The Internal Revenue Service periodically produces estimates of the difference between the income taxes actually paid and what should have been paid by all taxpayers. This is called the tax gap and for tax year 2006, the IRS estimated the tax gap at $450 billion. In addition, the IRS reports that voluntary compliance with the income tax system and tax law is at 83.1 percent. The tax gap represents tax money that is never paid. IRS audits are one way that the agency seeks to reduce the tax gap.
By running your income tax return through the discriminant inventory function system, your return is scored by adding points based on the amount of errors or problem entries that the system finds. Your tax return is eligible for an audit one it reaches a certain amount of points. Returns scoring higher through the discriminant inventory function have a higher likelihood that an auditor will be able to collect additional taxes from the taxpayer, making the audit worthwhile.
A tax audit can be conducted to study the habits of taxpayers, and to determine how they file their returns and certain entries that they make for statistical purposes. This is done through the IRS' National Research Program. Returns are selected for audits through this program randomly, not based on errors or the likelihood of additional tax collections. Nonetheless, these returns will be checked thoroughly for compliance with the law.
The fear that an income tax return might be audited is sometimes reason enough to make sure that some taxpayers are more honest with their deductions and income reporting. If an audit process were not in place, people are more likely to neglect reporting income or over-report expenses.
Often, a taxpayer can be caught under-reporting income because of the level of deductions that he claims. For example, if a taxpayer is claiming a mortgage interest deduction of $20,000, while reporting $40,000 in income, the IRS might wonder how he is able to pay such a large house payment. In the case of mortgage interest, even if the taxpayer doesn't claim the deduction, the mortgage company will report it to the IRS on Form 1098.