By Collin Almeida

Police and auditors have one thing in common: they make even most honest, law-abiding citizens nervous. After all, who hasn't felt their heart jump at sound of a police siren close behind them even if they are obeying all traffic rules? Generally, same feeling comes over people when topic of an IRS audit arises.

Most taxpayers fear an audit because they don't know if they are adequately prepared. You may ask yourself: Did I save right documentation? Are all my deductions legal? Can I answer all of IRS's questions? For home-based business owner, however, these questions are even more pressing, so waiting for an audit to test their preparation is not best option. By following some easy guidelines, they can take guesswork out of keeping records.

Obviously, every deduction claimed needs to be documented, but many taxpayers aren't clear on what is adequate proof. The IRS does require more than just a few jottings in a notebook, but not much more. First, each deduction must be recorded with a copy of an invoice or bill. For example, if you are claiming your utilities expenses as a deduction, you need to keep a copy of each month's bill. In addition to proving expenses were incurred, you must also prove they were paid. So along with that utilities bill, you may want to staple canceled check or credit card statement that covered charges. Receipts, bank statements, and even invoices stamped "paid" also count as evidence that expenses were have been taken care of.

Child Deductions While custodial parent is generally allowed $3,050 per child for 2003 ($3,000 for 2002), this rule can be over-ridden. Parents can agree to allocate exemptions—for example: allowing your ex to have child's exemption won't preclude a custodial parent from claiming head of household filing status.