How to Prepare for an Audit of Your Income Tax Return

You don't need to panic if your tax return is selected for audit. In most cases it simply means that your return was randomly selected, or that your return was flagged because it had one or more items that require a closer look. Here are the most common reasons returns are flagged.

If you are self-employed, your chances of being audited increase.

If your income is much higher or lower than the previous year, someone will probably want to know why.

If you are trying to deduct expenses for a home office, or you are involved in a partnership, your return is more likely to be flagged.

If your income is mainly from tips or rentals, or if you have lots of money tied up in tax shelters, the government may be interested in learning more details about it.

If your return shows a high percentage of deductions for the amount of income reported, you may be audited and required to provide further explanations and proof.

If you have large money transfers that are not adequately explained on your return, you can almost surely expect your return to be flagged.

If someone reports paying you a large sum that does not show up as income on your own return; or if someone simply turns you in for a tax violation, chances are high that you will be audited.

If your annual income is over $100,000, or if you have had prior audits, your chances of being audited increase greatly.

It is impossible to avoid an audit if you are flagged for one, but you can reduce your chances of having one by making your return as complete and accurate as possible in the first place.

If, after you have done your best to be complete and accurate, you still receive a notice that you must appear for an audit, try not to take it personally. Auditors are not out to, "get you," only to recheck your return in your presence to be sure it is correct. If an error is discovered, on either side, ample opportunity is given to rectify the error so you are still not in danger of prison or any other dire consequence unless blatant fraud of some kind is present. In that case, prison may be a just reward.

Here are a few steps you can take before the audit to ensure that things run as smoothly as possible, and that your return will be quickly accepted by the agent assigned to you.

1. Recheck your return, looking for any questionable areas that might raise a question or need further explanation.

2. Arrive on time for your appointment. Be calm and friendly, and ask for clarification of anything you don't understand.

3. Unless otherwise directed, bring your current tax return, and your tax returns for the last three years.

4. Have proof of all deductions claimed on your return as these are likely to be areas for questioning by the auditor. Bring original receipts in a small envelope, and be prepared to bring them out if your auditor asks for them.

4. If you are involved in a partnership, bring records pertaining to the partnership agreement and bank records if they pertain to your audit.

When you are finally prepared for your audit, relax. Worrying will help you, and, guess what? Auditors are people just like you and me. The chances are that you will do just fine and be on your way quickly, done with the worry about taxes for another year. You should remember that most audits are short and simple, and end satisfactorily for both the taxpayer and for the Internal Revenue Service.

Suppose, though, that after your audit ends, you think you have been unfairly judged, or that a mistake has been made in your particular case? All taxpayers are entitled to file an appeal if they feel an unjust decision has been reached. If you fit into this category, don't hesitate to contact your local IRS for the proper form to use in filing an appeal.