The IRS carries out three different types of tax audits:

The IRS can audit any business or personal tax return with three years of filing; it can collect back taxes owed for up to 10 years. So, if a 2018 audit of a return filed in 2015 finds discrepancies in a return or returns filed between 2008 and 2018, it can collect taxes on all those returns.

Get your records in order. IRS auditors can impose penalties on your business for poor records. Organize records by year and by type (income, expenses, pension plans, etc.). Make sure all relevant records are available. If they aren't getting busy acquiring them. Request bank or credit card records or information from vendors. If records aren't available, don't make them up!

Make every effort to reconstruct lost or destroyed records, and document your efforts. If there was a fire in your office, for example, document your attempts to reconstruct your business records, and show that you did backups of records.

Understand intentional vs. unintentional failures. Intentionally minimizing your business taxes by illegal means is tax evasion, and it's against the law. If you can show that your issue (no records for a particular year, for example) was unintentional, the IRS tends to be more lenient. On the other hand, they are much quicker to impose fines and penalties for intentional actions or omissions.

Make sure you don't have any personal expenses in your business records. You must keep personal and business expenses separate, with different bank accounts and credit cards and separation of business and personal travel expenses. Read more about separating business and personal expenses for tax purposes.

If you are being audited for having multiple years of business losses, you will need to show that you were working hard to make a profit and be a real business and not just a hobby. Selling and marketing expenses, keeping excellent records, will help you make your case.

The IRS looks more closely at certain kinds of businesses and business activity. For example:

• • Cash businesses, in which it's easy to under-report income. Cash businesses are more likely to be audited and it's difficult to prove income for a cash business.
  • Be prepared to show documentation of (1) business travel and (2) business entertainment and meals. These expenses are top targets for the IRS, and you must show the business purpose for each expense. The records must be contemporaneous (at the time) and include date, time, amount, who was there (if appropriate) and specific business purpose.