IRS Audits: How They're Triggered and What to Expect

The Odds Are Low — But Not Zero

In fiscal year 2022, the IRS audited roughly 3.8 out of every 1,000 individual tax returns — a historic low driven by staffing shortages and budget cuts. Yet that average masks a stark reality: certain income levels and deduction patterns draw scrutiny at far higher rates. Understanding what triggers an audit and how the process unfolds can mean the difference between a quick resolution and a drawn-out financial ordeal.

How the IRS Selects Returns for Audit

The IRS does not randomly pull returns. Several structured methods determine who gets examined.

The Discriminant Information Function (DIF) Score

Every return receives a DIF score. This algorithm compares deductions, income, and credits against statistical norms for similar filers. Returns that deviate significantly from norms rank higher and receive human review. The IRS does not publish the exact DIF formula.

Computer Matching Programs

The IRS matches W-2s, 1099s, and other third-party information returns against what taxpayers report. A mismatch — say, a 1099-B showing $80,000 in stock proceeds that never appears on a return — almost always triggers a notice.

Related Examinations

When the IRS audits a business, it sometimes audits related parties. Partners, shareholders, and investors may receive notices when their business entity is already under examination.

Specific Audit Campaigns

The IRS Large Business and International division runs targeted campaigns on known compliance risks — such as conservation easements, micro-captive insurance arrangements, and syndicated partnership transactions.

Common Audit Red Flags

High charitable deductions relative to income — Donations that equal 20–30% or more of adjusted gross income attract attention.
Large Schedule C losses — Consistently reporting business losses, especially from activities that resemble hobbies, raises a passive activity question.
Home office deductions — Allowable under strict IRS criteria, but frequently overclaimed.
Round-number deductions — Claiming exactly $5,000 in every category suggests estimates rather than records.
Unreported foreign accounts — FBAR and FATCA requirements make offshore income highly visible to the IRS.
Very high income — Returns showing $1 million or more in income face audit rates roughly five times the national average.
Cash-intensive businesses — Restaurants, car washes, and similar businesses receive heightened scrutiny due to unreported income risk.

Three Types of IRS Audits

Audit Type	How It's Conducted	Typical Scope
Correspondence Audit	By mail only	One or two specific items; usually the most common type
Office Audit	In-person at an IRS office	Broader review of deductions; taxpayer brings documentation
Field Audit	IRS agent visits home or business	Comprehensive; often involves complex returns or large businesses

Correspondence audits make up the vast majority of IRS examinations. They typically ask for receipts or a simple explanation for a specific item on the return.

Statute of Limitations

The IRS has three years from the return due date (or filing date, whichever is later) to assess additional tax in most cases. The window extends to six years if the taxpayer omits more than 25% of gross income. There is no statute of limitations for fraudulent returns or unfiled returns.

Situation	Statute of Limitations
Standard return	3 years
Substantial omission of income (>25%)	6 years
Fraudulent return or no return filed	No limit
Amended return filed within 60 days of expiration	60 days from amended filing

What Happens During an Audit

The process begins with a notice — either Letter 2202 for office audits or a specific IDR (Information Document Request) for field audits. The notice specifies the tax years under review and the items being questioned.

Responding to a Correspondence Audit

Taxpayers have 30 to 60 days to respond. Send documentation by certified mail with return receipt. Keep copies of everything. If the IRS accepts the documentation, it closes the case and sends a no-change letter. If not, it issues a proposed adjustment.

Appealing the Outcome

Taxpayers who disagree with audit findings have several options:

IRS Appeals Office — An independent body within the IRS that reviews disputes; most cases settle here without litigation.
Tax Court — Taxpayers can petition Tax Court before paying the disputed amount (the deficiency procedure).
District Court or Court of Federal Claims — Requires paying the tax first, then suing for a refund.
Audit Reconsideration — Available if new documentation was not presented during the original audit.

Protecting Yourself Before an Audit Happens

Good recordkeeping is the single most effective defense. The IRS expects contemporaneous records — receipts, mileage logs, bank statements — maintained at the time of the expense, not reconstructed years later. Digital recordkeeping tools and cloud storage have made this far more practical than in previous decades.

Working with a CPA or enrolled agent during an audit provides professional representation before the IRS. Enrolled agents are federally licensed specifically for this purpose and can represent taxpayers at all administrative levels.

This article is for informational purposes only and does not constitute financial advice.