Accounting Articles > IRS Audit:
How did I get selected?
So your business has been selected for audit by The IRS. What do you do now?
First of all, don't panic. The IRS is only doing its job. They have a responsibility to make sure that everyone is paying a fair amount of tax. Although your concept of what's fair might differ from theirs, no one is out to get you. Unless you have committed extremely serious crimes, The IRS generally does not want to put you in jail. They might want to hit you with ridiculous amounts of additional tax, interest and penalties. But if they put you in jail, they will have a hard time collecting money from you, which is their main goal.
The Internal Revenue Service selects returns for audit in a variety of ways. Your industry could have been targeted. Several broad categories of businesses are frequently investigated for various income and payroll tax law violations. Also, there are “800 numbers” which upset individuals can call to report businesses anonymously, and you may have been targeted in this way, it has even been known for a divorced spouse to get revenge on an ex with an IRS audit.
A more common method of selection is a computerized grading process. Your business income tax return has an SIC Code (Standard Industry Classification). This code system is like the old Dewey Decimal System commonly used for library books, and every business that does what you do has the same number. Using the SIC Code, your Zip Code, and all of the numbers on your return, they do statistical analysis against all of the returns that are geographically significant to yours, and grade your return. If the grade is high enough, if there are enough “Red Flags” in your return, then you may be audited.
Regardless of why your business has been selected, don't make the mistake of asking an IRS Agent why you were selected. Even if they do know, I've never seen one tell a client why they were chosen.
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