How to Prepare for a Tax Audit: What Individuals and Businesses Should Do Now

AVM DeMars
Aug 10
4 min read

Stone building facade with raised letters reading INTERNAL REVENUE SERVICE in sunlight.

An IRS audit is a review of a person's or organization's books, accounts, and financial records to make sure the information and amount reported on a tax return are correct.

Just because you receive a tax refund, it doesn’t mean you're safe from audit selection, and amending your tax return doesn't remove the original one from the selection pool.

Being selected for a tax audit requires detailed preparation to provide the IRS with the documents and tax evidence they're looking for. New York, New Jersey, and Connecticut residents should have this information readily available before year-end, while recordkeeping problems are still fixable.

In this blog, we’ll fill you in on:

Why the IRS may audit you
What individuals and businesses should do to prepare
What to do if you’re selected for an audit

What Triggers an IRS Audit?

The IRS can select you for an audit for one of two main reasons: a random, statistical screening or in connection with related examinations.

When It’s Random

The IRS builds statistical “norms” from a random sample of audited returns conducted under something called the National Research Program. In the event of an audit, your return is compared against the norms within that program.

When It’s Not

A “related examination” can pull your return into scope if it involves a business partner, investor, or other party whose return was separately flagged.

Regardless of the reason, being selected for an audit does not implicitly imply wrongdoing.

How the IRS Notifies You

The IRS will only ever initiate a tax audit by mail and conduct its investigation via mail or an in-person interview.

You will never hear from them via phone or email. Any unsolicited call demanding immediate payment is not a legitimate IRS contact.

You can always verify your status online or call either of the IRS phone numbers (866-897-0177 and 866-897-0161) if they’re included on your audit letter.

If you’re selected, you need to prepare carefully.

What Individuals Should Do to Prepare for a Tax Audit

These are three steps you should take if you’re flagged for an audit.

1. Organize Your Supporting Documents

The IRS might request:

W-2s and 1099s
1098 mortgage interest statements
Charitable contribution acknowledgment letters
Brokerage and mutual fund statements
Schedule K-1s (from partnerships, S-corps, estates/trusts)
Canceled checks or credit card statements supporting claimed deductions

2. Know Your Retention Window

For current and future tax returns, you should keep your records for:

3 years, for standard returns, starting from the date the return was filed
6 years, if your gross income was underreported by more than 25%
Indefinitely, for fraudulent or unfiled returns

3. Avoid Common Audit Red Flags

The IRS may flag your return if they see:

Charitable deductions that are large relative to your reported income
Home office deductions without clear documentation of exclusive business use
Unreported gig/freelance income from 1099-NEC or 1099-K forms
Cryptocurrency transactions
Cash-based side income that's inconsistently reported

What Businesses Should Do to Prepare for a Tax Audit

Business owners need to approach IRS audits a bit differently.

1. Separate Personal and Business Finances

You should always keep one dedicated business checking account, one dedicated business credit card, and run zero personal transactions through either one.

Mixed accounts are one of the most common reasons that legitimate deductions get disallowed on an audit. That's because reconstructed records without justifiable documentation don't hold up under audit scrutiny.

2. Document Everything, Not Just Totals

Especially during a tax audit, the IRS has even stricter documentation-handling rules that you need to follow.

Any receipts you referenced should clearly state what the expense was for and how it relates to your business.
All bills and invoices should include the payee's name, the type of service, and the date of payment.
Any canceled checks should be grouped together with the bills they covered.

As a general rule of thumb, no single document can stand on its own. The context matters just as much as the paper trail itself.

3. Reconcile Books Early On

Don't wait until the year is almost over to get your books in order.

Instead:

Reconcile payroll tax filings against W-2/W-3 totals
Confirm your 1099-NEC filings match vendor payment records
Review sales tax collected versus sales tax remitted (this is especially important for NY/NJ/CT businesses, as nexus rules differ by state)
Aim to close out your books in December, not January, to catch discrepancies before filing season

If you're selected for an individual or business IRS audit, it will play out a certain way.

What Happens If You're Selected: Office, Field, or Correspondence Audit

Depending on the specific circumstances of your situation, the IRS can have you go through a:

Correspondence Audit: This is handled entirely by mail, typically for narrower issues like a single deduction or a mismatched 1099.
Office Audit: This is an in-person interview at an IRS office.
Field Audit: Generally the most comprehensive type, an IRS examiner will visit your home, business, or accountant's office.

AVM DeMars Prepares You for an IRS Notice Before the Notice Arrives

Fixing recordkeeping gaps now, before year-end, ensures you get through a tax audit as calmly as possible. Doing it after a notice arrives means you're scrambling against a deadline.

AVM DeMars has spent 30+ years representing individuals, C-corps, S-corps, and estates in tax examinations across New York, New Jersey, and Connecticut.