The Internal Revenue Service launched a program of random audits in October in an effort to hone its ability to estimate compliance rates and crack down on tax fraud. Unlike its usual audits, which are more targeted and so not representative of all taxpayers, the program will randomly select about 13,000 individuals for a closer examination of their 2006 returns. The goal is to gather information that will help reduce the $290 billion “tax gap,” the estimated difference between taxes paid and taxes owed. (In 2006, the IRS audited about 1.3 million taxpayers as part of its routine auditing process.)

What happens during a random audit?
No one knows for sure what will occur during this latest round of random audits. The IRS has stated that a lot of the audits won’t be that intrusive. They’re going to use their computer matching program to verify some things. [But for some] it looks like there will be an intensive audit, which can include verification of every item on the return. That means you have to prove you’re a citizen, date of birth, dependents, income and expenses, etc. (i.e., that they really exist). In terms of how intrusive each audit will be, we won’t know until people start getting audit notices.
How can you reduce your chances of getting audited?
You can’t reduce your chances of a random audit. But for audits in general, there’s a lot of stuff you can do.
For a normal tax return, file an accurate return, and most of the time you won’t get audited. Get a reputable return preparer. If someone says, “Don’t worry, you won’t get audited if your expenses are below this amount,” that is probably not someone you want to work with. Keep records. If you have any cash transactions, keep records. If you make a mistake, and you discover it, you can file an amended return before any audit starts. If you make a mistake, it is just that most of the time. But if you go into a return thinking, “Maybe the IRS won’t catch me,” and you don’t report 10 or 20 percent [of your income], that’s not the way to do it if you want to avoid an audit or more than an audit later.
In general, small-business owners and self-employed people have a much larger likelihood of getting audited, because W-2 wage earners have taxes withheld from their returns.
Other “stuff” that may pop you out of a computer and trigger an audit includes a situation where you have $50,000 in income and have reported losses of $100,000, wiping out all the income reported. Or, a taxpayer showing $60,000 in income with a $45,000 mortgage [deduction] may get you an audit.