Can confirm this. I run a consulting company and received a letter like that in 2016. They sent a bill with corroborating documentation indicating I’d underpaid by about $2,600. I reviewed my own records, concluded they were right, checked in with my accountant and paid it. It wasn’t threatening at all, nor did I feel like I’d be imminently prosecuted. The IRS, for all its public perception, has actually been sort of a joy to work with, insofar as I’ve had to interact with them at all.

That said, I’m always vaguely terrified each year when I deduct the low five figures I’ve spent on bare meral server hardware. Being audited remains in my top ten fears, even though I don’t try to evade taxes. I always wonder if someone at the IRS is going to see my return and say, “He paid this much for ‘Computer Hardware’? That seems fishy.”

For the limited purpose of helping another entrepreneur sleep easy, and not to offer accounting advice: The IRS has to recover ~$1k per IRSian hour to make it worth their time, for reasons which fall fairly straightforwardly from consulting math that you're very familiar with.

Consider the set of all companies in the economy which spent $15k last year on "computer hardware." How many IRS hours would be required to read all their returns, given that they are sitting in a pile. How many would, on examination, show a deficiency? How much would those deficiencies be worth, on average? What's your ballpark estimate for how long it takes a government employee to put through a single routine non-trivial work order?

Suppose the IRS sits down with a randomly selected small business for a site visit audit. Suppose they budget 2 hours onsite and 8 hours offsite for the audit. How many of those minutes do you think they will spend on that line item, specifically? Does it allow them to do more than ask "I see your return shows $15k on computer hardware. What was the hardware? Can you show me your records?"

The Automated Under-Reporter program does this on-the-fly with no recurring cost, and provides corroborating evidence to the auditor. In fact, an analysis of AUR showed that the IRS is too-lenient in prosecuting claims with automatically-trawled evidence!

https://www.treasury.gov/tigta/auditreports/2015reports/2015...

The Automated Under-Reporter Program is not a "sufficiently advanced compiler" for tax returns. It does simple match: did your brokerage account say you made $30k in dividends on a 1099-DIV to the IRS last year? Cool. Do you show a line item which matches $30k in dividend income on your 1040? No? Add an item to a work queue.

It doesn't (and can't) divine "Did the expense on this business return factually happen? Was it for the operation of the business? Is it standard and ordinary?"

Why would Joe pay taxes when he didn't make any profit off the 600k?

He claimed the $600k as a (deductible) business expense; a false deduction has the same effect as concealing taxable income.

I see.