What steps can you take to avoid an audit?

There is nothing you can do to guarantee that you will never be audited.  However, by following three simple rules, you can minimize your chances of being audited and, if you are audited, minimize your chances of having to pay additional tax and penalties. Rule #1: Keep good records.  Many audits are by correspondence and if you quickly produce records to substantiate your deductions, you probably will not be transferred to a live (i.e. field) audit.  Rule #2: Keep and report all Forms 1099 and 1098 on your tax return, whether for income or for deductions, e.g. mortgage interest.  Rule #3: Keep all business and personal records and transactions separate.  Mixing your personal finances with your business income and expenses is the quickest way to lose an audit.