How is tax fraud detected?

The vast majority of fraud is detected by four methods:

  1. top secret algorithms that evaluate data from every tax return that is filed. Specifics are a very closely guarded secret, but generally they are looking for outliers or patterns that warrant additional investigation
  2. more simplistic data matching of numbers that get reported from multiple sources 
  3. random selection of returns for audit 
  4. whistleblower incentives (whistleblowers can receive up to 30% of tax collected)

The average taxpayer is much more likely to be the victim of a fraudulent tax return than the perpertrator, so you also might be interested in: Identity theft and fraudulent tax returns