How to Prepare for a Tax Audit

Loans and interest. An auditor may review loan paperwork, deposits, bank statements, credit card statements, receipts and canceled checks to verify that you used borrowed money only

Employee classifications. The IRS will review employee classifications on your return and check this data against time cards, job descriptions, benefit plans, invoices, canceled checks, contracts and other business records. Auditors will pay particular attention to independent contractor classifications, since many firms improperly classify regular employees as contractors. For more information about IRS rules, read The Proper Classification of Workers.

Payroll. Auditors will examine canceled checks, tax returns, deposits, business records and other forms to check for completeness, accuracy and timely filing. They will also review records documenting state, federal and Social Security (FICA) withholding, Medicare taxes, advance earned-income credit, unemployment compensation and workers’ compensation premiums. The IRS will also examine salaries and bonuses paid to owners and officers of your business to be sure they are legitimate and within industry standards.