The most important thing you can do is swallow the panic and prepare as much as possible. Start by finding a copy of the return in question and reviewing it to make sure you understand it. If it was prepared by a tax professional, you might have to go back for some clarification. You might even consider the value of having the tax professional accompany you to the audit.

Substantiation is the key to a successful audit. The Internal Revenue Service has the right to look at any records used to prepare the return, so get ready to bring them in. But do not bring in a crate of receipts for the auditor to wade through. This is one situation where neatness really does count. The more receipts and paperwork the auditor has to search through, the more errors he or she can find. When the examiner asks about automobile deductions, your ability to produce a file labeled "car" not only builds the appearance of credibility but also prevents the auditor from finding potentially problematic items in your crate. In addition, going through all that paperwork to organize it refreshes your memory concerning the year in question.

What to Bring to the Audit

If you cannot substantiate the income or expenses claimed on your tax return, the IRS is permitted to make estimates in addition to assessing a separate penalty for not maintaining adequate records. It is a fair guess that you do not want this to happen. Therefore, at a minimum, you should plan on bringing the following:

Bank Records. The auditor will most likely want to see bank statements, cancelled checks, and receipts from both personal and business accounts. If you made any payments for expenses by cash instead of by check, make sure you include any documentation.

Electronic Records. If you have charged business expenses on debit or credit cards, statements from the bank or credit card company will serve as proof of payment.

Accounting Records. If you kept a formal set of accounting ledgers and journals, bring them. However, the Internal Revenue Code does not require the maintenance of formal books for a small business, so you might only have a check book and cash register tapes.

Appointment Books, Logs, Diaries, and Calendars. Contemporaneous records of activities and expenses will help justify an expense to an auditor if it appears to be reasonable.

Usage Records for Listed Property. If you take deductions for equipment such as automobiles, entertainment equipment, computers, and telephones, which lend themselves to both business and personal use, the auditor may require records of business usage. If you have not maintained this type of log, reconstruct it by memory or by reference to projects.

Automobile Records. Deductions for cars used for both business and personal use are subject to great scrutiny by auditors. A log keeping track of the business portion is the best documentation, but gas and repair receipts with notations about business trips are helpful in substantiating your claims.

Travel and Entertainment Records. In order to deduct business travel and entertainment expenses, you must have a written record of the specific business purpose as well as a receipt. If you do not have a contemporaneous log or record, you are permitted to create one later, but be sure to tell the auditor of that fact in order to maintain your credibility.

Copyright 2009 LexisNexis, a division of Reed Elsevier Inc.