So what are the chances of being audited? Audit chances are increased when deducting home office expenses, charitable contributions, small business mileage claims, entertainment expenses, and certain medical costs. So especially if you make these types of deductions or if you missed paying your taxes at some point, be sure to have the right papers on hand.

The important point to remember is that during an audit, the IRS will want to see records of income and deductions.

Thus, tax information that you should hold on to includes:

-Tax returns

In addition to saving tax returns for audit purposes, tax returns can be useful for help with filing taxes in the current year such as in looking at deductions you have taken in the past that you might have otherwise forgotten to take.

-Home expenses

Be sure to keep all records having to do with your home including settlement papers and receipts for home improvement work that can explain the worth of your home because single filers can receive a $250,000 tax-free capital gain and married filers can receive a $500,000 tax-free capital gain on their sale of their home. However, this tax-free capital gain can only be realized if the profit of the sale falls within the tax-free limits. The tax-basis (value of the home when purchased) needs to be verified.

-Business records

-W-2s, 1099s, bank statements, brokerage statements, as well as evidence for expenses such as receipts, checks, and mileage records.

-Records of securities like stocks, bonds, options, and mutual funds. Don't throw away these records until 3 years after you sell the securities.

-Deductions such as childcare expenses, education expenses, travel costs, and automobile costs. Form 8275 is a Disclosure Statement you can file with your taxes to explain deductions to reduce chances of an audit.

-Mortgage interest you have paid (Form 1098)

How long should you hold onto these papers? The IRS has a statute of limitations that is 3 years from when you file your return. Thus, if you don't file your taxes, the statute of limitations doesn't begin. Also, you want to try to keep tax information for 6 years because if the IRS believes you underreported your income by more than 25%, they can audit you up to 6 years after you have filed the return.

Not having the right records when undergoing an audit can turn into a nightmare. Though the chances of being audited are not high, anyone can be chosen for an audit. Be prepared and the process can run quite smoothly.