What Causes an IRS Audit?
Though only about 1 percent of taxpayers are audited, according to Marketwatch, an IRS audit can be an annoyance at best and costly at worst. High-income taxpayers are more likely to be audited, but anyone is at risk. Improper filing, inaccurate reporting, or intentionally fraudulent tax-dodging can all lead to an IRS audit.
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Discriminant Function System
The IRS subjects each tax return to a "discriminant function" (or DIF) review, which assigns a score to the return based on a data pool of numerous returns. This allows the IRS to determine typical income, deductions and expected taxes based on a certain profile. Statistical outliers far beyond the DIF expectations can trigger an audit.
Improperly filing for certain deductions can cause an audit, and checking off certain deductions
makes one more audit-prone. For example, deducting unreimbursed business expenses or capital gains taxes on the sale of a house can cause an audit.
The IRS automatically cross-references income forms (such as W-2s and 1099s) generated by employers with those reported by tax filers. Therefore, if you neglect to report income on a W-2, which the IRS has on record, its computerized cross-checking system may detect the discrepancy and trigger an audit.
Forms and Schedules
According to the “Wall Street Journal,” filing certain schedules and forms tend to cause an audit. If you have a small business and file as a Schedule C, for example, you'll also be more likely to end up the target of an audit. (Incorporating and filing Schedule S, on the other hand, reduces this risk.)Source: ehow.com