The Internal Revenue Service (IRS) is reviving the random tax audit program.  For years, the IRS has randomly selected thousands of individual taxpayer returns to audit.  These returns were selected even if the agency had no reason to suspect the taxpayer of any wrongdoing.  The data gathered from these audits was used to determine which returns are most likely to dodge paying their fair share of income taxes.  Tax dodging increases the federal tax gap (estimated amount of taxes owed to the IRS) which is about $290 billion.  Imagine if someone owed you that amount of money, I am sure you would make sure you collect.  So guess what?  One of the priorities of the IRS is to reduce the federal tax gap.        

In the early 1990s, the random audit program attracted significant criticism for being overly intrusive and time consuming for many taxpayers.  In addition, these audits were very expensive to the taxpayer because in many cases professional assistance was needed.  So, after many years of not performing the random audits, the IRS decided to take a new approach.  They audited about 45,000 returns for the 2001-tax year but were less intrusive and had a gentler approach.  This new approach received less criticism and the IRS was able to gather data it needs to update the agency’s Discriminant Inventory Function System.   This system is used to identify which returns to audit.

The Discriminant Inventory Function System performs various tests on tax returns and assigns a score to each individual return.  This score identifies which returns are likely to be tax dodging.  The IRS will not divulge the details of its scoring system but as tax professionals we know that there are some returns that are more likely to get selected for an audit than others.  Be sure to keep detailed records to support the deductions and other items reported on your tax returns. 

In October 2007, the IRS randomly targeted about 13,000 income tax returns for the 2006-tax year, from various income categories and performed audits.  They also plan to select additional returns to audit in subsequent years to continue updating the agencies systems.

What does all this mean to you? Maybe nothing, since the number of returns selected for random audits is less than 1 percent of the returns filed per year.  However, if you are selected just make sure you are paying your fair share of taxes and keep those records.