Ever wondered why some people get audited while others don’t? Contrary to popular belief, IRS audits are not random. The IRS uses data-driven algorithms, information matching, and specific risk indicators to decide which tax returns to review more closely. Knowing how the IRS selects returns for audit helps you avoid unnecessary red flags and respond effectively if chosen.
Understanding How the IRS Selects Tax Returns for Audit
The IRS uses several systems and methods to identify returns with potential errors, inconsistencies, or noncompliance. Here are someone of them:
1. The Discriminant Inventory Function System (DIF)
The DIF score is a secret numeric rating assigned by the IRS to each tax return. It measures the likelihood that your return has errors or unreported income.
- High DIF scores = higher audit potential.
- Returns with unusual patterns or ratios compared to national averages are more likely to be flagged.
The exact formula is confidential, but it’s based on years of IRS data and statistical modeling.
Learn more about the audit process in IRS Publication 556.
2. Information Matching
The IRS compares information from your tax return to third-party data (employers, banks, brokers, etc.).If numbers don’t match — such as missing 1099s, W-2s, or bank interest — the system automatically generates a discrepancy notice (like a CP2000).
3. Related Examinations
If your tax return is connected to another taxpayer’s — for example, a business partner, investor, or employer under audit — your return might also be pulled for examination. This is known as a related examination audit.
4. Industry or Income Pattern Deviations
Certain industries — like restaurants, contractors, and cash-heavy businesses — are more likely to be audited. IRS algorithms also compare your expenses and deductions to statistical norms for your income bracket or business category. If your ratios are way outside the average, your return may be flagged for review.
5. Self-Employment and Schedule C Filers
Self-employed individuals have more complex filings — and more opportunity for mistakes. Deductions like home office, mileage, and meals are heavily scrutinized if they appear inflated or inconsistent. The IRS reviews small business returns through its Small Business/Self-Employed Division (SB/SE).
6. Random Research Audits
Although rare, some audits are truly random — part of the National Research Program (NRP). These audits help the IRS refine its data models and update compliance risk indicators. NRP audits are comprehensive and often require detailed documentation.
7. Whistleblower Tips or Third-Party Referrals
The IRS occasionally investigates based on tips, referrals, or complaints — especially for suspected fraud, hidden income, or unfiled returns. Learn more about the IRS Whistleblower Program.
What Happens After Selection?
If your return is flagged, an IRS examiner reviews it before deciding whether to open a formal audit. If selected, you’ll receive a letter outlining the next steps. Audits are conducted by mail (correspondence audit), in-person (office audit), or at your place of business (field audit).
How to Reduce Your Audit Risk?
- File accurate, complete, and well-documented returns.
- Avoid aggressive deductions that can’t be supported.
- Reconcile all 1099s and W-2s before filing.
- Keep business and personal expenses separate.
- Work with a tax professional for complex filings.
When to Seek Legal Help?
If you receive an audit letter, contact a tax attorney before responding. Attorneys can:
- Review your return and identify weak points,
- Communicate directly with the IRS,
- Prepare you for interviews or document requests,
- Negotiate settlements or penalty relief.
A legal representative ensures your rights are protected throughout the process.
Need help with a similar issue? Contact our firm today for a consultation.
The IRS audit selection process isn’t random — it’s data-driven. By understanding how the system works, you can file smarter, document properly, and avoid unnecessary scrutiny.
If you’ve received an audit notice or need help preparing for one, contact Pelham PLLC today. Our experienced tax attorneys can help you respond strategically and minimize potential exposure.
FAQs
What is the DIF score in an IRS audit?
The DIF score is an internal IRS rating that measures how likely a tax return contains errors or unreported income. High scores increase audit risk.
Does the IRS randomly select people for audits?
A small number of audits are random, but most are selected through the IRS’s data analysis systems like DIF and information matching.
What’s the most common reason for an IRS audit?
The most common trigger is income mismatch — when reported income doesn’t match what employers, banks, or brokers reported to the IRS.
Can a tax attorney help reduce my audit risk?
Yes. A tax attorney can review your filings, ensure compliance, and prepare you in advance by identifying audit red flags before you file.
