How the IRS Decides
Who to Audit

Most Audits Start With a Computer, Not a Human

The IRS audits a small percentage of returns each year — less than 1% of individual filers. But that doesn't mean selection is random. The vast majority of audits begin with automated systems that flag returns before any human reviewer sees them.

Understanding how those systems work tells you exactly what to avoid.

The DIF Score: The IRS's Audit Algorithm

Every return you file gets a Discriminant Information Function (DIF) score — a proprietary IRS algorithm that compares your return's deductions, income ratios, and credits against statistical norms for similar taxpayers at your income level. The higher your DIF score, the more your return deviates from the expected pattern.

High DIF scores don't automatically trigger an audit — a human examiner still reviews flagged returns. But returns with unusual ratios of deductions to income, large charitable contributions relative to adjusted gross income, or business losses that consistently offset significant personal income are exactly what the DIF is designed to catch.

The Automated Underreporter Program

Separate from DIF scoring, the IRS's Automated Underreporter (AUR) program generates CP2000 notices by matching your filed return against every 1099, W-2, K-1, and information return filed by payers. When the numbers don't align, the system flags the discrepancy automatically.

This is the source of most IRS correspondence examinations. A 1099-B showing $80,000 in stock sale proceeds that doesn't match your Schedule D. A 1099-NEC from a client that doesn't appear as self-employment income on your return. A 1099-INT from a bank account you forgot to include.

The AUR doesn't know about your basis, your expenses, or the context of the income — it just sees the number doesn't match. That's what triggers the notice.

Specific Red Flags That Elevate Audit Risk

Beyond the automated systems, certain patterns consistently draw scrutiny:

• Large cash income businesses — restaurants, contractors, hair salons, and other cash-intensive businesses are historically over-represented in audits because the IRS knows income underreporting is easier
• Consistently unprofitable businesses — a Schedule C showing losses for multiple consecutive years signals the IRS that the activity may be a hobby rather than a genuine business, disqualifying the deductions
• High charitable deductions — non-cash charitable contributions, particularly those requiring Form 8283, are a consistent audit flag when the claimed value is disproportionate to income
• 100% business use of a vehicle — the IRS knows almost no vehicle is used exclusively for business, and this claim consistently draws examination
• Large rounded numbers — expenses of exactly $10,000 or $25,000 suggest estimation rather than documentation
• Foreign accounts and income — FBAR requirements and FATCA reporting have significantly increased IRS focus on offshore assets

What Happens If You're Selected

Most IRS examinations are correspondence audits — they send a letter requesting documentation for a specific line item, you respond with records, and the matter is resolved by mail. These are not the in-person audits people fear.

Office audits (you come to an IRS office) and field audits (an agent comes to you) are reserved for more complex cases — typically involving business income, significant unreported income, or cases where the IRS suspects fraud.

The CP2000 and CP3219A are the correspondence examination notices you're most likely to receive. Both are resolvable with proper documentation and a timely, accurate response.

The Best Defense Is a Clean Return

Audit defense starts before you file. Accurate reporting, proper documentation, deductions that are proportionate to your income level, and consistent treatment of income and expenses year over year are your best protection. The IRS isn't looking for perfection — it's looking for anomalies.

If you've received a CP2000 or a formal examination notice, the response strategy matters as much as the documentation. A professional representative who understands what the examiner is looking for — and what they're not — resolves these cases faster and with less exposure than self-representation.

Frequently Asked Questions