Preparing for an Audit: Documentation and Tips

Quick overview

An IRS audit is an examination of tax returns and supporting records to verify accuracy and compliance. Preparation focuses on gathering the right documents, creating an audit-ready packet, understanding why your return was selected, and knowing when to get professional representation. In my practice as a CPA with 15+ years handling audits, well-organized documentation often turns a stressful audit into a short, manageable review.

Why documentation matters (and how long to keep it)

The IRS usually has three years from the filing date to audit a return, but that window extends to six years if you omit more than 25% of your gross income and can be indefinite in cases of fraud or no return filed. For specific guidance on retention periods, see IRS Topic No. 203: How Long Should I Keep Records? (IRS) — https://www.irs.gov/taxtopics/tc203.

Practical retention rules I use with clients:

• Keep records supporting income, deductions, and credits at least three years.
• Keep records for six years if you fail to report more than 25% of gross income.
• Keep records for seven years for claims involving worthless securities or bad debt.
• Keep employment tax records for at least four years after the date the tax becomes due or is paid (consult IRS guidance for specific cases).

Common audit triggers

Returns are selected in a variety of ways: random algorithmic review, document matching (information returns like W-2s and 1099s that don’t match what you reported), and related examinations. Typical red flags:

• Large or unusual deductions relative to income (e.g., excessive charitable giving or business meal deductions)
• Mismatched income between your return and submitted 1099s/W-2s
• Cash-heavy businesses or high cash receipts
• Multiple years with losses or consistently reporting low income
• Unreported foreign accounts or cryptocurrency activity
  For more on red flags and triggers, see our related guide: What Triggers an IRS Audit: Common Red Flags.

Types of audits and what they mean for documentation

• Correspondence audit: Conducted by mail. The IRS asks for specific documents. Keep the response concise and provide only what’s requested. See our article: Correspondence Audit Walkthrough: What You Need to Prepare.
• Office audit: You meet an IRS agent at a local office. Bring originals and organized copies.
• Field audit: An IRS agent visits your business or home. These are more invasive; treat them as serious. Our Field Audit guide covers expectations: Field Audit Survival Guide: Interviews, Records, and Strategy.

Each audit type requires the same foundational documentation, but presentation and volume vary. Correspondence audits are usually limited in scope; field audits can expand into multiple years and related entities.

How to build an audit-ready packet

Create a concise packet that tells the story of items on your return. I recommend the following structure:

1. Cover letter: One page summarizing the return year, IRS contact details, and a short explanation of the materials enclosed.
2. Index/Table of contents: Numbered list of documents and page references.
3. Copies of the tax return(s): Include the original return and any amended returns.
4. Source documents, grouped by topic:

• Income: W-2s, 1099s, K-1s, bank deposit records.
• Bank and credit card statements: Highlight transactions that support reported amounts.
• Receipts and invoices: Organized by expense category (mileage logs, meals, supplies, subcontractor payments).
• Contracts, invoices, and ledgers: For business deductions and revenue.
• Proof of charitable contributions: Written acknowledgments from charities and bank/credit-card evidence.

1. Reconciliation worksheets: Simple spreadsheets that reconcile reported amounts to your source documents.
2. Explanatory notes: Short memos (1–2 paragraphs) explaining unusual items or accounting methods.

Tips for packaging:

• Provide clear labels and tabs; use PDFs for mail or electronic delivery.
• Avoid volunteering extra documents not requested. Send only what is asked unless a proactive explanation will help (e.g., a reconciliation that resolves a mismatch).

Records to prioritize (detailed list)

• Prior-year and current-year tax returns (minimum 3 years)
• All W-2s, 1099s, K-1s, and related information returns
• Bank statements and cancelled checks supporting deposits and payments
• Receipts and invoices that substantiate deductions
• Mileage logs and appointment calendars for business travel
• Payroll records, Forms 941/940, and state filings if you have employees
• Loan documents and proof of interest payments
• Documentation for asset purchases and sales (closing statements, depreciation schedules)
• Records of digital-asset transactions and exchange statements (if applicable) — keep clear buy/sell dates, amounts, and values

Communication rules and legal rights

• Respond within the deadline specified on the IRS notice. Missing a deadline can escalate the issue.
• Don’t volunteer extraneous information. Provide what’s requested and clarify that you’re available for follow-up.
• You have the right to representation. Consider engaging a CPA, enrolled agent, or tax attorney to communicate with the IRS on your behalf (see IRS taxpayer rights and representation guidance at https://www.irs.gov/advocate).
• Keep copies of everything you send and a log of all communications (dates, names, phone numbers).

How I manage client audits (practical workflow)

In my practice I follow a consistent checklist that saves time and reduces stress:

1. Review the IRS notice to determine scope and deadlines.
2. Pull a copy of the return and identify the specific items questioned.
3. Gather source documents and create a one-page narrative explaining each questioned item.
4. Reconcile reported amounts to the bank statements and ledgers.
5. Prepare a clean, indexed packet and send by certified mail or upload via IRS secure portal, keeping proof of delivery.
6. If the audit is complex or adversarial, escalate to formal representation and consider the appeals process.

This workflow has repeatedly reduced audit timeframes for clients because the IRS agent can follow the documentation trail quickly.

Common mistakes to avoid

• Sending disorganized stacks of papers without an index.
• Failing to reconcile differences between bank records and reported income.
• Over-explaining or volunteering unrelated records that prompt broader inquiries.
• Waiting until the last minute to collect documents — retrieval can take weeks for older records.

When to involve a professional

Hire a tax professional when:

• The audit involves complex business issues, undisclosed foreign accounts, or large adjustments.
• You’re uncomfortable communicating with the IRS directly.
• The IRS proposes substantial penalties or adjustments that affect multiple years.

An experienced CPA or enrolled agent knows how to present records, negotiate reasonable adjustments, and, if needed, prepare for appeals.

Appeals and next steps if you disagree

If you disagree with an audit finding, you can ask to speak with the auditor’s manager, request an Appeals conference, or file a formal protest depending on the envelope of the adjustment. The IRS Office of Appeals is independent of exam functions and can negotiate changes without immediate collection action. For procedural steps, consult IRS guidance on appeals or talk with your tax professional.

Digital organization tips

• Use accounting software (QuickBooks, Xero, or similar) to tag transactions and attach receipts.
• Use PDF scanners or mobile apps to capture and store receipts promptly.
• Keep a secure backup (encrypted cloud storage) and maintain an index or naming convention by year and category.

Final checklist before sending documents

• Does the packet include an index and cover letter?
• Are documents paginated and clearly labeled?
• Did you include reconciliations for large or unusual amounts?
• Do you have proof of delivery (certified mail receipt, portal confirmation)?
• Have you saved copies of everything you sent?

Additional resources

• IRS Audit overview and types: https://www.irs.gov/uac/audits
• How long to keep records (IRS Topic No. 203): https://www.irs.gov/taxtopics/tc203
• Taxpayer rights and representation (Taxpayer Advocate/representation): https://www.irs.gov/advocate

Internal guides from FinHelp that complement this article

• What Triggers an IRS Audit: Common Red Flags
• Correspondence Audit Walkthrough: What You Need to Prepare
• Building an Audit-Ready File: What Documents to Keep and For How Long

Professional disclaimer

This article is educational and reflects general best practices and common IRS rules as of 2025. It does not constitute personalized tax advice. For guidance tailored to your situation, consult a licensed CPA, enrolled agent, or tax attorney.