A tax audit will be much less worrisome if you prepare for it.
Who's afraid of being audited by the IRS? Most everyone. The key to surviving an audit -- and even coming out on top -- is not to panic, but to prepare. If you go it alone, before meeting the auditor, thoroughly review the tax returns being audited. Be ready to explain how you or a tax return preparer came up with the figures. If you can't, then head for the preparer or another tax pro. Pinpoint problems backing up income sources or expense deductions. Research tax law, if necessary. You'll need to legally show your right to take tax deductions or other tax benefits claimed on your return.
Find all records that substantiate your tax return. As discussed, the IRS has a right to look at any records used to prepare your tax return. Organize your records for the auditor in a logical fashion.
Neatness counts. Forget about dumping a pile of receipts before an auditor and telling her to go at it. Messy records mean more digging, and more gold the IRS expects to mine. Conversely, auditors frequently reward good recordkeepers by giving these folks the benefit of the doubt if any problems arise. Neatness builds your credibility with the auditor even if you are not really all that honest. Order appeals to an accountant's mentality, I guess. Also, pre-audit organization of receipts, checks and other items refreshes your recollection for the audit meeting.
What to Bring to an Audit of Your Small Business
Be prepared to show that your tax return is based on good business records. Audit success means documenting your expenses. Proof should be in writing, though auditors can accept oral explanations. A list of items the auditor wants to see usually accompanies your audit notice.
At a minimum, the IRS will expect you to produce the following documents:
NOTE: Don't make the IRS guess. If you don't produce adequate records, the auditor is legally permitted to estimate your income and/or expenses plus impose a separate penalty for your failure to keep records.