Tax documentation is the evidence the IRS examines in an audit. Poor documentation invites IRS adjustments and penalties. Excellent documentation defends your positions and often results in audit closure with zero changes.
Documentation Essentials
For every income item and deduction claimed, you should have supporting documentation: Income: W-2s, 1099s, bank deposits, client invoices, business revenue records. Deductions: receipts, invoices, credit card statements, canceled checks, and contemporaneous business purpose documentation.
Red Flags That Trigger Audits
Large round-dollar deductions (suspiciously round numbers invite scrutiny). Inconsistent deductions year-to-year. High deduction-to-income ratios. Large charitable contributions without documentation. Large business losses from a side business that looks like a hobby.
Building Defensibility
The best defense is transparency. If you take an aggressive tax position, disclose it on Form 8275 (Disclosure Statement) to show transparency. The IRS respects taxpayers who are upfront about aggressive positions; they disrespect those who hide them.
Professional Preparation
A CPA or tax professional should retain documentation proving their review and analysis of your return. If audited and the IRS questions a deduction, the professional's workpapers showing their review and analysis of supporting documentation strengthen your defense.