Are Tax Audits Actually Random? – Avoid This Mistake + FAQs

According to a 2022 IRS Data Book, fewer than 1% of individuals get audited, yet audit triggers remain a mystery for most taxpayers.

No, IRS audits are not purely random. The IRS primarily uses algorithms and data analysis to select returns that show signs of errors or underreporting.

However, a small number of audits are chosen randomly as part of IRS research programs. By understanding what triggers an audit, you can file with confidence and avoid common red flags.

What you’ll learn:

• 🎯 Audit randomness explained – Whether IRS audits are luck of the draw or driven by specific factors.

• 🚩 Top audit triggers – Common red flags (like mismatched income or unusual deductions) that can attract IRS attention.

• 🗺️ State-by-state differences – How audit rates vary across U.S. states, and which states see the most (or fewest) audits.

• 🏢 IRS systems & terms – Key concepts like the DIF score, EITC audits, and CP2000 letters, plus how IRS departments flag returns.

• 📋 Real audit scenarios – Three real-life tax audit examples and outcomes, tips to avoid mistakes, and myths versus facts about audits.

How the IRS Selects Tax Returns for Audit

The IRS doesn’t pull tax returns out of a hat. Instead, it uses a mix of sophisticated screening and occasional random sampling to decide who gets audited. Here’s how the process works:

Random selection (National Research Program)

The IRS does conduct some random audits, but these are relatively rare. Through its National Research Program (NRP), the IRS randomly selects a small sample of returns to study overall compliance.

These NRP audits are used to update the “norms” for taxpayer behavior and refine the IRS’s computer scoring models. If your return is chosen in this random pool, it doesn’t mean you did anything wrong – it’s essentially an IRS quality check to gather data. (Of course, if an error is found in a random audit, you’ll still need to fix it and pay any tax owed.)

Computer screening and DIF scoring

Most audits result from the IRS’s algorithmic screening, not pure chance. Every tax return is processed through an automated system that compares your numbers to norms for similar taxpayers. The IRS’s Discriminant Information Function (DIF) score is a key part of this. The DIF system analyzes each return and assigns a score indicating the likelihood of inaccuracies.

Returns with high DIF scores – meaning something looks unusually off compared to IRS averages – are flagged for potential audit. For example, reporting very high deductions or losses compared to your income might push your DIF score above the threshold. A high score doesn’t guarantee an audit, but it increases the chance that an IRS examiner will take a closer look.

Related taxpayer audits and referrals

Sometimes your return can be selected because of links to another case. If the IRS audits someone you did business with (say, a partner, employer, or investor) and finds questionable transactions, they might audit related returns – including yours. These are called related examinations.

For instance, if your business partner was caught claiming a bogus deduction that also appears on your return, the IRS could extend the audit to you. Additionally, the IRS has a Whistleblower Office and takes referrals – if someone submits a credible tip (or a state tax agency reports a discrepancy), it can lead to a targeted audit. Referrals and related audits aren’t random at all; they’re very specific triggers coming from outside information.

Automated underreporter notices (CP2000)

Not all IRS inquiries are full audits. Many taxpayers first experience an IRS review through an automated underreporter program. If you forget to report income that was reported to the IRS (like a Form 1099 or W-2), the IRS computers will send a CP2000 notice proposing additional tax.

A CP2000 is not technically an audit, but it feels similar – you must provide documentation or agree to the adjustment. While a CP2000 notice is handled by automation, repeated mismatches or serious underreporting issues could escalate to a formal audit by an examiner.

IRS departments and flags behind the scenes

Different parts of the IRS handle different kinds of audits. For example, the Small Business/Self-Employed (SB/SE) division focuses on self-employed individuals and small business owners (like Schedule C filers), who often have more complex returns and potential red flags (e.g. cash income, high expenses). The Wage & Investment division handles simpler wage earner returns – many mail audits for things like the Earned Income Tax Credit (EITC) happen here.

Meanwhile, the Large Business & International (LB&I) division deals with corporations and very high-income individuals, often using targeted techniques rather than random selection.

If an audit uncovers possible fraud, the case can be referred to the IRS’s Criminal Investigation (CI) unit. Throughout all this, oversight bodies like TIGTA (the Treasury Inspector General for Tax Administration) ensure that audit selection follows the rules and isn’t influenced by bias. In short, the IRS relies on a mix of computer models and human expertise across these departments to pick returns that likely need a closer look.

Common IRS Audit Triggers and Red Flags

Most IRS audits are triggered by specific issues on a return – often called “red flags” – rather than by pure chance. Knowing these common triggers can help you avoid unwanted attention:

• 🚩 Unreported income or mismatches: The IRS matches the income you report to forms like W-2s and 1099s submitted by employers and banks. If something is left out or doesn’t match (for example, you forgot a 1099), it’s an instant red flag. Even a small underreporting can prompt an inquiry or CP2000 notice.

• 🚩 Excessive deductions or credits: Big write-offs aren’t illegal, but if you claim deductions or credits far larger than what peers at your income level claim, the IRS may take notice. For instance, a very high charitable contribution or medical expense relative to your income can stand out. Similarly, claiming tax credits you don’t actually qualify for (like the EITC or education credits without supporting documents) will draw scrutiny.

• 🚩 Schedule C (self-employment) losses: Being self-employed can raise audit risk, especially if you report losses year after year. The IRS watches for individuals who might be disguising a hobby as a business just to write off costs. A Schedule C with large losses offsetting other income, or one with unusually high expenses (like a home business showing thousands in travel or meals), is more likely to get flagged. Cash-intensive small businesses (food service, ride-share drivers, etc.) also face more scrutiny since cash income is easier to underreport.

• 🚩 100% business use of personal assets: Claimed a vehicle or home office as 100% business use? The IRS knows that’s rare. If you write off all your car expenses as business mileage (and you have no other personal vehicle), or you deduct a home office for a space that’s not exclusively used for work, those could be audit flags. The higher the percentage of use you claim for business, the more critical it is to have detailed records.

• 🚩 Large swings or anomalies: Unusual changes in your tax picture can invite questions. For example, if your income jumps or drops dramatically or you claim a brand-new large deduction this year that you never did before, the IRS may inquire to ensure it’s legitimate. Reporting perfectly round numbers for expenses (e.g. exactly $10,000 in supplies) might also look suspiciously like estimates rather than actual figures.

• 🚩 Cryptocurrency transactions: In recent years, the IRS has ramped up attention on virtual currency. If you traded crypto and didn’t report the gains, or answered “no” to the 1040 question about crypto while actually trading, that discrepancy is a trigger. The IRS conducts compliance campaigns on crypto and even issues summonses to get transaction data, so unreported crypto income can lead to an audit or tax notice.

• 🚩 Early retirement withdrawals or special tax breaks: Taking money out of retirement accounts early (before age 59½) with no penalty reported, or claiming uncommon tax breaks (like certain farming credits or fuel tax credits), can raise eyebrows. The IRS checks that early withdrawals meet an exemption or that special credits are legitimate. If something looks off, they might ask for proof or clarification.

• 🚩 Earned Income Tax Credit (EITC) claims: The EITC is a valuable credit for low-income working taxpayers, but it’s also notoriously error-prone. The IRS knows that around a third of EITC claims have mistakes. If you claim the EITC, especially with multiple children or unusual living situations, expect the IRS to verify qualifications. Many EITC audits are done by correspondence asking for documentation (like proof of a child’s residency or your income).

Types of IRS Audits: Mail, Office, and Field

If your return is selected for review, the IRS can conduct the audit in a few different ways. The nature of the issue usually determines the audit type:

Correspondence audits (by mail)

Most individual audits are handled by mail. In a correspondence audit, the IRS sends you a letter (for example, a CP series notice or Form CP75) asking for more information about specific items. These audits typically focus on straightforward issues that are easy to document, like proving you paid for a deduction or verifying a credit. You might be asked to mail in copies of receipts, Forms 1098 or 1099, or other proof. Correspondence audits are common for things like EITC claims, simple deduction verification, or income mismatches. They’re generally the least intrusive type of audit – you usually don’t meet an auditor face to face.

Office audits

An office audit means you’ll be invited to an IRS office for an in-person interview with an auditor. The IRS will tell you in advance which documents to bring (for example, bank statements, expense logs, or invoices related to the items under review). Office audits tend to cover issues that are too complex for mail but not so sprawling that they require a field visit. For instance, if you have a medium-sized business with some complicated deductions, the IRS might conduct an office audit to go over your records together. The atmosphere is professional – you sit down at the IRS office (often in a conference room) and answer questions with your documents on hand. You have the right to be represented by a tax professional (like a CPA or attorney) during an office audit.

Field audits

The field audit is the most extensive type. Here, an IRS revenue agent comes to you – typically to your home, business, or your accountant’s office – to perform a thorough examination. Field audits are reserved for the most complex or serious cases, such as businesses with substantial assets, complex tax shelters, or individuals with very high incomes and many moving parts on the return. In a field audit, the agent might spend days reviewing your records. They can tour your business site, ask in-depth questions, and examine original documents. Field audits are detailed, but they’re also relatively rare for typical wage-earning individuals. If you face a field audit, it often helps to have professional representation, as these audits can cover multiple years and tax issues at once.

No matter the audit type, the IRS will always start by notifying you via an official letter – they won’t call or email out of the blue. And in any audit, you have Taxpayer Rights (such as the right to appeal disagreements and the right to professional and courteous treatment). The type of audit just reflects how the IRS gathers the info it needs, from a simple mail correspondence to a full on-site review.

Comparing Random vs Targeted Audits

When it comes to audit strategy, the IRS balances random selection and targeted selection. Truly random audits (like those in research programs) treat every taxpayer the same, while targeted audits focus on returns likely to have problems. Each approach has advantages and disadvantages:

In practice, the IRS leans heavily on targeted audits because they yield more results for the effort. A targeted audit guided by data has a higher chance of uncovering unpaid taxes than a random pick. However, a small element of randomness (like selecting a few returns at random) can keep taxpayers on their toes – everyone knows there’s at least a slight chance of being audited, even if they follow typical patterns. This unpredictability can encourage overall compliance.

Meanwhile, targeted audits let the IRS focus limited resources where the money is – for example, auditing a high-earner or a business with suspicious deductions is more likely to bring in revenue than randomly auditing a school teacher. The downside is targeted methods might disproportionately hit certain groups (like small business owners or EITC claimants), which raises questions of fairness.

That’s why the IRS tries to strike a balance: use data-driven selection for efficiency, but also conduct some random audits and continually refine criteria to keep the system fair.

IRS Audit Rates by State

Where you live doesn’t change federal tax laws, but it can affect your chance of an IRS audit. Audit rates vary by state due to differences in income levels and how many residents claim certain credits or have complex returns. For example, states with more low-income taxpayers claiming the EITC tend to see higher audit rates (because many of those audits are correspondence checks on EITC claims).

In contrast, states with predominantly middle-income populations often have lower audit frequency. Below is a snapshot of audit rates per 1,000 tax returns in each U.S. state (approximate figures):

(Higher numbers indicate a higher likelihood of audit per capita. For context, the national average in recent years has been around 0.2–0.5%, which is 2 to 5 audits per 1,000 returns. Mississippi, for example, has one of the highest rates largely due to audits of EITC claims, whereas states like New Hampshire or Wisconsin are on the low end.)

It’s worth noting that state tax agencies also conduct audits for state income taxes (where applicable). If the IRS adjusts your federal return, they often share that info with your state tax authority, which could trigger a state-level audit or tax bill.

But a state like Florida or Texas (which have no state income tax) won’t audit you on income, only the IRS will. The table above is about federal IRS audits, which apply to all taxpayers regardless of state.

Real Examples: Tax Audit Scenarios

Sometimes it helps to see how audits play out. Here are three hypothetical audit scenarios that illustrate why an audit might happen and what the outcome can be:

Each scenario above shows a different trigger – unreported income, excessive expenses, and a credit claim – and how the IRS handled it. In all cases, keeping clear records and responding promptly was key to resolving the audit.

Notable Court Rulings on IRS Audits

Over the years, courts have weighed in on the IRS’s audit powers and taxpayers’ rights. Here are a few key rulings:

• United States v. Powell (1964) – The Supreme Court upheld the IRS’s broad authority to issue summonses and conduct investigations as long as it’s for a legitimate tax purpose. The IRS cannot harass taxpayers, but courts generally give the IRS leeway to ask for information relevant to an inquiry.

• United States v. Bisceglia (1975) – This case involved a “John Doe” summons (where the IRS didn’t know the taxpayer’s identity initially). The Supreme Court allowed the IRS to investigate a mysterious bank account with large deposits of old currency, even without a specific target. It confirmed that random or unusual investigations are permissible when the IRS is pursuing possible tax noncompliance.

• United States v. Clarke (2014) – The Supreme Court ruled that taxpayers can’t get a court hearing on an IRS summons just by claiming the IRS acted improperly; they must show some credible evidence of bad faith. In other words, if you think an audit or summons is being used to harass you or for some ulterior motive, you need solid proof before a court will intervene. This ruling reinforced that audit selection motives are usually not up for debate in court unless there’s clear evidence of abuse.

Bottom line: If the IRS audits you, how and why you were selected is generally not a winning argument to fight the audit – the focus will be on the facts of your tax return. However, these cases also affirm that the IRS’s power, while broad, is not unlimited; it must have a legitimate purpose and not violate taxpayers’ rights.

Tips to Avoid an Audit (Common Mistakes to Watch For)

While there’s no foolproof way to guarantee you’ll never be audited, you can greatly reduce your chances by filing carefully. Here are some tips to avoid common audit-triggering mistakes:

• ✅ Report all your income: Make sure you include every W-2, 1099, and other income on your return. The IRS has copies of those forms, so if you leave one out, their computers will catch it.

• ✅ Double-check your figures: Simple typos or math errors can cause hiccups. Use tax software or a professional, and review your entries. An oddly high number due to a typing mistake could raise a flag (and at minimum will be corrected by the IRS).

• ✅ Keep good records: Maintain receipts, invoices, and logs for any deductions or credits you claim. If you ever do get questioned, solid documentation can turn a nightmare into a minor inconvenience. Lack of records, on the other hand, can turn an audit into a costly ordeal.

• ✅ Be careful with large deductions: Claim every deduction and credit you’re entitled to – but be realistic. If you have unusually large write-offs for your income level, be prepared with documentation. Sometimes adding a short explanation or required forms (for example, attaching Form 8283 for large charitable gifts) can preempt questions.

• ✅ File on time and accurately: Late or amended returns don’t automatically trigger audits, but staying within deadlines shows you’re on top of your taxes. If you need an extension or have to amend, that’s fine – just do it properly. And always sign your return; unsigned returns can attract extra scrutiny or get rejected.

• ✅ Use a reputable tax preparer (if needed): Many audits happen because of obvious errors or flaky tax schemes. Avoid preparers who promise huge refunds by bending the rules. Ultimately, you’re responsible for what’s on your return, so choose advisors carefully and review your return before it’s filed.

None of these tips can guarantee you’ll skate under the radar, but they will help you file a return that looks accurate and substantiated – which is usually your best defense against an audit notice.

Tax Audit Myths vs Facts

There are plenty of myths swirling around IRS audits. Let’s set the record straight on a few:

• Myth: “Only rich people get audited.” Fact: No – while higher incomes do face more audits proportionally, the IRS also audits plenty of low-income filers (especially those claiming credits like EITC). In some recent years, taxpayers under $25k with credits were audited at similar rates to middle or upper-middle income folks.

• Myth: “Claiming a home office (or other deduction) guarantees an audit.” Fact: No single deduction automatically triggers an audit by itself. True, certain deductions (home office, large charitable gifts, etc.) might increase your risk a bit if they’re unusual, but millions claim them legitimately. As long as you qualify and have records, don’t be afraid to take deductions you deserve.

• Myth: “Filing an extension or amendment flags you for audit.” Fact: False. The IRS doesn’t use extensions as an audit trigger – many taxpayers file extensions for legitimate reasons. Amended returns are reviewed, but they are actually often less likely to be audited than original returns (unless the amendment is large and unexplained). It’s always better to correct a mistake with an amendment than to hope the IRS doesn’t notice.

• Myth: “If I get a big refund, the IRS will audit me.” Fact: The size of your refund isn’t itself an audit trigger. What matters is why you got a big refund – for example, if it’s due to claiming a credit that you weren’t eligible for, that could be an issue. But plenty of people get large refunds (through withholding or credits) with no audits at all.

• Myth: “IRS auditors will show up at my door unannounced.” Fact: Almost never. Except in rare cases of suspected fraud (handled by special agents), IRS audits start with letters and are scheduled. You won’t get a knock on the door from an auditor without plenty of prior correspondence. If someone claims to be an IRS agent and surprises you without any notice, it’s likely a scam.

• Myth: “Once you’ve been audited, you’re on a list and will be audited again and again.” Fact: Not necessarily. The IRS doesn’t blacklist people for repeated audits without cause. If your future returns have similar issues as a past audited return, those issues could get looked at again, but many people are audited once and never again. Conversely, if you have a risky pattern year after year, each year stands on its own merit for selection.

In short, don’t let myths scare you. Focus on filing an accurate return. The fear of an audit is often worse than the reality – especially if you keep good records.

FAQ: Frequently Asked Questions about Tax Audits

Q: Are IRS audits completely random?
A: No. Most audits are selected because something on the return stands out. Only a small percentage of returns are randomly examined for research purposes.

Q: Can I be audited even if I didn’t do anything wrong?
A: Yes. It’s possible to get picked in a random sample or have to verify something simple. Honest taxpayers can be audited, but if your return is accurate you have nothing to fear.

Q: Does the IRS tell you why you’re being audited?
A: No. The audit notice might list the items under review, but it won’t say “because your deductions were high.” The IRS generally doesn’t divulge its exact selection criteria.

Q: Do low-income people get audited too?
A: Yes. Audit rates are low for everyone, but low-income taxpayers (especially those claiming credits like EITC) do get audited at higher rates than you might expect.

Q: Will filing an amended return increase my audit risk?
A: No. Correcting your return is encouraged if needed. An amended return by itself isn’t an audit trigger, though the IRS will check the changes you made.

Q: Is a CP2000 notice the same as an audit?
A: No. A CP2000 underreporter notice is not a full audit; it’s an automated mismatch letter. You resolve it by mail. However, you should respond to avoid it escalating further.

Q: If I’m audited once, is it more likely I’ll be audited again?
A: Not necessarily. The IRS doesn’t automatically audit you again just because you had one audit. As long as future returns are accurate and don’t repeat past issues, your odds of another audit remain low.

Q: Can a state tax audit lead to an IRS audit (or vice versa)?
A: Yes. State tax agencies and the IRS share info. If one finds a major error (for example, the state adjusts your income), they usually inform the other. One audit can lead to another.