Overview

The IRS does not select returns for audit at random alone. Instead, it uses a mix of automated analytics, information‑return matching, targeted campaigns, and examiner referrals to prioritize returns that appear most likely to contain errors, omissions, or fraud. While the overall chance of an audit is low for most taxpayers, certain patterns and items on a return raise the probability of closer scrutiny.

(Author note: In my 15+ years advising clients, returns with large out‑of‑norm deductions or mismatched third‑party reporting are the most common triggers I see.)

Sources: IRS—What Is an Audit (IRS.gov) and IRS guidance on information reporting and correspondence programs.

Key IRS systems and signals used in selection

  • Discriminant Function (DIF) and scoring models: For decades the IRS has used DIF-style scoring to rate returns. These systems compare line items and combinations of items against historical norms and known error patterns; higher scores indicate greater likelihood of adjustment. The DIF system has evolved and now operates alongside newer analytics platforms.

  • Automated Underreporter (AUR) and document matching: The IRS matches wage, dividend and 1099‑series payer data against filed returns. Mismatches between what payers report and what taxpayers report are a leading cause of notices and audits.

  • Return Review Program (RRP) and other analytics: The IRS runs programs that apply machine learning and rules‑based analytics to spot suspicious returns and to route likely issues into correspondence or field examinations.

  • Targeted compliance campaigns: The IRS periodically runs issue‑specific compliance campaigns (for example, high‑fraud areas such as improper Earned Income Tax Credit claims, certain small‑business issues, or underreported cryptocurrency income). These campaigns raise audit activity for taxpayers in the target area.

  • Whistleblower tips, referrals, and random selection: Human referrals (from examiners or whistleblowers) and limited statistical random sampling are also part of the mix.

Common triggers that increase audit probability

Below are repeated, high‑impact triggers that often move a return from routine processing into examination:

1) Mismatched third‑party information

  • W‑2s, 1099‑NEC, 1099‑MISC, 1099‑B and 1099‑DIV/INT are matched to your return. Underreporting income that appears on these forms often generates automated notices or an AUR case.

2) Large or unusual deductions relative to income

  • Excessive charitable gifts, business losses, or home‑office and vehicle deductions that sit well outside your industry or geographic peers will be flagged.

3) High income or complex returns

  • Higher incomes bring more scrutiny because the dollars at stake are larger. Complex returns with multiple schedules, partnerships, or foreign accounts naturally trigger more review.

4) Self‑employment and cash businesses

  • Businesses with cash transactions (restaurants, salons, contractors) and gig‑economy work are areas the IRS watches closely because underreporting is historically common.

5) Mismatches and timing issues

  • Reporting income under the wrong EIN or on the wrong form, late amended returns, or discrepancies between business and personal filings attract attention.

6) Certain credits and relief claims

  • EITC, refundable tax credits, and some stimulus/related claims receive closer programmatic review due to historically high error and fraud rates.

7) Cryptocurrency and virtual currency reporting gaps

  • The IRS has invested resources and data matches to identify unreported crypto gains. Failure to report crypto transactions that appear on third‑party records can lead to examination. See our guide on reporting crypto income for audit‑risk guidance: How to Report Cryptocurrency Income and Avoid Audits.

Real‑world examples (anonymized)

  • A sole proprietor claimed unusually high vehicle and meal expenses that topped industry averages for similar revenue—this return received a correspondence audit request for receipts and logs.

  • A freelancer’s 1099‑NEC was issued to a business EIN while their Schedule C listed the income under the taxpayer’s name and SSN, creating a mismatch and triggering a notice.

  • A taxpayer reported lower dividend income than reported by the broker on Form 1099‑DIV; the automated matching program generated an inquiry, followed by an adjustment when the taxpayer couldn’t document a discrepancy.

Who tends to be audited more often

  • High‑income taxpayers and those with complex returns (partnerships, S corporations, foreign accounts).
  • Small business owners, especially cash‑heavy businesses or owners who pay themselves from unreported cash.
  • Taxpayers claiming large, unusual deductions or refundable credits.
  • Taxpayers with mismatches between information returns and filed returns.

Overall national audit rates have been low in recent years (well under 1% for most individual returns), but rates vary widely by income, deductions, and industry (see IRS Data Book and program descriptions).

How to reduce your audit risk (practical, professional tips)

  • Keep thorough records: receipts, mileage logs, bank statements, invoices, and contemporaneous notes. Good documentation often stops an audit before it begins or resolves it quickly if selected.

  • Report all taxable income exactly as shown on information returns. If a payer used the wrong EIN or SSN, correct it quickly and keep documentation of the correction attempt.

  • Use reasonable, supportable estimates for business use (e.g., home office percentage, vehicle business miles). Conservative, well‑documented methods reduce examiner pushback.

  • Don’t round excessively or use obviously rounded figures for multiple large items; these patterns can look suspicious to automated algorithms.

  • File accurately and on time; amended returns are not inherently bad, but frequent or late amendments can raise questions.

  • When claiming industry outliers (large deductions or losses), keep industry benchmarks and peer data if possible to show reasonableness.

For more on common triggers and preventive strategies, see: What Triggers a Tax Audit and How to Reduce Your Risk.

If the IRS selects you: steps to take immediately

1) Read the notice carefully. The IRS will tell you why it contacted you and what documents are requested.
2) Do not ignore the notice. Failure to respond can lead to additional penalties and enforced collection.
3) Gather a clear, organized file of the requested documents. Our checklist can help: Preparing for an IRS Income Tax Audit: Documents to Gather.
4) If the request exceeds your comfort or expertise, engage a qualified tax professional (CPA, EA, or tax attorney). Having representation early can improve outcomes and preserve legal protections.
5) Consider whether the issue is resolvable by mail (correspondence) or requires in‑office or field meetings—be realistic about what you can document.

Appeals and further action

If you disagree with the IRS adjustment, you generally have the right to appeal within the IRS Office of Appeals and, ultimately, to Tax Court. Keep appeal deadlines in mind and get professional help for submissions and conferences (see FinHelp’s guides on audits and appeals for steps to escalate cases responsibly).

Common misconceptions

  • “I’m safe because I do nothing wrong.” Even honest mistakes or mismatches can trigger an audit. The IRS lacks perfect context—good documentation is the practical defense.

  • “Only high earners get audited.” While higher incomes see higher audit rates, audits can and do affect taxpayers at all income levels for the reasons listed above.

Final checklist (quick action items)

  • Reconcile 1099s/W‑2s with your return before filing.
  • Keep receipts and contemporaneous logs for large deductions (home office, mileage, travel, meals).
  • Use reputable tax software or a preparer who reviews information returns and can explain industry norms.
  • Respond to IRS notices promptly and keep a copy of every communication.

Professional disclaimer: This article is educational and does not substitute for personalized tax advice. For specific audit or tax law questions, consult a qualified tax professional.

Authoritative sources and further reading

  • IRS — What Is an Audit? (IRS.gov: Audit Types)
  • IRS — Automated Underreporter and information‑return matching programs
  • IRS — Return Review Program and targeted compliance campaigns

Internal resources from FinHelp you may find useful:

If you’re worried about audit selection for a specific return, gathering a clean, well‑organized file and consulting an enrolled agent or CPA is the best way to reduce risk and resolve issues efficiently.