The IRS uses audits as a way to check for filing, reporting, and payment compliance. IRS audits are triggered based on special computerized scores known as DIFs (Discriminant Functions). DIFs are differences in numbers compared to what others in similar tax situations have. Tax situations that are commonly audited include:

• Disproportionately low income and high deductions
• Gross business receipts of more than $100,000 on Schedule C
• Large non-taxable items that are reported
• Excessive charitable contributions
• Barter transactions
• Tax shelters and abusive trusts
• Poorly documented investment or business transactions
• Claiming the earned income credit
• Tip income
• Deductions for often-inflated business expenses (i.e. auto costs, hobby losses, travel and entertainment expenses, and home office deductions)

Don't be afraid to take all deductions you are entitled to claim. If you have large, unusual deductions, attach explanations to the actual tax return. Be thorough, check the math, and sign your tax return. Then, mail the return with adequate postage.

If there is any difference in your records versus the records received from your financial institutions, clear it up before the tax return is filed and/or write a letter to the IRS explaining the difference.

If you are contacted by the IRS, do not volunteer any information to the IRS or to an IRS auditor that you are not legally obligated to provide. In addition, do not sign anything the IRS sends until you have read it, understand it, and agree with it. Respond to any notice from the IRS promptly, addressing clearly and specifically only the issues raised by the IRS. Keep a copy of all paperwork sent to the IRS and send all correspondence to the IRS by certified mail. File for an extension on a current tax return if being audited. If you file while being audited, the latest tax return becomes available for audit as well.

Consult with an accountant if you believe the IRS is wrong. If you are audited, consider being represented by a tax professional with experience in dealing with auditors.