Don't fear an audit ... Be ready for it

Nothing will ruin your day faster than a letter from the Internal Revenue Service (IRS). That stark, white envelope … the simple, black font. You unfold the letter and the first sentence jumps right off the page: Your tax return has been selected for examination.

Business owners and self-employed taxpayers are the IRS' favorite targets. (Sorry, practice owners and relief doctors.) Those filing a Schedule C were four times more likely to have tax returns examined.

While you may not be able to avoid being audited, you should be confident in your filing and able to defend your numbers. Here's how:

Don't be fooled: Audit urban legends

“They never look at paper returns!” There is no evidence that paper filing instead of e-filing your tax return increases or decreases your risk of audit.

“You'll disappear if you file April 15!” Some people think you can avoid an audit by filing with the herd of millions of other taxpayers. There is no evidence that an extension causes the IRS to flag your return.

“Throw them off your scent!” The flawed idea is that the IRS catches a small mistake-such as underreporting interest income by $200. It sends a letter asking you to pay the difference and then throws the return in the “already reviewed” pile never to be looked at again.

Reduce your chance of an audit

Don't be greedy. How your return is prepared shouldn't be based on how much you want to spend on taxes. This process leads to deductions that just don't smell right. Make sure your deductions are defensible. 

Take a top-down look. Ask yourself, “According to my tax return, did I make enough money to cover housing, car, food, insurance and other living costs?” You better believe the IRS will wonder the same thing.

Be careful with expense categories. Some deductions-like automobiles, home offices, travel expenses, and meals and entertainment-are flashing red lights on your tax return. Make sure they're justified.

If you are audited ...

Have representation. A seasoned CPA is worth the cost in potential tax savings alone. Audits can be tricky, and the stakes can be enormous.

Watch your attitude. Don't appear arrogant, but also don't slink in like a guilty criminal-be a confident and self-assured rational person ready to defend his or her numbers.

Try to be organized. A pile of receipts will not confuse auditors. It will just tick them off.

Leave some money on the table. Showing that you didn't deduct every last dime-”My family went with me to the conference, but I didn't deduct their flights”-paints you as a reasonable and honest person.