How the IRS Prioritizes Tax Cases: From Correspondence to Field Audits

Introduction

Understanding how the IRS chooses tax returns for examination—what I call IRS tax case prioritization—helps taxpayers and small business owners avoid common pitfalls and be ready if contacted. The IRS no longer relies on purely random selection. Instead it combines automated data checks, statistical scoring, and targeted compliance campaigns to focus limited audit resources on returns most likely to have errors or underreporting (IRS; see Pub. 556).

How the IRS Screens Returns (Overview of Systems and Tools)

• Automated information matching. The IRS receives third‑party information (W‑2s, 1099s, bank reports) and compares those records to what taxpayers report. Mismatches commonly trigger notices through programs such as the Automated Underreporter (AUR) and newer Return Review Program processes (IRS online resources).

• Scoring and risk models. Historically the IRS used the Discriminant Function (DIF) scoring system and still uses statistical models and machine learning tools to assign risk scores. Higher scores increase the chance of an inquiry or exam when combined with other factors.

• Compliance campaigns and leads. The IRS runs targeted initiatives (for example, investigations into specific industries, passthrough issues, or high‑wealth taxpayers). These campaigns create lists of returns that meet particular risk criteria.

• Human review and referrals. Many cases flagged by models get a human review before selection for correspondence or field audits. Revenue agents and examiners review records and prioritize cases based on complexity and potential yield.

Types of IRS Exams and How Prioritization Determines the Level of Scrutiny

• Correspondence audits (mail). These are the most common and lowest‑intensity exams. The IRS sends a letter asking for documentation about one or two line items—charitable gifts, unreconciled income, or a deduction. Because these require minimal examiner time, many mismatches or modest discrepancies are handled this way.

• Office audits. These require the taxpayer or representative to meet with an IRS examiner at an IRS office. Office exams are used when a deeper review is needed but the case can be handled without visiting the taxpayer’s premises.

• Field audits. These are on‑site audits at a taxpayer’s home, business, or representative’s office. Field audits are reserved for complex or high‑risk cases where the IRS expects to need substantial time and document review. Prioritization steers the most serious or high‑yield cases to field audits.

Common Triggers That Move a Return Up the Priority List

• Unreported or underreported income relative to third‑party records (W‑2s, 1099s).
• Large or unusual deductions for a given income level (e.g., unusually high business expenses, large home office deductions).
• Discrepancies between return items and industry norms or averages.
• Schedules and forms that historically attract compliance scrutiny (e.g., Schedule C for sole proprietors, certain passthrough partnership issues).
• Participation in targeted IRS campaigns (e.g., high‑income non‑filers, micro‑captive transactions in past years).
• Random sampling—while rare, the IRS does still use sampling for specific studies.

Who Is Most Likely to End Up on a Priority List

Any taxpayer can be selected, but some groups face higher odds:

• Self‑employed and cash‑intensive businesses (Schedule C) because income is easier to underreport.
• Small businesses with poor bookkeeping or missing third‑party forms.
• High‑income taxpayers and complex estates with sophisticated transactions.
• Taxpayers claiming large losses or large charitable deductions compared to income.

Practical Example from My Practice

In my years advising small business owners, I’ve seen returns flagged because deductions were unusually high compared with industry norms. One client’s Schedule C showed vehicle expenses and meals that were near the top of industry averages. The return received a correspondence inquiry asking for receipts and a mileage log. Because we had contemporaneous records and a consistent accounting method, the issue was resolved at the correspondence stage with minimal adjustment. That case illustrates two things: good records reduce escalation risk, and many flagged issues can be resolved without an office or field audit.

What Happens Once a Return Is Flagged?

1. Notice or letter. Most audits begin with a letter. The IRS will describe the items under review and request documentation. Don’t ignore it.
2. Response and review. If documentation answers the question, the case often closes. If not, the file may be elevated to an office or field exam.
3. Agent evaluation. The assigned examiner reviews the materials and issues proposed adjustments, a no‑change letter, or additional requests.
4. Appeals and resolution. Taxpayers have appeal rights if they disagree with adjustments (see IRS Pub. 556 and IRS appeals procedures).

Tips to Reduce Audit Risk and Prepare If Selected

• Keep contemporaneous records. Maintain receipts, canceled checks, ledgers, and digital backups for at least three years (the normal statute of limitations) and longer for larger or suspicious items. The IRS commonly requests documentation covering the years under review (IRS guidance on recordkeeping).

• Reconcile third‑party reports. Before filing, compare your W‑2s, 1099s, and bank records to the return so you minimize mismatches that trigger notices.

• Use consistent accounting methods. Frequent switching between cash and accrual or inconsistent categorization raises flags.

• Don’t over‑claim deductions. If a deduction is aggressive or near the top of industry ranges, be prepared to substantiate it.

• Respond quickly and fully. Time is your friend. Responding promptly to an IRS letter narrows the scope and often prevents escalation.

• Consider professional representation. If an exam escalates beyond correspondence, a CPA, enrolled agent, or tax attorney can manage communications and preserve appeal rights.

Statute of Limitations and Appeals

• Typical assessment period: The IRS generally has three years from the date you file to assess additional tax. If income is underreported by more than 25 percent, the assessment period can extend to six years. There is no statute of limitations for fraud or for returns not filed (IRS guidance on assessment time limits).

• Appeals process: If you disagree with an examiner’s determination, you can request a conference with the IRS Office of Appeals before paying a proposed deficiency. Appeals is independent of the examination group and exists to resolve disputes without litigation (see IRS Pub. 556).

Common Mistakes Taxpayers Make

• Ignoring notices. Nonresponse can lead to default assessments and collection actions.
• Poor recordkeeping. Lack of backup prompts adjustments and penalties.
• Providing incomplete documentation. Partial answers often increase suspicion and prolong examinations.
• Hiring inexperienced representatives. Choose credentialed practitioners (EA, CPA, tax attorney) with audit experience.

Useful Resources and Next Steps

• IRS Publication 556, “Examination of Returns, Appeal Rights, and Claims for Refund” (IRS). This is the official guide to audit and appeal rights.
• IRS information on audit processes and appeals (search “IRS audits” at IRS.gov).

For practical, step‑by‑step help on documentation and preparation, see our guides:

• How to Organize Supporting Documentation for a Tax Audit: https://finhelp.io/glossary/how-to-organize-supporting-documentation-for-a-tax-audit/
• Surviving an IRS Field Audit: Step-by-Step Preparation: https://finhelp.io/glossary/surviving-an-irs-field-audit-step-by-step-preparation/
• What Triggers an IRS Correspondence Audit and How to Prepare: https://finhelp.io/glossary/what-triggers-an-irs-correspondence-audit-and-how-to-prepare/

Final Thoughts (Professional Insight)

In my practice, the most effective way to avoid being a high‑priority case is simple: good records, conservative reporting, and regular reconciliation of third‑party income reports. Many audits begin as modest inquiries—if you’re organized and responsive, most will resolve without further escalation.

Professional Disclaimer

This article is educational and does not constitute legal, tax, or financial advice for your specific situation. For personalized guidance, consult a qualified tax professional. Rules and procedures can change; I referenced IRS publications and guidance current as of 2025 (for example, IRS Pub. 556 and IRS audit information pages).

Authoritative sources

• IRS Publication 556, “Examination of Returns, Appeal Rights, and Claim for Refund” (IRS)
• IRS audit information and FAQs (IRS.gov)
• IRS guidance on assessment time limits (IRS.gov)