I got audited a few years back. I claimed something that set off a red flag--deducted tuition for a grad program as a business expense.

I freaked out at first because I thought I must have messed something up or that they knew I messed something up.

What I discovered is that: at the end of the day these folks are probably just as annoyed as you that they got another "audit" in their pile. And being flagged doesn't mean you are wrong. It means they need more information before they can decide.

I wrote a detailed response with the actual flow chart from their own guidance, I circled the decisions on the chart, and then provided proof of each decision in my letter. Basically I held their hand and showed them I could legit deduct it.

They were like "oh, cool thanks! You're good. Actually, you could have itemized x if you have receipts for it and you'd get a bigg r deduction if you wanted to amend"

That's when I realized they don't really check everyone's taxes at all. They have a system that flags certain situations for further review. I guess, in my case, people lie or mess up this tuition deduction a lot so they double check.

Mind you, if you routinely fudge your taxes, they will eventually notice something strange, or hit you with a randomized audit. Then, whoops, we found something! Better take a closer look at all your past filings too....

They don’t actually know the final amount, but they do have an independent expectation for certain items.

If your job withholds income tax then it is paid quarterly to the government, so they know how much you made and how much taxes you should be paying.

If you win a large sum of money in the stock market or gambling at a casino then the broker or management company reports a tax bill to the IRS. The same happens for large early withdrawals of retirement funds.

They also know information based on previous returns, like how many kids you have or if you own a home.

They may not know it down to the dollar amount you’ll be paying because of the complexity of the US tax code and the deductions you’ll claim. For example, the government has no record of you purchasing a $600 electric car charger but you can claim that on your taxes to reduce your tax liability. That being said, if you under-report the amount you made at your job they will almost surely audit you if the number reported by your employer doesn’t match the number you provide.