What Triggers an IRS Letter or Audit?

Only about two to three out of every 1,000 individual tax returns are audited annually, but millions of taxpayers receive IRS notices each year. Most of these communications stem from routine verification processes that compare information reported on a return with data the IRS receives from employers, financial institutions and other third parties. While most discrepancies result in a notice, certain anomalies or unresolved issues can lead to a more detailed examination, including an audit.

So, how does the IRS decide when a return warrants a closer look?

Income Matching

The IRS uses a sophisticated matching program to compare information reported on tax returns against W-2s, 1099s, K-1s and other third-party records, automatically flagging potential discrepancies. For example, if the IRS has a 1099 for interest not reported on your return, a letter is headed your way. If you agree with the income adjustment and pay the corrected tax, that’s generally the end. 

Payment Verification

Similar to the matching process, the IRS checks to make sure your reported estimated tax payments correspond with recorded payments. If they don’t match, you’ll likely receive a letter. If the IRS is correct and you made an error, you need only pay the corrected balance due after verifying the adjustment is accurate. 

For payment verification purposes, it’s a best practice to retain proof of payment, such as canceled checks or other payment confirmations, as discrepancies can sometimes result from simple data-entry errors.

Return Screening

The IRS scans every return through the Discriminant Information Function (DIF) system, which detects anomalies by comparing returns to data compiled from similar taxpayers. For example, it would be unusual for someone earning $50,000 annually to report $40,000 in charitable contributions. If such an anomaly is identified and flagged by DIF, a human agent reviews the return to determine whether more examination is warranted. 

While unusual deductions may receive additional scrutiny, taxpayers should confidently claim legitimate deductions that are properly documented.

What Happens Next?

If the IRS discovers a discrepancy, you’ll generally be notified via letter within a few months of filing electronically. While most notices resolve quickly, the IRS generally has three years from the filing date to further examine your return. Remember that most letters are straightforward to resolve, and our tax pros are here to help you navigate any complexities that may arise.