To obtain an effective and simple means to regulate the microstructure and synergistically improve the mechanical properties and flame retardancy, maleic anhydride grafting ethylene-octene copolymer (POE-g-MAH) was applied as the compatibilizer to adjust the dispersion of each component for the intumescent flame retardant polypropylene-toughened blends (iPP/POE/IFR) with multi-phase and multi-scale. The impact of selective dispersion of IFR on the microstructure and properties of the composites was investigated systematically in this study. The results showed that the aggravation of IFR particle was inhibited and the interphase adhesion with the polymer matrix was strengthened along with the increase of POE-g-MAH content, while the dimension of POE-rich domains was reduced initially due to better compatibility, and increased afterwards resulting from the incorporation of the IFR particles. At higher loading of POE-g-MAH, IFR rather dispersed in the POE-rich domains with "core-shell" structure than dispersed evenly in the polymer matrix, which is benefit for the increase of impact strength. However, this selective dispersion of IFR is disadvantageous to form the continuous and stable charred layer with typical folded structure, which imposed undesirable effect on flame retardancy. The addition of compatibilizer should be in a proper range to obtain the simultaneous improvement on mechanical properties and flame retardancy. It is believed the results of the study provide important references for flame retarded olyolefin blends system.