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Whether you are a filing privately or you are a small/large business, being hit with an audit by the IRS is no laughing matter. Here is a little check-list to ensure your documents are in order.
I came across this article on how to provide the correct documentation to the IRS. For the most part, audits will come in the mail, which will give you enough time to go over what needs to be sent. When substantiation is requested by the IRS, receipts,invoices,bank statements, cancelled checks should be provided.
In essence, you want to make your case as water-tight as possible. Avoid sending memos and letters from your tax advisers, even if they are regarding whether or not you qualify for a deduction. It is best to avoid handing over cards that the IRS could play against you.
If you are asked for all of your documentation regarding a particular tax year or deduction, remember that documents to be used in tax litigation are covered by work-product privilege, meaning, the IRS cannot gain access to them because they are to be used in anticipation of tax litigation. You can withhold these documents as well as any other documents that are protected by attorney client privilege.
If you are issued a subpoena, you may have legitimate footing to refuse such a request. It may also help to have your documents legended with "work-product" protections.
You may also consider having your attorney hire accountants, which can allow attorney-client privilege from an accountant as well.
Remember to keep all memos on tax matters out of your main tax file. It is best not to have one singular tax file. If you have more than one tax issue, have a separate file on each issue. They should not be lumped together, for the purposes of limiting disclosure.
If you are a company, keep legal tax memos, .etc at your counsel's office.
Work-product protection is more sound after your return is filed, which gives you a better argument if it comes down to litigation.