We have talked about the formulaic approach that the IRS uses to perform tax return audits before. The system grades tax filings based on a number unknown factors -- but the point of the system is to establish whether an individual's return is "likely" to have improprieties or mistakes. Based on the score that the formula spits out, the IRS determines whether a return is worthy of an audit.

In addition to this system, random audits can be performed, as can the arduous task of sifting through the paperwork of individual filings to find irregularities between what an individual reports and what their employers report.

However, another thing to know about tax audits is that they are more likely if you have more wealth -- in fact, they are far more likely. The average audit level is 1 percent of all filings. But according to federal data...

  • ... if you earn between $500,000 and $1 million, you have a 4 percent likelihood of being audited.
  • ... if you earn at least $1 million but less than $5 million, you have a 9 percent chance of getting audited.
  • ... if you earn between $5 million and $10 million, the audit rate is 18 percent.
  • ... if you earn more than $10 million, you have a 27 percent chance of getting audited.

Knowing that, it is important for those with higher incomes to consult an attorney if the Internal Revenue Service comes calling. Remember that some of their inquiries may just be boilerplate questions to get a feel for your unique situation. If you have your finances organized and are prepared for their inquiries, you can fend off an audit.

Source: Wall Street Journal, "Chances of an Audit Grow With Income," Tom Herman, May 12, 2013