Adequate record-keeping is the only garlic that will keep away the IRS vampires. "Certainly, proper documentation will keep the IRS from digging deeper," says Pfister. But don't forget, it's not unheard of for the IRS to compare your records with those of your suppliers or outside vendors to see if the numbers are the same. For that reason, Pfister says, "it's a bad idea to try to recreate your records after you get the audit notice. There's not much of this information that can't be verified by outside sources." A simple example would be an employee's W-2 form, which can be verified through your company.
Pfister stresses that the most important thing during any audit is to have all your records in order and make sure they detail the flow of money and the purchase of assets under consideration. Without proper documentation, the IRS can disallow deductions-and, worse yet, go back to other years and check those tax returns as well.
Exemplary record-keeping or not, what right does the IRS have to ask how you acquired that Rolls Royce sitting in your parking lot? "Unfortunately," says Heaney, "if I list my vehicles as assets, it's well within the power of the IRS to ask how I acquired these assets."
What can you do to avoid a financial probe? Not much, it seems. It all comes back to one caveat: "You win the game by knowing the rules," says Heaney. To do so, he has two basic suggestions. For starters, your accountant should be educating you on proper record-keeping. In addition, it's a good idea to keep current with IRS literature.
There are IRS publications that detail national and regional guidelines for housing, the cost of living and a host of other expenses, which Heaney says will help you learn what to expect if the IRS comes knocking. To request information or IRS publications, call the Freedom of Information Reading Room at (202) 622-5164. And remember, as accountants are fond of saying, "Preparation for an audit begins with the preparation of the return." A word to the wise.