How should you prepare for your IRS audit?

If the words “IRS audit” strike terror in your heart and every other part of your body, you are not alone. Debt.org reports that slightly more than 1 million taxpayers face an audit every year.

Before you panic, however, keep in mind that an audit notice does not imply that the IRS suspects you of criminal activity or of deliberately making a mistake on your tax return. Rather, the IRS computer system may have randomly selected your return. Alternatively, an agent may think something on your tax return is out of the ordinary.

Common audit reasons

The most common reasons you may be audited include the following:

  • Your claimed income fails to match your W-2 or 1099.
  • You took a home office deduction.
  • You claimed unsubstantiated business use of your vehicle.
  • You claimed rental losses.
  • You claimed hobby-related deductions.

Audit preparation

Your audit notice will list what types of documents the IRS wants to examine. Often these consist of such things as the following:

  • Your pay stubs
  • Your receipts
  • Your home mortgage statements
  • Your brokerage account statements
  • Your retirement account statements
  • Your tax returns for the previous year or two

Be sure to take copies of these documents, not the originals, to your audit. Also remember to show the examiner only the documents he or she asks for. Do not voluntarily produce additional documents.

You have the right to take an attorney, CPA or the accountant or tax preparation service that prepared your taxes with you to your audit. You also have the right to disagree with and appeal any finding the IRS examiner makes.