Don't Fear the Auditor

State agencies, which lack the budget and therefore the manpower of the IRS, have been turning to technology to tackle the tax gap. Used in various areas of tax compliance, "data-mining" cross-matches databases to unearth instances of underreporting, non-filings and collection risk assessment.

Daniele Micci-Barreca, principal at Elite Analytics, an Austin-based analytics firm, works with state tax agencies to identify questionable returns through data-mining.

Data-mining allows Micci-Barreca's clients to more accurately and efficiently determine whom to audit on the basis of possible underreporting or overstated deductions. His system, Micci-Barreca says, finds "unusual returns, such as unusually high medical deductions for the age range of that taxpayer or recurrent patterns of losses on a Schedule C."

Using the Net to Catch Scofflaws

Other items that can catch an IRS agent's eye include charitable donations that are inconsistent with a taxpayer's income, information that doesn't correlate with forms submitted by employers and banks, and claiming deductions above IRS target ranges.

So a letter from the IRS glares at you from your mailbox months after you've submitted your return. Don't panic. Most investigatory correspondence from the IRS is prompted by a simple mathematical error or a forgotten signature.