The IRS reviews your tax return in stages, and almost all of it happens by computer before a human ever sees the filing. Automated systems check your arithmetic, match your reported income against what employers and banks separately told the IRS, and score every return for the likelihood that an audit would change your tax. Fewer than 1% of individual returns end up in a formal examination,1Internal Revenue Service. IRS Data Book, 2024 but knowing what each stage does tells you what a notice actually means and which deadlines are running against you.
The First Stop: Automated Math and Clerical Checks
Your return lands in the Individual Master File, the IRS’s central database for individual taxpayer accounts. The system pulls in data from paper and electronic filings, verifies your Social Security number against Social Security Administration records, and checks your address using third-party software.2Internal Revenue Service. PIA ID Number: 7483 Individual Master File (IMF) At the same time, the Math Error Program scans for arithmetic mistakes, mismatched filing statuses, and dependents already claimed on another return.
When the system catches one of these straightforward errors, the IRS can adjust your tax or refund immediately without opening an audit. A separate statutory provision treats math and clerical corrections differently from substantive disputes: the agency sends you a notice explaining the change, and that’s it.3Office of the Law Revision Counsel. 26 USC 6213 – Restrictions Applicable to Deficiencies; Petition to Tax Court
You then have 60 days from the date on that notice to request that the IRS reverse the adjustment. If you make the request in time, the IRS has to undo the summary assessment and follow regular deficiency procedures if it still disagrees.3Office of the Law Revision Counsel. 26 USC 6213 – Restrictions Applicable to Deficiencies; Petition to Tax Court Miss that 60-day window and you lose the right to challenge the correction in Tax Court. It’s one of the shortest deadlines in the tax system, and most people don’t realize the clock has started.
The Scoring Algorithm That Flags Returns for Review
Once your return clears the math check, it runs through an algorithm called the Discriminate Function System, or DIF. The system assigns every return a numerical score estimating how likely an audit would be to change your tax. A companion model, the Unreported Income DIF, specifically scores the probability that you left income off the return.4IRS.gov. The Examination (Audit) Process
Both scores draw on historical patterns from audits of similar returns by profession and income range. High-scoring returns get routed to a human examiner who decides whether the flags warrant an actual audit. The IRS keeps the formulas secret, so no tax professional can tell you exactly what triggers a high score. The patterns that consistently draw attention are the familiar ones: unusually large deductions relative to income, big year-to-year swings, and round-number entries that suggest estimation rather than records.
How Audit Odds Change with Income
Your income level moves the odds significantly. For the 2022 tax year, examination coverage broke down roughly like this:1Internal Revenue Service. IRS Data Book, 2024
- Under $25,000: 0.4%, elevated because many returns in this bracket claim the earned income tax credit, which the IRS scrutinizes closely
- $25,000 to $200,000: 0.1% to 0.2%
- $200,000 to $500,000: 0.1%
- $500,000 to $1 million: 0.6%
- $1 million to $5 million: 1.1%
- $5 million to $10 million: 3.1%
- Over $10 million: 4.0%
These figures cover returns still inside the normal three-year audit window, so the percentages may tick up as more examinations close. The overall picture is stable, though: most working- and middle-income filers will never be audited, while seven-figure returns face meaningfully higher odds.
Document Matching: The Other Automated Track
Separate from DIF scoring, the IRS runs an entirely different check called the Automated Underreporter program. Every employer, bank, brokerage, and other payer that sends you a W-2 or 1099 sends a copy of that form to the IRS. The AUR system matches those third-party reports against what you reported on your return.5Internal Revenue Service. 4.19.3 IMF Automated Underreporter Program When the numbers don’t line up — a brokerage reports $8,000 in dividends and your return shows $3,000 — the system flags the mismatch.
Matching runs several months after the filing deadline, because the IRS needs time to collect and process the third-party documents. A mismatch doesn’t automatically mean anything was wrong: a 1099 may have been issued in error, or income may have been reported on a different line than the computer expected. But mismatches generate cases that tax examiners then review.6Internal Revenue Service. Automated Underreporter (AUR) Questionnaire
If AUR flags your return, you’ll get a CP2000 notice. This is not technically an audit; it’s a proposed adjustment. The notice identifies who reported the mismatched amount, what the discrepancy is, and how it would change your tax if the IRS’s figure is correct.7Internal Revenue Service. Understanding Your CP2000 Series Notice You generally have 30 days to respond, either by agreeing with the proposed changes or by sending documentation showing why your original numbers are right.8Taxpayer Advocate Service. Notice CP2000
Cryptocurrency Reporting Expands Starting in 2025
The matching net is getting wider. For transactions on or after January 1, 2025, cryptocurrency brokers must report gross proceeds to the IRS on a new Form 1099-DA. For transactions on or after January 1, 2026, brokers must also report cost basis for covered digital assets.9Internal Revenue Service. Final Regulations and Related IRS Guidance for Reporting by Brokers on Sales and Exchanges of Digital Assets The AUR system will start matching your reported crypto gains against broker data the same way it already matches stock sales on Form 1099-B.
If Your Return Is Pulled for an Audit
Most individual audits are handled entirely by mail. During fiscal year 2017, roughly 71% of all IRS examinations were correspondence audits.10Taxpayer Advocate Service. Correspondence Examination You get a letter asking you to mail in documentation for one or two specific items — a charitable contribution, a home office deduction, a particular credit. The scope is narrow, and you never sit across from an examiner.
More complex returns can trigger an in-person examination. A field audit means a revenue agent comes to your home or business to review records on site. An office audit means you bring your records to an IRS office. These are far less common but broader in scope: the agent may look at multiple years and multiple issues and can interview you under oath. The IRS has statutory authority to examine books, records, and other data and to summon witnesses when determining the correct tax.11Office of the Law Revision Counsel. 26 USC 7602 – Examination of Books and Witnesses
In most audit situations, you have to prove that what you reported is correct — not the other way around. You meet that burden by producing records: receipts, bank statements, mileage logs, canceled checks, and similar documentation.12Internal Revenue Service. 13Internal Revenue Service. Taxpayer Bill of Rights
How Long the IRS Has to Come Back at You
The audit window isn’t open forever. Under normal circumstances, the IRS has three years from your filing deadline (including extensions) or three years from the date you actually filed, whichever is later.14Internal Revenue Service. Time IRS Can Assess Tax The window extends to six years if you omitted more than 25% of your gross income. If you filed a fraudulent return or never filed at all, there’s no time limit; the IRS can come after you decades later.
Your records should track these windows. The IRS recommends keeping supporting documents at least three years after filing. Hold them six years if anything about your situation could trigger the six-year rule. Records tied to a loss from worthless securities or bad debt should be kept seven years. Employment tax records go at least four years after the tax is due or paid.15Internal Revenue Service. How Long Should I Keep Records If you never filed a return for a year, keep everything for that year indefinitely.
What the Mail Actually Says
The IRS always initiates contact by mail, never by email, text, or social media.16Internal Revenue Service. Ways to Tell if the IRS Is Reaching Out or if It’s a Scammer An agent may call to confirm an appointment for a scheduled audit, but only after you’ve already gotten a letter. Any unsolicited phone call, email, or text demanding payment is a scam. The IRS does offer an online account where you can view certain digital notices and opt into email notifications for account activity,17Internal Revenue Service. Online Account for Individuals but the first notice about a review still arrives on paper.
After a formal audit, the IRS sends a 30-day letter laying out the examiner’s proposed adjustments and giving you 30 days to respond.18Taxpayer Advocate Service. Audit Report – Letter Giving Taxpayer 30 Days to Respond If the disagreement isn’t resolved, the IRS escalates to a statutory notice of deficiency, sometimes called a 90-day letter. That notice gives you 90 days (150 days if you’re outside the country) to file a petition with the U.S. Tax Court before the IRS can formally assess the additional tax.19Internal Revenue Service. Understanding Your CP3219N Notice The 90-day deadline is absolute. Miss it and the IRS proceeds with its proposed assessment.
Penalties and Interest When You Owe
If an audit determines you owe more tax, the bill rarely stops at the tax itself. Interest accrues from the original due date of the return, not from the date the audit concludes. The rate is the federal short-term rate plus three percentage points, compounded daily, running until you pay in full.20Internal Revenue Service. Quarterly Interest Rates Because the rate resets quarterly and compounds daily, drawn-out disputes get expensive.
On top of interest, the IRS may add penalties. The accuracy-related penalty is 20% of the underpayment when it results from negligence, carelessness, or a substantial understatement of income.21Internal Revenue Service. Accuracy-Related Penalty The civil fraud penalty is 75% of the portion of the underpayment attributable to fraud, and once the IRS proves any part of an underpayment was fraudulent, the entire underpayment is presumed fraudulent unless you prove otherwise.22Office of the Law Revision Counsel. 26 USC 6663 – Imposition of Fraud Penalty The accuracy-related penalty is by far the more common of the two; the fraud penalty carries a much higher evidentiary bar for the IRS.
If You Disagree with the Result
Before anything goes to court, you can request a conference with the IRS Independent Office of Appeals. Appeals operates separately from the examination and collection divisions that made the initial determination, and its job is to resolve disputes without litigation.23Internal Revenue Service. Appeals – An Independent Organization The process is less formal and less expensive than Tax Court, with no complex rules of evidence, and going to Appeals doesn’t waive your right to go to court later.
If Appeals doesn’t resolve things, or if you’d rather skip it, you can petition the U.S. Tax Court after receiving a statutory notice of deficiency. You have 90 days from the date on the notice to file (150 days if you’re abroad).19Internal Revenue Service. Understanding Your CP3219N Notice Tax Court is the only forum where you can challenge a proposed assessment without paying it first. Once the 90-day window closes without a petition, the IRS assesses the tax and shifts into collection.
Paying What You Owe
Agreeing with an audit result, or losing a dispute, doesn’t mean you have to pay the full balance immediately. The IRS offers structured payment options that can prevent more aggressive collection like levies and liens.
- A short-term payment plan covers balances you can clear within 180 days. There’s no setup fee for individual taxpayers regardless of how you apply, though interest and penalties keep running until the balance is paid.24Internal Revenue Service. Payment Plans; Installment Agreements
- A long-term installment agreement paid by direct debit costs $22 online or $107 by phone, mail, or in person. Low-income taxpayers, defined as those with adjusted gross income at or below 250% of the federal poverty level, have the setup fee waived entirely.24Internal Revenue Service. Payment Plans; Installment Agreements
- A long-term installment agreement paid by other methods (check, Direct Pay, or debit/credit card) costs $69 online or $178 by phone, mail, or in person. Low-income taxpayers pay a reduced $43 fee, which may be reimbursed under certain conditions.24Internal Revenue Service. Payment Plans; Installment Agreements
An active payment plan generally stops the IRS from levying wages or bank accounts while the agreement is in effect. Penalties and interest still run on the unpaid balance, so paying as much as you can upfront, even short of the full amount, lowers the total cost.