Why organized records matter

Good records cut audit time, reduce penalties, and make it easier to explain deductions or credits. In my practice, taxpayers who keep an indexed audit file usually resolve state reviews with fewer adjustments and less stress.

Before an audit: build an audit-ready system

  • Create a master folder for each tax year and label consistently (e.g., “2024TaxAudit_File”). Include: filed tax return, supporting schedules, W-2/1099s, bank and credit-card statements, invoices, receipts, payroll tax records, sales-tax returns, and contracts.
  • Categorize (income, COGS, expenses, payroll, assets, sales tax). Use subfolders or tags so an auditor can trace a number from the return to its source document.
  • Adopt a retention policy and calendar. Store records for a minimum of 3 years after filing and keep 7 years for claims of loss or bad-debt deductions; retain property records until the period of limitations ends after disposition (IRS guidance) (see IRS Publication 583 and “How long should I keep records?”) (https://www.irs.gov/pub/irs-pdf/p583.pdf; https://www.irs.gov/taxtopics/tc203).
  • Use the 3-2-1 backup rule for digital files: three copies, on two different media, one offsite (cloud or physical). Prefer searchable PDF/A exports for receipts and invoices.

What documents states commonly request

States will vary, but commonly requested items include: filed returns, receipts and invoices supporting deductions, bank and credit-card statements, payroll registers and deposit records, sales-tax logs and exemption certificates, mileage logs, and contracts or leases. See our guide: Preparing for a State Tax Audit: Documents States Commonly Request.

How to keep digital records admissible and secure

  • Scan promptly at 300 dpi or higher; convert to searchable PDF using OCR and retain original file metadata where possible.
  • Keep an audit trail (file creation dates, who scanned, changes). Use reputable cloud services with versioning and encryption.
  • Redact unnecessary personal data before sharing (e.g., full SSNs) but keep unredacted originals in a secure location if requested by the auditor.
  • Follow state rules for electronic records acceptance; many states accept digital copies, but confirm if originals may be required.

Specific practices for businesses

  • Payroll: retain payroll registers, Form W-2 copies, 941s, state withholding filings, and proof of tax deposits.
  • Sales tax: keep exemption certificates, point-of-sale reports, resale certificates, and all refund/credit documentation.
  • Fixed assets: maintain purchase invoices, depreciation schedules, and disposition records until after the statute of limitations on the disposed asset.

Reconstructing lost records

If receipts are missing, reconstruct using bank or credit-card statements, third-party invoices, canceled checks, or vendor confirmations. If a disaster destroys records, follow the steps in our guide: Reconstructing Records After a Disaster.

Preparing an audit packet to deliver

Prepare a concise audit packet: a one-page cover letter, an index/table of contents that maps return line-items to supporting documents, and clearly labeled copies. If responding by mail, use templates and timing tips from our article: How to Respond to a Tax Audit by Mail: Templates and Timing.

Common pitfalls to avoid

  • Haphazard file names and missing indexes that force reassembly under auditor time pressure.
  • Over-reliance on memory instead of contemporaneous records (e.g., mileage logs kept after the fact).
  • Failing to back up digital records or encrypt sensitive information.

Quick audit-ready checklist

  • Master folder for each tax year with index
  • Original tax return and signed e-file authorization
  • Source documents for income and major deductions
  • Payroll and sales-tax records (if applicable)
  • Proof of tax payments and deposits
  • 3-2-1 digital backups and encrypted storage

Sources and next steps

Professional disclaimer: This article is educational and not personalized tax advice. Laws and state audit procedures vary; for specific guidance, consult a licensed tax professional or your state revenue department.