Overview

The IRS doesn’t pick returns at random most of the time. It combines automated systems, third‑party information, and leads from audits or external sources to find returns that merit further review. The goal is to detect noncompliance efficiently while using limited examiner resources (IRS, “Data Sources for Audits”). This article explains the main selection methods, common triggers, practical recordkeeping and response steps, and what taxpayers can expect if their return is chosen.

How selection works — the main mechanisms

  • Discriminant Function (DIF) and scoring models: The IRS uses statistical scoring systems that compare a return to expected norms for similar filers. A higher DIF or similar score raises the chance of a review. These models are designed to spot discrepancies in reported income, deductions, or credits.

  • Automated Underreporter (AUR) / document matching: The IRS receives copies of income documents such as W‑2s and 1099s from employers and payers. Returns that don’t match those information returns are flagged for follow‑up (IRS, “Data Sources for Audits”).

  • Math error and automatic adjustments: Simple math mistakes or missing schedules can trigger a correspondence contact or automatic correction without a full audit.

  • Related examinations: If an audited taxpayer reveals issues tied to other taxpayers or entities (business partners, investors, family members), the IRS often opens related examinations.

  • Leads and referrals: Whistleblower tips, state tax agency referrals, and industry trends can produce targeted campaigns.

  • Random sampling and national research: The IRS occasionally selects returns for random review or for statistical programs used to measure the tax gap.

  • Specialized selection for credits and high‑risk categories: Certain credits, like the Earned Income Tax Credit (EITC), historically get more scrutiny. Similarly, returns with unusual combinations of income or large, out‑of‑norm deductions may be targeted.

Sources: IRS guidance on data sources for audits and the general principles of matching and scoring (see IRS: Data Sources for Audits).

Types of examinations you might face

  • Correspondence audit: The most common and least intrusive. The IRS requests documents by mail to verify one or two items.

  • Office audit: A taxpayer or representative meets with an IRS examiner at a local IRS office.

  • Field audit: An IRS agent visits a taxpayer’s home or business. These are generally reserved for complex issues or large adjustments.

Your response strategy depends on the type of exam. A correspondence audit often needs only organized documentation; an office or field audit requires fuller audit files and, often, professional representation.

Who is most often selected — and who can be selected

Technically, any taxpayer can be selected. That said, these profiles often draw more attention:

  • Self‑employed individuals and small business owners (unreported cash income, large deductions relative to revenue)
  • High‑income taxpayers with complex returns
  • Filers claiming large or unusual deductions (home office, vehicle, unreimbursed business expense)
  • Returns with mismatches between reported income and third‑party forms (W‑2s, 1099s)
  • Situations involving partnerships, S corporations, estates, or large rental portfolios

Remember: selection is about likelihood of error, not guilt. Many reviews result in no change after documentation is provided.

Common triggers and red flags

  • Income that doesn’t match third‑party reports (AUR/document matching)
  • Large charitable deductions without contemporaneous receipts
  • Repeated home‑office claims or large business‑use‑of‑home percentages
  • Excessive business losses year after year on Schedule C
  • Inconsistent or missing Schedule E reporting for rental income
  • High cash transactions inconsistent with reported income
  • Amended returns or prior years with adjustments

For more on red flags, see our glossary piece “What Triggers an IRS Audit: Red Flags to Watch”. (https://finhelp.io/glossary/what-triggers-an-irs-audit-red-flags-to-watch/)

Real‑world examples and practitioner perspective

In my practice advising small businesses over 15 years, I’ve seen common patterns: a contractor who underreported 1099 income because payments were recorded in a separate cash book; a taxpayer who claimed a large home‑office deduction without daily logs; and partners in a short‑lived venture who received conflicting K‑1s. In each case, the IRS selection process began with a data mismatch or an out‑of‑norm deduction, then expanded to related returns.

A typical scenario: the IRS’s AUR process flags a return because a 1099‑NEC issued by a client shows income that wasn’t reported. The taxpayer receives a letter asking for clarification or payment. If the filer responds with documentation showing a reporting error, the matter is often resolved without further escalation.

Recordkeeping and documentation that reduce risk

Good records don’t prevent selection, but they make responding fast and painless. Keep these items for at least three years, and longer for matters tied to unreported income, property basis or foreign accounts:

  • Copies of W‑2s, 1099s and K‑1s
  • Receipts, bank statements and canceled checks for deductions
  • Mileage logs or digital records for business trips (date, miles, purpose)
  • Contracts, invoices and bank deposit records for business income
  • Home‑office calculations and method used to allocate expenses

See our guide on record retention for audits for recommended retention policies and a checklist: “Record Retention Policies That Protect You During Audits”. (https://finhelp.io/glossary/record-retention-policies-that-protect-you-during-audits/)

Practical steps if the IRS selects your return

  1. Read the notice carefully. Notices explain the issue, what documents are needed, and a deadline. Do not ignore it.
  2. Gather documents that directly support the items under review. Keep responses concise and organized.
  3. Consider representation. If adjustments could be large or complex, use a CPA, enrolled agent or tax attorney. You can authorize a representative with Form 2848 (Power of Attorney); see our article “Using a Power of Attorney (Form 2848) During an Audit or Appeal” for details. (https://finhelp.io/glossary/using-a-power-of-attorney-form-2848-during-an-audit-or-appeal/)
  4. Meet deadlines. Missing a deadline can limit appeal rights and increase penalties or interest.
  5. If you disagree, follow the appeals process. The IRS Office of Appeals is available to resolve disputes administratively.

For correspondence examinations, respond using the exact documents requested — don’t provide extra unrelated documents that can invite broader scrutiny.

Penalties, interest and timing

If the IRS assesses additional tax, you may also face penalties and interest. Penalties vary by the nature of the error (e.g., fraud vs. negligence) and whether the taxpayer had reasonable cause. Prompt, complete responses and, where appropriate, reasonable‑cause arguments can mitigate penalties (IRS Taxpayer Bill of Rights).

How to reduce future selection risk

  • Stay consistent year-to-year. Large, unexplained changes draw attention.
  • Use professional tax preparation for complicated returns.
  • Keep a contemporaneous audit file: receipts, explanations and computations. When the IRS asks, you’ll be ready.
  • Consider voluntary disclosures if you discover substantial past underreporting — a carefully managed correction may reduce penalties compared with discovery by the IRS.

FAQs (short)

Q: Does filing electronically reduce the chance of review?
A: No. Electronic filing speeds processing but does not shield a return from selection.

Q: Can the IRS audit returns more than three years back?
A: Standard statute of limitations is typically three years, but six years applies if substantial underreporting (25% or more) is present, and there is no statutory limit for fraud or failure to file.

Q: Will an audit always result in tax due?
A: No. Many reviews close with no change after documentation supports the return.

Authoritative sources

Internal resources

Professional disclaimer

This article is educational and not personalized tax advice. Details in tax law and IRS procedures can change; consult a qualified tax professional for help with a specific case.

If you want, I can convert this into a printable audit‑response checklist or a short email template to use when you first receive an IRS notice.