The 33-year-old will go up against Jamaican sprinter Usain Bolt and South Africa's 400m star Wayde van Niekerk.
The women's award is between Ethiopia's 10,000m champion Almaz Ayana, Jamaican sprinter Elaine Thompson and hammer thrower Anita Wlodarczyk from Poland.
The awards will be presented in Monaco on 2 December.
The three athletes in each category were shortlisted from an original list of 10 announced last month following a vote of representatives from all sections of the sport and members of the public.
Farah secured a historic 'double double' by retaining both his 5,000m and 10,000m Olympic titles in Rio.
Bolt sealed the 'triple triple' in Rio, winning his third Olympic title in the 100m, 200m and 4x100m relay while Van Niekerk became the first man to run sub-10 seconds for the 100m, sub-20 for the 200m and sub-44 for the 400m, breaking Michael Johnson's 17-year world record on his way to Olympic gold.
Paula Radcliffe, in 2002, was the last British athlete to win one of the IAAF's end-of-year awards while the last Briton to win the men's award was triple jumper Jonathan Edwards in 1995, the year in which he jumped 18.29m - still the world record.
Great Britain's Olympic champion Mo Farah is one of three athletes still in contention for the men's IAAF World Athlete of the Year award.