Overview

The IRS audit risk score is a behind-the-scenes number that helps the agency prioritize which tax returns to examine. The score is not a single public metric you can view; it’s produced by several automated and manual systems that compare your return to historical patterns, third‑party information (W-2s, 1099s, mortgage interest statements) and industry norms. A higher score means the return looks riskier — for example, it has anomalies that suggest underreported income or overstated deductions — and may make it more likely the IRS will select it for examination. (IRS, “Understanding the Audit Process,” accessed 2025: https://www.irs.gov/businesses/small-businesses-self-employed/audits)

In my practice advising individuals and small-business owners, I’ve seen the same root causes raise scores: unexplained income gaps, large or unusual deductions for the taxpayer’s industry, inconsistent filing patterns, and missing third-party matches. This article explains how the IRS creates these scores, what commonly triggers them, and practical steps to lower your audit profile.

Background and how selection systems evolved

Audit selection began as a manual, paper-driven process and evolved into statistical models in the mid‑ and late‑20th century. Since then the IRS has layered tools that examine returns from different angles:

  • Discriminant Function System (DIF): A statistical scoring tool that compares returns to norms and historical adjustments. Returns that deviate substantially receive higher DIF scores.
  • Automated Underreporter (AUR) and information return matching: The IRS receives copies of many third‑party forms (W‑2s, 1099s, 1098s). When the amounts on a filed return don’t match those information returns, automated programs generate mismatch alerts and potential audit triggers.
  • Document matching and specialized filters: Certain issues (large Schedule C losses, unusually high charitable gifts, or claimed business use of a personal vehicle) run through additional filters or specialist reviews.

These systems are updated over time as tax law changes and new data sources appear. The core idea remains: use data to focus limited audit resources where the chance of an incorrect return is highest. See IRS guidance on examinations and taxpayer rights (Publication 556) for procedures the IRS follows when a return is examined. (IRS Pub. 556: Examination of Returns, Appeal Rights, and Claims for Refund, accessed 2025: https://www.irs.gov/forms-pubs/about-publication-556)

How the IRS actually scores returns (what the systems look for)

The IRS does not publish the exact formulas it uses, but public documents and past disclosures identify the main inputs and processes:

  • Third‑party data matching: The IRS compares amounts reported on your return with employer and payer reports it already has. Missing or lower reported wages or interest/dividend income than third‑party forms typically raise flags.
  • Anomalous ratios and industry norms: The DIF and related models compare items such as deduction ratios, profit margins, or expense-to-revenue relationships to established norms for similar taxpayers. Large deviations increase risk scores.
  • Prior compliance history: Returns from taxpayers with recent audits, penalties, or repeated amendments often score higher.
  • Unexplained changes year over year: Large jumps or drops in income, large one‑time losses, or sudden spikes in deductions compared with previous years can draw attention.
  • Certain red-flag items: Foreign accounts or income, large Schedule C losses year after year, heavy cash businesses, and certain credits (e.g., high Earned Income Credit claims without supporting documentation) may prompt additional scrutiny.

Automated programs can generate soft notices first (requests for clarification) or route returns to examiners for manual review. Information‑return matching programs such as AUR are highly effective because the IRS already possesses the third‑party forms. A mismatch usually triggers a notice asking for explanation or amendment before a full audit is opened. (IRS information returns overview and AUR program pages, accessed 2025.)

Real-world examples (how small changes affect scores)

  • Example 1 — High deductions for income level: A taxpayer earning $50,000 who claims $40,000 in unreimbursed business expenses on a Schedule C will look abnormal compared with industry norms. That deviation can inflate the DIF score and lead to an audit.
  • Example 2 — Missing third-party income: A taxpayer who receives a 1099‑NEC for $12,000 but reports only $8,000 in self‑employment income will likely generate an AUR mismatch letter because the IRS already holds the 1099‑NEC information.
  • Example 3 — Repeated losses: A small business showing multi‑year Schedule C losses with minimal gross receipts may be selected because the system expects a certain profit pattern; the IRS examines whether the activity is a hobby or a business for tax purposes.

In the field, I’ve helped clients avoid examinations by resolving data mismatches proactively. When we locate missing 1099s, correct wage reporting, or provide contemporaneous receipts that justify a deduction, the automated trigger often resolves without a full audit.

Who is most likely affected

Anyone who files a federal income tax return can be selected, but these groups are statistically more likely to generate higher audit risk scores:

  • Higher‑income taxpayers: Returns with very large incomes and complex investments draw more attention because the tax dollars at stake are larger.
  • Self‑employed and small‑business owners: Schedule C filers and cash-based businesses often have more deduction opportunities and, without detailed records, more areas for misreporting.
  • Taxpayers with substantial investment or rental income: Multiple K‑1s, rental schedules, and complex capital transactions increase the chance of mismatches and additional filters.
  • Prior offenders or frequent amenders: A history of amended returns, penalties, or unresolved notices increases scrutiny.

Lower‑income taxpayers are still reviewed (for example, EITC claims receive specific attention), but their overall audit probability is generally lower than for wealthy, complex returns. (IRS annual reports and data books outline audit rates by income level; see IRS Data Book and IRS audit statistics for the most current numbers.)

Practical steps to reduce your audit risk score

You can’t see your numeric score, but you can address the inputs that increase it. Apply these practical steps:

  1. Keep organized, contemporaneous records
  • Retain receipts, invoices, mileage logs, canceled checks, and bank statements. For business expenses, document the business purpose, date, and amount. Good records make it easier to support deductions if questioned.
  1. Reconcile third‑party forms before filing
  • Compare W‑2s, 1099s, and 1098s against your draft return. If a payer sent an incorrect 1099, get it corrected before filing to avoid an AUR mismatch later.
  1. Use reasonable, industry‑based estimates
  • If you use estimates (e.g., home office percentage or meal allocation), document how you arrived at those numbers and keep industry benchmarks on hand.
  1. Avoid extreme, one‑off deductions without documentation
  • Large charitable contributions, sudden business losses, or unusually high travel expenses need supporting records and reasonable explanation.
  1. File accurate, complete returns and respond promptly to IRS notices
  • If you receive a correspondence letter, respond quickly. Timely, clear responses often close cases without examination.
  1. Work with a qualified preparer when convenient
  • A CPA or enrolled agent can help lower inadvertent errors and provide defensible documentation strategies. In my practice, clients who used professional preparers had fewer procedural notices and better outcomes during exams.

For more on recordkeeping and documentation best practices, see our guides on tax recordkeeping and self‑employment taxes: tax recordkeeping guide and self‑employment taxes explained.

Common misconceptions

  • Misconception: Only high incomes get audited. Reality: While audit rates increase with income complexity and level, audits also target specific issues like EITC or casualty losses in lower income groups.
  • Misconception: If the IRS hasn’t audited me before, I’m safe. Reality: One clean year doesn’t prevent later selection—changes in income, new forms, or new business activity can change your profile.
  • Misconception: You can ignore IRS notices. Reality: Many examinations start with a simple mismatch letter; ignoring it can escalate to a full audit, penalties, and interest.

What to expect if selected

Selection yields different outcomes:

  • Correspondence examinations: The IRS asks for documentation by mail. Many mismatches are resolved here.
  • Office or field audits: In‑person or virtual reviews of records and interviews.
  • Automated adjustments: For simple math or matching issues, the IRS may correct amounts and send a notice proposing changes.

If you are contacted, review Publication 556 and the IRS audit pages for your rights and procedures. Consider engaging a qualified tax professional to represent you — enrolled agents, CPAs, and tax attorneys can formally represent taxpayers before the IRS.

FAQs (brief)

  • Will the IRS tell me my audit risk score? No. The numeric score is internal and not disclosed; you only see an audit letter or notice if the IRS acts.
  • Can I lower my score? You can lower the chance of selection by improving recordkeeping, reconciling third‑party forms, and avoiding extreme, unsupported positions.
  • Does using a tax preparer eliminate audit risk? No, but qualified preparers reduce mistakes and help document positions, which can lower risk and improve outcomes if examined.

Professional disclaimer

This article is educational and does not substitute for personalized tax advice. For advice tailored to your situation, consult a qualified tax professional or CPA.

Authoritative sources and further reading

Internal resources from FinHelp.io:

If you need help preparing for an IRS inquiry, organize your records first: dates, amounts, and supporting receipts make the process substantially smoother.