Taxes and the IRS - Frequently Asked Questions   How can I prepare for an IRS audit before it happens?   Additional training and improved technology are available for examiners and revenue agents. This could mean more audits may be conducted on this year's returns than in prior years. Advances in government computer technology allow the IRS to more efficiently and effectively scrutinize tax returns during routine processing.  As a result, each year there is an increasing likelihood that you may receive an inquiry from the Federal, State and Local taxing authorities as to the completeness or accuracy of your income tax returns. "Audit-proofing" your tax return means knowing what the IRS will be looking for long before your tax return is prepared, and being in compliance with documentation and substantiation requirements. Three critical elements in the "audit-proofing" process are as follows: Substantiate revenue and cash receipts Substantiate your expenses, deductions, and cash disbursements Learn the points of law that apply to your tax return and document your point of view. Substantiate means to have "documented evidence" like a "receipt" to support a purchase, or an "invoice" to support revenue.  Substantiate may also mean documentation of business usage like automobile mileage logs.  The evidence should agree to your tax return.  A business should also have a "general ledger" which is a summary of all transactions during the year.  Tax examiners are impressed when they encounter taxpayers who are not only versed on the finer points of the tax law, but who are also totally prepared with all the substantiating documents to back up their deductions and support their revenues.  A tax examiner impressed with your cooperation and organization may be less inclined to probe deeper to find something wrong.   How long should I maintain tax documents?   Generally individuals and small business owners should keep receipts, invoices, bank statements, credit card bills, etc. for a minimum of four (4) years.  Generally the internal revenue service can audit tax returns going back for three (3) years; however, the IRS can go back six (6) years for tax returns with significant errors as shown below:   Determination of IRS Examination Statute of Limitations: Income tax returns = 3 years generally. Income tax returns with substantial income understatement (> 25%) = 6 years. Fraudulent return = NO limit. No return filed = NO limit. Certain records should generally be retained for longer periods as follows: Small Business/Self-Employed supporting documents - IRS recommends 7 years. Cost basis of property - based on retention period for year in which sold. Depreciable assets - based on the last year depreciation claimed on the asset. Deductions for bad debts or worthless securities - 7 years (IRC Sec 6511(d)(1)). Tax records that should generally be kept indefinitely include copies of tax returns, results of an audit, general ledgers and financial statements. Why is finding a good team of professionals important?   Whether you are embarking on a new start-up business or whether you are already a successful business owner, choosing a competent and compatible CPA, attorney and banker is critical.  Building a good working relationship with your professional advisors will give you "piece of mind" so that you can concentrate on what you do best - making a profit!  A good team of professionals will also maximize your chances of developing a successful business. There are a number of things to look for in an accountant, an attorney and a banker.  First, it is important that each of the professionals is someone with whom you can have an effective communication system.  Professionals who do not return your phone calls and are slow to get your work done will not be a good fit for you.  Second, your professional team must have vast experience that is compatible with your anticipated needs.  Choosing a CPA firm that concentrates on performing audits may not be a good fit to prepare your tax returns.  A divorce attorney may not be a good fit to help you form a new company.  A banker who works mostly with personal accounts will usually not be the best person to choose for your small business needs. Third, you should consider finding professionals who know one another and share existing clients. Knowing that your professionals already have a working relationship should minimize any concern you might have about differences in philosophies and business practices.  Professionals who regularly work together usually have an effective communication system. Finding the right professionals can lead to growth and success for your business; failing to do so could also mean the rapid demise of an otherwise great business idea.