rs-irs-audits

Should I Be Concerned If I Am Selected for an IRS Audit? So understanding that an audit is a basic check here’s why I think that you should be somewhat concerned if you’re selected for audit by the IRS so the first thing to understand is that the government can’t audit everybody the government is operating with very limited resources particularly over the last few years politically it’s not popular to fund the IRS to create havoc or create any sort of discontent among floating tax payers as a politician funding the IRS is not something that makes you popular with your constituency but the reality is is with a shrinking budget and with the IRS being forced to do more and more things and do that differently the IRS is very picky picky about who it chooses to audit so the first thing to consider is that if you were selected for audit there must be a good reason for it.

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What Are My Chances of Being Audited by the IRS? So understand that the IRS has very few resources to audit taxpayers taxpayer audits are something that’s fairly time-consuming I mean if you think about what most people think about when they think about an otter they have to send somebody out that person has to look through your books and records they have to make a determination and there’s an investment of time that goes along with it most IRS offices are not particularly well staffed particularly with field auditors which is what most people equate IRS audits? To so you have to understand that the IRS doesn’t have a whole lot to go after people so again they pick and choose what they have based on the resources that they have available the type of audit that has been issued is a good indicator of what the seriousness of the audit is.

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No it doesn’t really work like that. If you’re selected for audit by the IRS then they want to do an investigation to some varying degree into the information that you’ve reported on your tax return. Not complying with that investigation or trying to obstruct it in any way by not responding to the auditor or doing any number of things to impede their investigation or just calling them up and saying send me a bill isn’t really a good strategy. Number one if you call the auditor up and tell them to send you a bill then they’re going to disallow everything that they could possibly disallow and send you the largest tax bill that they can in order to protect the interest of the government. By doing that you’re cruising for a much higher liability than you’re probably entitled to. Number two is if you have a complicated issue or if there’s something that the IRS feels that is really there, for example if you don’t report 30-40 thousand dollars on a tax return for income then yeah, the IRS isn’t just going to let it go. There are penalties involved with the unreported income. There are penalties involved with overstating deductions and the IRS is not going to say “oh well if we catch you just go ahead and mail some check and everything will be fine.” No. The IRS is about compliance. If you don’t comply with the tax laws by filing returns that are inaccurate or if you’re overstating things or understating things, the IRS is going to punish you so it’s not something that’s just as simple as writing a check and being done with it. You have to really play ball with the audit whether you want to or not.

Well it depends so as I’ve explained previously the IRS has very limited resources and they’re not there to waste time; however once the IRS has you under examination, it’s not like they’re just gonna look at one particular issue and then go away unless you have a super technical legal issue that is the reason that you got audited. For example if you’re running a captive insurance company, they may not be concerned about your ordinary and necessary business expenses, they’re going to go after the captive insurance company. So IRS audits tend to be generally pretty thorough because what happens is the auditor is operating off a checklist and so the auditor wants to make sure that when they’re doing an examination, they’re actually examining it. Generally what happens is the auditor will spot a couple of different categories, they’ll look at a couple of expense categories, they’ll look at a couple of income categories, they’ll do a bank reconciliation, something like that and then if that comes out okay, then the auditor is not going to dig any deeper. If it doesn’t come out okay, then the auditor’s going to dig down and so what we refer to when an auditor digs down is sometimes they engage on a fishing expedition which is where they’ll throw a whole bunch of things out there and see what sticks. But then the other thing that they can do is that if they find an error they’ll, start digging into everything and they’ll use the inaccuracy in one category to open up all the other categories on the return and go digging through. So you want to try to avoid that situation if you can but just understand that particularly if you’ve been assigned to a field agent and that person is either coming out to your house or coming out to your business, that person’s going to do their job and they’re going to be pretty thorough with their examination.

Well the answer to that is pretty much everything. Once you’re under examination, the government has pretty broad latitude to investigate anything they think is relevant. If you don’t provide something, then the IRS agent has the authority to issue a summons for something. A summons is a demand that you produce records. So let’s say you didn’t want to produce your bank records. The IRS could summons you and command you to bring them down or the IRS could summons the third party like a bank and demand production of that document. If for some reason you still didn’t produce the records after the summons, then the IRS could get district counsel involved and they can go to court and enforce the summons order. So what will happen a lot of the times is people will make a serious error on their taxes, like they’ll leave off income and then they won’t want to provide the evidence to the IRS to kind of hide their tracks. But the problem with that is the IRS in a lot of cases can get the information anyway so if you don’t provide it to them and make it easy on them, they’ll do it by force, so just understand walking into this that the IRS has very broad authority to gather the information it needs to conduct an examination. The government has given the IRS very broad latitude when it comes to audits because they want them to be effective so realize that if you’re asked to produce a document, you’re probably going to be asked to turn it over.

The IRS selects returns for audit through a combination of computer scoring, automated document matching, and targeted enforcement programs — not by having agents manually review returns at random.

Most returns are never looked at by a human being. The selection process is largely algorithmic, and for most taxpayers, their only IRS contact will be a computer-generated notice, not an examiner. Understanding how selection actually works is useful both for making sense of a notice you’ve received and for knowing what genuinely raises your exposure.

How the IRS Calculates Your DIF Score

Every return filed with the IRS receives a DIF (Discriminant Function System) score — a statistical measure of how likely your return is to generate additional tax if examined.

The DIF algorithm compares your return to a statistical baseline built from TCMP (Taxpayer Compliance Measurement Program) audits — intensive line-by-line examinations conducted on randomly selected returns. The IRS used that data to establish norms for what deductions, income ratios, and expense patterns look like at each income level. A return that deviates significantly from those norms gets a higher DIF score.

The IRS does not publish the scoring formula. What’s known is that it’s driven by comparison to similarly-situated taxpayers: what a Schedule C sole proprietor with $250,000 in gross receipts typically looks like, what a W-2 employee at your income level typically claims. The further your return strays from that profile, the higher your score — and the more likely it is to land in a human reviewer’s queue.

How Automated Document Matching Works

Separate from DIF scoring, the IRS’s Automated Underreporter (AUR) program cross-references the income shown on your return against the 1099s, W-2s, and other information returns filed by third parties.

When there’s a mismatch — you reported $80,000 in freelance income but payers reported $95,000 to the IRS — the AUR program generates a CP2000 notice. This is not an audit. It’s a proposed adjustment based on the discrepancy. The IRS gives you 60 days to agree, disagree, or provide an explanation.

CP2000 notices are the most common IRS contact taxpayers receive. They’re also one of the most misunderstood — many people treat them like a final bill and pay immediately, even when the proposed adjustment is wrong or partially wrong. If you’ve received a CP2000, the proposed amount is not necessarily what you owe, and you have the right to dispute it.

IRS Targeted Enforcement Programs

Beyond the statistical selection process, the IRS announces specific enforcement priorities each year based on where it believes compliance problems are concentrated.

The current and recent priority areas include:

• High-income non-filers. The IRS has committed significant resources — backed by roughly $14 billion in new IRA enforcement funding — to identifying and pursuing taxpayers with incomes above $400,000 who have not filed returns. These cases often involve substantial assessments and may carry civil fraud penalties.
• Pass-through entity structures. Partnerships and S-corporations with complex or multi-layered structures have received increased attention. The IRS has deployed dedicated Large Partnership Compliance teams to examine these entities.
• Digital assets. Form 1099-DA went into effect for brokers beginning in 2025. The yes/no digital asset question has appeared on the front page of Form 1040 since 2019. The IRS treats unreported cryptocurrency transactions as a known compliance gap.
• Foreign financial accounts. FBAR (FinCEN Form 114) and FATCA (IRC § 6038D) disclosures remain a priority. FBAR penalties — up to $10,000 per non-willful violation per account per year — make this one of the higher-stakes areas of IRS enforcement for taxpayers with international ties.
• Research and development tax credits under IRC § 41. The IRS has identified abusive R&D credit claims as a significant compliance issue, particularly claims promoted by third parties on contingency. These are a Dirty Dozen list target and subject to heightened scrutiny.

Related-Party and Promoter Examinations

If someone you did business with gets audited, the IRS may audit you as part of the same examination.

This happens when a promoter is investigated, when a partnership or S-corporation is examined and the IRS pulls the returns of partners and shareholders, or when a contractor or vendor relationship surfaces during a field audit. You don’t need to have done anything wrong to be drawn into this kind of examination — your name appears on a return or transaction that the IRS is already looking at.

Related-party examinations can move faster than standard audits because the IRS agent is already familiar with the underlying transactions. If you learn that a business partner or promoter is under examination, it’s worth getting ahead of it rather than waiting for a notice.

Random Selection

A small percentage of returns are chosen for audit purely at random, with no audit trigger at all.

These random examinations are used for statistical sampling — the IRS needs updated compliance data to recalibrate the DIF algorithm and its enforcement priorities. If you’re selected randomly, the audit is not a signal that something is wrong with your return. That said, a random audit is still a legal proceeding and should be handled the same way as any other: with records organized, scope controlled, and ideally with representation.

What to Do If You Receive an Audit Notice

An audit notice is the beginning of a process, not a finding — and the type of audit matters a great deal for how you respond.

The three main audit types are: correspondence audits (conducted entirely by mail, typically for a single narrow issue); office audits (you or your representative meets with an IRS examiner at an IRS office); and field audits (an agent comes to your home or business — the most intensive format, typically reserved for complex returns or businesses). The scope of a field audit can expand significantly depending on what the agent finds, which is one reason representation matters.

As a general rule: don’t respond to an IRS audit notice without first understanding what’s being examined and why, and don’t meet with an IRS agent without representation. Statements made to examiners can be used to expand the audit into years and issues that weren’t originally at issue.

Frequently Asked Questions

How does the IRS select returns for audit?

The IRS uses three main mechanisms: DIF scoring (a statistical algorithm that compares your return to similarly-situated taxpayers), automated document matching through the Automated Underreporter program, and targeted enforcement programs aimed at specific income levels, industries, or transaction types. Most returns are never reviewed by a human. A small percentage are chosen randomly for statistical purposes.

What is a DIF score and how does it affect my audit risk?

The DIF (Discriminant Function System) score is a number the IRS assigns to every return, based on how much your deductions, income, and ratios deviate from statistical norms for your income level. Higher deviation means a higher score and greater likelihood of selection. The IRS doesn’t publish the formula, but the underlying driver is comparison to similarly-situated taxpayers — not the absolute size of any single deduction.

Is a CP2000 notice the same as an IRS audit?

No. A CP2000 is a proposed adjustment generated by the IRS’s Automated Underreporter program when your reported income doesn’t match information returns filed by third parties. It’s not a formal audit under the examination procedures. You have 60 days to respond, agree, or dispute it — and you should review the proposed adjustment carefully before paying, because the IRS’s proposed amount is often not what you actually owe.

What should I do when I receive an IRS audit notice?

Read it carefully to identify what type of audit it is, what year or years are at issue, and what the deadline is. Don’t respond without first organizing your records for the issues raised. In most cases, responding through a representative — rather than directly — limits what you say to the IRS and helps keep the audit scope from expanding beyond the original notice.

If your return has been selected for examination, our IRS audit defense page covers what to expect at each stage — or read our complete guide to IRS audits for a full breakdown of the process. If you’d like to talk through your specific situation, book a free 15-minute call.