IRS audits have declined steadily since the 1980s, but there are still some 1.5 million annual tax audits as of 2014. You still need to be prepared if you are selected for one of these tax audits. The first step is to figure out what kind of audit you are facing. Understand what you are required to do and what you don't have to comply with. Ensure that all of your requisite financial documents are in order and ready for the auditor.

Types of Audits

Individuals and small businesses are likely to face one of three kinds of audits. The first, most common and simplest is the Form 566(CG), also known as a correspondence audit. This audit is almost always issued to correct an error on your tax return or to seek explanation about information listed on the return.

The most comprehensive kind of audit you are likely to face is the Form 4564, or field audit. This is a full-scale investigation of your annual financial circumstances and takes place at your home or place of business.

Another audit you may see is the Form 3572, or in-office audit. This audit takes place at the IRS office and is in between the specificity of correspondence and field audits.

Legal Obligations

You need to know how long you have to keep your records and how far back the IRS can demand to search. Normally, any records over the prior three years are fair game. The IRS can be very intimidating. Be sure you understand your rights and that you are prepared.

Records and Documents

Most of the legwork for an IRS audit is performed in the months and years prior to your audit. You should have a computer file or desk drawer with your records and other important information. You need to be able to back up all of your claims in your tax returns, and you need to be able to produce them in an orderly fashion.

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