In addition to documentation matching programs to identify unclaimed income on returns for audit, the IRS runs the data on a return through a differential equation that identifies the probability of there being a major error on a return.
They call this a “Diff Score.” The higher the Diff Score the greater the changes for an audit. Each year the IRS starts with the highest Diff Scores and works their way down the list, based upon time and agents availability.
I’ve had IRS audits revoked from happening, just by having the audit transferred to another IRS Office who was busy working on higher Diff Scores and couldn’t do the audit.
Knowing the top secret algorithm of the differential equation takes years of experience as even the IRS agents are not allowed to know the equation. This was explained to me by top IRS programmers in Washington DC that worked fill time on the equation.
I worked to fine tune the program to eliminate unnecessary audits. For example, if a clergy with 50% of their compensation as non-taxable Housing Allowance and they tithed 10% of total income to the church, that showed 20% of taxable income as a donatation and flagged them for audit.
By tweeking the program to consider non-taxable income and profession, we solved the problem of unnecessary audits.
Thanks for your responses. That was interesting.