When it comes to IRS audits, an ounce of prevention is definitely worth the proverbial pound of cure.
I wish I could tell you there's a magic solution to staying out of the cross hairs, but the reality is that lots of people get audited every year. This shouldn't scare you though, because there's some simple things you can do right now, even before you file a return, to protect yourself.
Most taxpayers can avoid an audit simply by keeping good records and preparing an accurate return. With the ever-changing nature of our tax laws, it's best to use tax prep software or an accountant to help with your annual filing.
Not surprisingly, software companies have put some extra resources around audit issues. TurboTax features an audit assessment tool that helps you identify areas of your tax return that might come under closer scrutiny. Both TurboTax and TaxCut also offer audit support after you file a return. TurboTax offers a self-help audit defense toolkit, while TaxCut will send an enrolled agent from a H&R Block office to represent you before the IRS.
Working with an accountant can help protect against audits too. We are trained to ask questions to make sure you qualify for various deductions and credits. And it also helps that accountants tend to keep a rather sizable paper trail, so finding documents when the IRS asks for more information generally isn't a problem. However, hiring a less scrupulous accountant can actually increase your chances of getting audited. But there's some easy ways to spot tax preparer fraud such as making up expenses or deductions out of nowhere, refusing to sign the tax return that they prepared, asking you to sign a blank tax form, or basing their fee on a percentage of your refund. Unfortunately, if a tax preparer files an incorrect return, you will still be on the hook for the underpaid taxes, so it's best to make sure your accountant is reputable.
Finally, here are some additional audit tips for specific tax issues. Corporations and small businesses can minimize the risk of audits by keeping good records, separating business from personal expenses, and by paying their owners a reasonable salary. Freelancers and creative professionals can help prevent an audit if their side-business is losing money by keeping enough records to prove they have a legitimate profit motive and plan to make their business successful. People who work from home are scared of claiming the home office deduction, although in fact this has become less of an issue, at least as far as I can tell from dealing with audits. And one last audit tip: if you donated cash or goods to charity this year, keep all your receipts!