How to Prepare for a Tax Audit

It's no secret that the IRS is ramping up the number of audits in an attempt to close the "tax gap." That's the term the IRS is using to account for the difference between the taxes it believes it should have collected and what it actually managed to collect. For 2001 (the last year for which data is available), the tax gap was $350 billion.

While the chances of being chosen for an audit are still generally low, your chances of being selected are on the rise. Don't get caught by surprise. Here's what you need to know in order to be prepared.

The most basic question is what kind of audit the IRS is seeking. Audits can be divided into two general categories: paper audits and people audits.