Overview

The IRS audit selection process is not a single tool but a layered system of data matching, risk scoring and targeted investigations. These methods include automated information‑return matching (comparing W‑2s, 1099s and other third‑party reports against what taxpayers file), statistical scoring models (commonly called DIF scores), tip‑or‑lead referrals, and programmatic compliance projects that focus on specific issues. The agency also runs random sampling to support research and compliance measurement (Internal Revenue Service, “How does the IRS select returns to audit?”, IRS.gov).

In my work advising individuals and small businesses, I see the practical result: returns that deviate from statistical norms or show mismatches with third‑party reports are far more likely to be examined. That doesn’t mean an audit equals wrongdoing—many audits confirm correct reporting—but being prepared reduces stress and cost.

How the major selection methods work

  • Information‑return matching: The IRS receives millions of Forms W‑2, 1099 and other information returns. If amounts on those forms don’t match what a taxpayer reports, the return is flagged for review. This is one of the most common reasons for a correspondence audit and for CP2000 notices (IRS, Examination and Collection pages).

  • Discriminant Function (DIF) and scoring systems: DIF is a statistical model that scores individual returns by the likelihood of significant noncompliance. High DIF scores increase the chance of selection for examination. The IRS supplements DIF with other analytic models that focus on specific risks (National Taxpayer Advocate and Internal Revenue Manual references have historically described these systems).

  • Related examinations and leads: If the IRS audits a business and finds discrepancies, associated returns (owners, spouses, related entities) can be selected. Tips from whistleblowers, state tax agencies, or other government reviews also generate leads.

  • Compliance campaigns and projects: The IRS runs targeted programs that focus on issues such as passthrough income, the gig economy, or improper claims (e.g., Earned Income Tax Credit). Returns fitting the target profile get special attention.

  • Random selection and research samples: The IRS uses randomly selected returns to measure compliance and to calibrate risk models. Random selection is a small but real part of the process.

Common triggers the IRS algorithms watch for

Algorithms don’t read intent—they look for statistical outliers and inconsistencies. Common patterns that raise score or create match issues include:

  • Large deductions relative to income (medical expenses, charitable gifts, business expenses).
  • Unreported income where 1099s or W‑2s exist.
  • Mismatched Social Security numbers or dependent information.
  • Repeated business losses, especially for hobby vs. business determinations.
  • Home office or vehicle expenses without clear documentation.
  • Large cash transactions or bank deposit patterns inconsistent with reported income.

For a practical checklist on common triggers, see our glossary entry: What Triggers an IRS Audit: Common Red Flags.

The Discriminant Function (DIF) — what it does and what it doesn’t

DIF is a scoring mechanism, not a single proof of fraud. It compares elements of a return against a statistical model developed from historical audit results to estimate the probability of a change resulting from an audit. A high DIF score means the return is statistically more likely to yield an adjustment. However, a high DIF score does not imply wrongdoing; often legitimate deductions or reporting choices can raise the score.

Important points about DIF:

  • It’s confidential and proprietary; the IRS does not publish the exact variables or thresholds. This limits the ability to game the system. (Internal Revenue Service; Internal Revenue Manual discussion of selection tools.)
  • DIF is one input among many; matching, leads and compliance projects also result in audits.

Information matching and notices: why CP2000 exists

When the IRS finds mismatches between third‑party information (W‑2s, 1099s, brokerage 1099‑B) and your return, the agency often issues a CP2000 (proposed changes) or a correspondence audit letter asking for clarification or additional documentation. Responding promptly and with clear records is the best way to resolve most mismatch cases.

Our guide to Preparing for a Correspondence Audit has a sample response letter and a document checklist that many taxpayers find useful.

Types of audits that result from selection

  • Correspondence (mail) audits: Most common. The IRS requests specific documents or explanations.
  • Office audits: You meet an IRS examiner at a local office. These are less common and usually focus on a limited set of issues.
  • Field audits: More intensive on‑site examinations, typically for businesses or complex cases.

See our Field Audit Survival Guide and Evidence Checklist if you face an in‑person review.

Who is more likely to be selected?

No one is completely immune, but historically higher audit rates occur among:

  • High‑income taxpayers (IRS audit rates rise with incomes over certain thresholds).
  • Return filers with complex returns—multiple schedules, passthrough entities, and foreign accounts.
  • Small‑business owners and self‑employed taxpayers who report both business income and expenses.
  • Taxpayers with unmatched information returns.

However, many audits are random or the result of data mismatches—so compliance and documentation matter for all filers (Tax Policy Center briefings and IRS statistics provide historical context).

Practical steps to reduce audit risk (and to prepare if selected)

  1. Keep organized records. Retain receipts, bank records, mileage logs and contracts for at least three years (longer if you file a claim for a loss or have foreign accounts). Documentation is your strongest defense.
  2. File accurately and timely. Simple arithmetic errors or late filings can increase scrutiny.
  3. Report all income shown on W‑2s and 1099s. Use transcript tools to reconcile third‑party reporting before filing when practical.
  4. Be conservative with complex deductions. If a deduction is legitimate, document it; if it’s borderline, re‑evaluate whether it’s worth the risk.
  5. Work with a tax professional. A CPA or enrolled agent can review returns for audit triggers and help assemble a defensible position. See our article on Preparing a Professional Audit File for organization tips.

In my practice I’ve helped clients avoid costly follow‑ups simply by adding an explanatory statement and supporting receipts when an uncommon deduction was claimed.

What to expect if you’re selected

  • The IRS will send a written notice describing the type of audit and the items under review. Never respond to an audit request by phone; always follow the written instructions.
  • If documentation resolves the issue, the matter can be closed quickly. If not, the IRS will propose changes and explain appeal rights.
  • You have rights under the Taxpayer Bill of Rights (access to representation, appeal, privacy). See the Taxpayer Advocate Service for further guidance.

For practical templates and timelines, read our guide to Preparing for a Correspondence Audit.

Common misconceptions

  • Myth: Only people who do something illegal get audited. Reality: Many audits are the result of mismatches, data anomalies or random selection. Audits are a compliance tool, not an accusation.
  • Myth: You can “beat” DIF by adding noise to your return. Reality: DIF and other models analyze multiple variables; trying to manipulate returns risks real penalties.

Sources and further reading

  • Internal Revenue Service, “How does the IRS select returns to audit?” (IRS.gov), and related IRM sections on examination selection.
  • Tax Policy Center, Briefing Book entries on audits and compliance statistics (taxpolicycenter.org).
  • National Taxpayer Advocate annual reports and IRS Taxpayer Bill of Rights (taxpayeradvocate.irs.gov).

Final notes and disclaimer

Understanding the IRS audit selection process helps you prioritize recordkeeping, honest reporting and smart tax planning. This article provides general education and should not be taken as personalized tax advice. For case‑specific guidance, consult a qualified tax professional.

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(Author: Financial content editor and tax advisor; educational intent only.)