Six Steps to Ease the Pain of an Audit

Hit the Books

Outsourcing your bookkeeping won't keep the IRS at bay. You have to be able to defend your deductions and income. Miller recommends getting monthly financial statements and going over each line item with your expert. This can also help you plot strategy. "It's your GPS system," says Miller. "You can compare your projections to see where you are off and on. That way, you're prepared for the ups and downs way ahead of time."

If facing the IRS alone is too frightening, let your accountant handle it. Ochsenschlager recommends clients sign power of attorney over to him so he can handle the audits. Too often, he says, clients "have an attitude that an audit is adversarial in nature and get off on the wrong foot with the agent. They frequently don't understand the questions, and also often talk too much, which can raise issues in the agent's mind that don't exist."

Have Records on Hand

Should you get a letter from the IRS, don't panic. In most cases, they want to review information for that year. In some cases, they'll go back further. Ochsenschlager recommends holding onto three years' worth of records, six years if you're a cash-based enterprise.

And don't be afraid to stand up to the IRS, says Miller. When he ran the office supply company Quill Corporation, they were sued by North Dakota for sales tax collection. "But the only thing we had was we were distributing free discs to customers so they could keep track of their purchases," recalls Miller, then founder, president and CEO of Quill. "We won in the lower courts. North Dakota won in their supreme court. We appealed to the U.S. Supreme Court. After $1 million in legal fees, we won the case."

Continues Miller, "If North Dakota had won, we would have had to start collecting taxes in every state we had business, which would have meant having a state auditor in our business every year. We would have 50 audits every year. If you feel you're right and you're willing to fight, then you can prevail. Make sure you have good expert advice, top flight accounting and legal firms."