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There are some basics anyone facing a tax audit should keep in mind. Naturally, each case will be somewhat different, but here are some very basic tips. The following are meant for small-business owners and sole proprietorships.

2008: Watch out for the "Tax Gap"

The IRS has set up a "National Research Program" to make sure small businesses are complying with the rules and regulations set for making tax payments, filing tax returns, and properly reporting everything they should be reporting. Their reasoning is that they suspect a "tax gap", meaning, they think there are lots of small businesses out there who got away with paying too little. They are going to be focusing most of their attention on the smallest of small businesses; sole proprietorships (the self-employed).

Now without getting into too much of a political debate, I'm not sure how the IRS determines they're missing $278 billion. They must take statistics from the previous year, account for various trends in small business growth....I'm no expert. But let's think for a minute here. How much will the IRS spend in creating and administering and otherwise bureaucratically regulating this National Research Program? Most likely, whatever they spend, it'll come out of what we paid in taxes.

In any case, the result of this initiative is that the IRS plans on visiting over 34,000 small businesses between now and the middle of 2010. And they plan on continuing on after that....that figure is just to give you an idea of what's going on. The Department of Revenue could be making a guest appearance as well, to make sure you, as a small business owner, have been paying your state income taxes and sales and use taxes.

What Do I Do if They Pick My Business for an Audit?

Some tax analysts are saying that being chosen for an audit does not necessarily mean your business is in trouble. In other words, it doesn't mean you're being investigated for criminal activity or fraud. It sounds more like they are sugar-coating it as a "We're just here to help you pay your taxes!" public service project. Sorry for the sarcasm...

In any case, make sure you have your accounting files in order. Be able to readily provide figures concerning your business' income and expenses for the past three tax years. You may not be audited on all three years, but in most cases, you will. Better to have everything prepared.

If you're nervous about not having certain proof of bank deposits and canceled checks, simply go to your bank and request statements

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