Most people at the IRS don't even know exactly what triggers an audit. The IRS has an algorithm, much like Fair-Isaacs Co. (FICO) credit-scoring algorithm. Unlike FICO scores, the IRS's score either sends you on your way, or decides to audit you. Accountants, tax preparers, and the IRS itself counsel people on the best ways to avoid an audit and the best way to trigger one. Filing an IRS form 4506-T isn't among the actions thought most likely to invoke an audit. But, it is an interaction with the IRS, providing more data for their Discriminant Inventory Function System, or "DIF" --- the program they use to decide who gets audited and why.
What is a 4506-T?
IRS form 4506-T is a Request for Transcript of Tax Returns. If you lost back tax returns and you need a copy, this is how you get a copy. In practice, though, more 4506-T forms are filed on a taxpayer's behalf and/or with their permission, than by the taxpayer himself.
Why File It?
4506-T forms are most often filed by a bank when you apply for a loan. When underwriting guidelines require a borrow to disclose tax returns, the 4506-T gives the bank insurance that the information on the returns provided is valid and not forged. If a loan requires the borrower to disclose his income but not his tax returns, the 4506-T, again, gives the bank insurance that the information is accurate. 4506-T forms are also used by financial professionals, from accountants and bookkeepers to tax and bankruptcy attorneys. If they need your tax returns and you don't have them, signing this form authorizes the IRS to provide the forms.
What Raises IRS Red Flags?
There is no way to know exactly what puts you on the radar of the IRS. Even if the IRS tells you, there's no way to know unless you can see the actual algorithm used in the IRS's DIF software. Like Fair-Issacs Co., the algorithm is proprietary and private. The best sources of information are the IRS itself and professionals who work with the IRS. Professionals such as accountants can "reverse engineer" IRS rules. Collectively, they note what actions tend to cause audits and what audited clients have in common. A thorough investigation of the top 10 reasons people get audited will not point to filing IRS form 4506-T. So, it probably doesn't. It might be a contributing factor if other flags are tripped.
What a 4506-T Indicates to the IRS
The IRS only wants to audit taxpayers that have the highest likelihood of creating a successful audit --- which means the taxpayer pays the IRS more money. The most common reasons to get audited all support this IRS motivation. You can't know for sure, but you can ask yourself what the form tells the IRS. See if it passes your own "sniff test." If you file the form yourself, it means you have tax returns that are lost, stolen or destroyed. It also says you're bothering to replace them. If a financial institution files a form 4506-T with your permission (a lot of consumers don't know what they're authorizing when they sign loan papers) it probably means you just applied for a loan. If they come from an accountant or bookkeeper or bankruptcy attorney, it may mean you're not especially organized. It doesn't indicate that you're living a lavish lifestyle on a small income. At most it might be a small, contributing factor to an audit flag, if other, more important flags are also tripped.
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