An audit is an IRS examination of an individual or corporation’s tax return, to verify its accuracy. There are three types of audits: correspondence audits (the IRS mails you a request for additional information), office audits (an interview is conducted at a local IRS office), and field audits (an interview is conducted at your place of business, for a corporate tax return). Your likelihood of being audited depends on the details of your tax return, but the determination process is a closely guarded secret, so it’s difficult to reduce the chances of getting audited.
A better approach is to just prepare yourself to handle an audit in the event that one occurs. Experts recommend keeping good records to support all the information in a return. Keep all documents that show income, like W-2 forms, 1099s and account statements, and records that support deductions, like 1098s, and canceled checks and receipts, for a minimum of seven years. Records related to retirement accounts, investments, home ownership and improvements, and copies of old tax returns should be kept forever. The reason detailed and accurate bookkeeping is so important is that the burden of proof is on you, not the IRS.
If you’re audited, don’t panic. Answer the IRS’ questions, but don’t give them more information than they ask for. You may want to consider getting professional assistance, especially for an office or field audit. If you had an enrolled agent or CPA prepare your return, you may want to bring that person to the audit. Be sure to bring to the meeting all the paperwork necessary to support your return.
There are many legitimate ways to reduce your taxes, which are known as tax shelters, but there are also some illegal ones, often called abusive tax shelters. It is often difficult to differentiate between the two. We recommend erring on the side of caution or consulting a tax expert when in doubt.