Many Americans are audited each year by the IRS. What alerts the IRS to conduct an audit? Are there specific reasons why someone is audited?

The IRS computer system generates the majority of audits. It compares the information on the tax return that you file with the information it already has from the W-2 form and the 1099 form. These numbers should match. If not, you will probably receive an IRS notice for audit. This usually is in the form of a correspondence audit.

Other factors the computer system looks at include low gross profit margin, high car expenses, little or no business profit, high travel and entertainment deductions, and high use of cars in your business. These factors may flag you for an audit.

The IRS may consider further examination with regards to:

1. Large amounts of itemized deductions

2. Unreported taxable income

3. Cash or tips in business

4. A record of tax deficiency and prior audit

5. Claims of tax shelter investment losses

6. Higher than normal business expenses for your business

7. Large cash amounts of charitable donations

8. Partner or shareholder in a business

9. Complex tax transactions with no explanations

It is important to note that if you take all of your tax deductions you may be audited. You have no reason to be concerned about this though if you have not done anything wrong.

Other means of selection for audit include:

1. You are a member of an IRS special target group: The IRS designates certain occupations as in need of scrutiny.

2. You are part of a market segment specialization program: The IRS is cracking down on specific workers.

3. You have been audited in the past: You will have a higher chance of being audited again.

4. You have been involved in criminal activity: This is especially true if you have been involved in a crime that involved large cash transactions.

5. You have amended a return and claimed a refund: If you have amended a return and claimed a refund on any tax return within three years of its due date, you have a fairly high risk of being audited.

6. You have been reported to the IRS: Reports can be from an ex-spouse, business associates, former employees, or even a law enforcement agency.

7. You are part of the taxpayers compliance measurement program: The IRS selects approximately 50,000 taxpayers randomly every three years for this program.