Question: IRS Audits

The Hemmingway Financial Company prepares tax returns for individuals. (Moto: “We also write great Fiction”) According to the IRS, individuals making $25,000-$50,000 are audited at a rate of 1%. The Hemingway Company prepares five tax returns for individuals in that tax bracket, and three of them are audited.

a. Find the probability that when five people making $25,000 - $50,000 are randomly selected, exactly three of them are audited.

b. Find the probability that at least three are audited.

c. Based on the preceding results, what can you conclude about the Hemingway customers? Are they just unlucky, or are they being targeted for audits?