Question: Why Did the IRS Select My Business for an Audit?

When you receive an audit letter from the IRS, your first reaction probably is, "Why Me?" The IRS audits businesses for one of several reasons.

Answer:

Why the IRS Audits Tax Returns
In Publication 3498 - The Examination Process, the IRS says it:

examines (or audits) some federal tax returns to determine if income, expenses, and credits are being reported accurately. IRS selects returns for examination using various methods. These methods include random sampling, computerized screening, and comparison of information received by the IRS such as Forms W-2 and 1099. Having your return selected for examination does not suggest that you made an error or were dishonest.

What does this mean?
The IRS selects tax returns for audit for one of several reasons, including:

• Random Sampling
  The IRS may pull your business tax return for audit completely at random.
  
• Computerized Screening
  This usually means that the return is compared with other tax returns for certain key areas, and this return's information was outside certain norms. For example, a home based business that showed deductions for use of home over $10,000 might be pulled for audit as being larger than average for this type of deduction.
  
• Comparisons of Information
  The IRS compares information received from several sources as a check against under-representing income. For example, if your business did work for another business and you received a Form 1099-MISC showing the income from that work, a copy goes to the IRS from the reporting business, and you must also report the income you received. If you don't include the 1099 income, there is a mis-match, and the IRS can require you to show this income or prove you did report it.
  

The letter you receive from the IRS should give you information about the reason for the audit. For example, if the IRS is asking for information about deductions, it is likely that your deductions fell outside computer-generated parameters; if the request is for information to verify income or to provide further information about a specific source of income, the IRS is probably trying to match records. If the reason is unclear, it may be that your business was selected at random.

Disclaimer. This article, and all information on this GuideSite, is presented for the purpose of giving you general information. This information is not intended to be, and should not be taken as, tax or legal advice. If you have a question about an IRS audit or other issue related to an audit, consult your tax representative or ask the IRS.

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