Math errors. IRS computers compare all computations for mathematical accuracy. When an error is found, the computer generates a correction notice, then the notice is mailed to the taxpayer. These notices are wrong about half of the time.
Mechanical errors. The same computers search for these errors. This may include the omission of a schedule or the failure to carry over a total. Correction notices are mailed if they result in more tax owed.
Unreported income. IRS computers compare 1099s and W-2s with the tax returns that are filed. A correction notice is generated if all income is not reported on the return. The IRS computer system computes the additional tax and mails out a correction notice that conveniently includes the tax, interest and (applicable) penalties.
The DIF System. The discriminate Function System is a sophisticated computer program that compares each entry of your tax return with national and regional statistical averages for persons in your same income category and profession. The program generates a DIF score for each taxpayer. The higher the score, the higher the audit probability. This is how most returns are selected for audit.