A series, a former IRS lawyer and ... More current law-school professor explains.
This is the second part of my two-part Q&A with a tax-law expert, professor, and former IRS lawyer. The first part is How The IRS Picks Tax Returns To Audit: A Tax-Law Expert Explains.
'April is the cruelest month' wrote the poet T.S. Eliot—and for taxpayers in the US, that may often be true. The filing deadline for federal tax returns is coming up on April 15. While nobody really likes doing tax-return homework for the IRS, it's safe to say that IRS audits and other forms of unwanted IRS attention are even more unpleasant, making diligence with your tax return a wise course.
For expert insights into how the IRS decides which tax returns to audit and how to prepare for an audit if it happens, I turned to tax expert Professor Bryan Camp. He is a professor at Texas Tech School of Law, a former staff member of the IRS Office of Chief Counsel, and a longtime tax attorney. Between teaching, doing academic research, and playing the fiddle at bluegrass jams, he kindly took time amid his busy schedule to answer my questions with his inside knowledge and personal flair.
In the first part of this Q&A, Professor Camp explained how the IRS selects which tax returns to audit, different types of audits, and how to handle IRS requests. In the second part, presented below, he explains more about how to avoid getting audited by the IRS, what to do if you are audited, tax-return areas that are likely to trigger an audit, and whether someone at the IRS can intentionally select you for an audit or release your tax information.
The biggest way to reduce the chance of any unpleasant interaction with the IRS is to be sure your tax return is consistent with any information returns submitted to the IRS about you, such as a Form 1099 or Form W-2.
When those returns are incorrect, you basically have three choices: (a) suck it up and report consistently with the incorrect information return; (b) attach to your return an explanation for why the information return is incorrect, or (c) make the correct return and then keep all your records because if the discrepancy is large enough you will indeed get a 'love letter' from the IRS asking about it, and you will generally only have a very short timeframe to respond.
Let me give you an example from my own experience. When my grandma died, she left her house to her three grandkids: my two sisters and me. We sold the house. The Title Company then sent the IRS a 1099 reporting that it had paid the ENTIRE sales proceeds to me. That 1099 was wrong for two reasons. First, I split the proceeds with my sisters.
More importantly, the proceeds were excluded from gross income by Internal Revenue Code Section 102 (which allows inheritances to be excluded from income). Pissed, I (properly) did not report any of that money. But you see how the IRS computers thought I had underreported income when they compared the 1099s with my tax return.
But I did not get audited. Instead I received what the IRS calls a 'compliance check.' About two years later I got a love letter (called a CP2000 notice) from the IRS telling me it believed I had overlooked some income I should have reported, and it gave me 30 days to explain why I should have not reported it. Since I was expecting that, I was prepared to respond and so that got cleared up.
Notice two points: (1) it took the IRS systems about two years to catch the discrepancy and ask me about it; (2) I had only 30 days to respond. If I had missed that deadline, then the IRS would have assessed a deficiency, and I would have had a much more difficult time working it out.
First, low incomes. You can look at the IRS Data books for details. Basically, Congress is very concerned that low-income taxpayers are cheating by improperly claiming tax credits such as the Earned Income Tax Credit.
Second, very high incomes. They get reviewed more because their errors cost the government a lot more lost revenue. For example, some large corporations are under continuous examination. In addition, very-high-income taxpayers are more likely to participate in the type of tax-shelter transactions that the IRS targets.
Third, self-employed taxpayers who report income on Schedule C may be more likely to be selected for audit. That is because while the IRS computer matching programs do a great job at spotting potential unreported income, they cannot spot erroneous deductions. So, again, if you report a very large loss on Schedule C and you use that loss to offset your decent wage income, that may trigger a higher DIF score (see the first part of this Q&A).
Yes. But that does not mean the IRS computer systems are shut down and, as I explained earlier, everyone's return is 'looked at' by the IRS computers. The IRS computers will attempt to correct perceived errors in returns by sending out notices like the CP2000 and then propose assessments if the taxpayer does not respond in a timely manner. Those actions are not audits. But they are still unpleasant experiences, even when you are correct.
The IRS almost never does a tip-to-toe audit. Almost always the IRS is looking into a particular issue or set of issues. So you want to be sure you know what the IRS is concerned about. You want to be sure to ask the IRS Revenue Agent what information they need and then give them that information—but ONLY that information.
If the IRS needs more, let them ask for it. You want to avoid letting them come to your home or business, so being cooperative and offering to bring the information to them is generally the best way to respond.
However, if you are worried about being criminally prosecuted, then you want to take the opposite approach and not volunteer information you think could help convict you of a crime. We call these 'eggshell' audits because while it starts out civil, you are walking on eggshells trying to avoid criminal investigation. Don't walk alone. There are many law firms that specialize in these kinds of audits.
Oh yes! If the auditor comes to believe that the taxpayer engaged in fraudulent behavior, the auditor must stop the audit and refer the matter to Criminal Investigation (CI). If CI decides not to work the case, the auditor can resume the audit.
Meanwhile, the auditor is prohibited from contacting the taxpayer during the time CI does its investigation. So if you are being audited and, suddenly, you are totally unable to communicate with your auditor, that's a baaaaaad sign. The eggshells are breaking.
As many years as are necessary to resolve the audit issues. For example, if the audit is about whether you properly reported income from the sale of property, the Revenue Agent is entitled to ask for all your property records back to the time you bought it to establish the proper basis. For a recent Tax Court case where the taxpayer was unable to establish basis on his rental property and therefore was not allowed a depreciation deduction, see Smith v. Commissioner, T.C. Memo. 2025-24 (March 24, 2025).
Another example is if you are claiming tax benefits in the audit year from stuff you did in a prior year; the Revenue Agent is entitled to look at that prior year to see if you did that right. Even though that prior year is not under audit, understanding what happened there may be necessary to resolve the year that is under audit.
As a practical matter, however, IRS employees rarely go beyond the year they are examining.
Training and structure. Informally this is called 'UNAX' for 'Unauthorized Access.'
Training: Employees learn that Congress wrote a statute that makes this behavior a crime. They learn they can go to prison. They also learn that they can be fired.
Structure: Employees have no ability to select a taxpayer for audit. As explained in Part 1 of this Q&A interview, all audit decisions must be made through the proper channels of authority.
And employees who identify a taxpayer for audit are not permitted to conduct the audit. So if a Revenue Agent auditing my tax return comes to believe that I am in cahoots with Joe and recommends opening an examination on Joe, then that recommendation must be approved by a series of IRS supervisors. If approved, Joe's audit must be done by another Revenue Agent. And my Revenue Agent cannot access that information because doing so would be UNAX.
IRS employees are incredibly cautious about accessing information not directly relevant to their jobs. That sometimes interferes with their ability to conduct a thorough audit, because in their mind the risks of UNAX outweigh the benefit to their examination. IRS employees are not evaluated on how many lost tax dollars they uncover. They are instead evaluated on how well they process their workload. That is one reason for cooperating. You help them 'git-er-done.'
Training and consequences. All IRS employees are trained not only that they must keep information confidential but also that they are not even allowed to look at any taxpayer's information unless they are working on that taxpayer's case (either in examination or in collections at the IRS).
To enforce these prohibitions, Congress wrote a statute in 1998 that creates what we call the '10 Deadly Sins.' Professor Keith Fogg wrote an excellent article about that statute, which provides that any IRS employee who improperly discloses taxpayer information may (and sometimes must) be fired.
Congress also wrote another statute on the unauthorized inspection or disclosure of tax returns or return information. That permits the taxpayer to sue the government and recover, at a minimum, $1,000 per improper disclosure Thus, if the improper disclosure goes out on a social media post that receives 1,000 hits, that's 1,000 improper disclosures.