There is a fair chance you will never encounter any problems with the IRS, but that doesn’t make the thought of an audit any less intimidating. Small businesses are genuinely afraid of the IRS and, more specifically, tax audits. If you get the news that your business is getting targeted by the IRS, don’t panic. We’ve put together a guide for effectively passing an audit.
The key to surviving an audit is not to be intimidated, but instead, buckle up and get prepared. Whether you approach a tax audit alone or with the assistance of a tax professional, preparation is vital. Before you meet an auditor, thoroughly review everything to do with the tax return being audited.
Here is a quick checklist to keep you organized:
- Locate every record and detail that can help substantiate your tax return, including receipts, checks, and other expenses.
- Organize your records. An auditor will appreciate it if you take the time to put together the records in a logical, straightforward manner.
- Research tax law if necessary. The IRS may have scheduled the audit because of tax deductions or other benefits you claimed, so know your rights beforehand. This is where a strong tax professional can come in handy.
Business Records to Gather
Now that you understand how crucial organization is when it comes to the IRS, it’s time to gather the necessary paperwork.
Here is what you will need:
- Bank statements for all accounts related to the small business.
- All business checks, even those that were canceled.
- Business-related receipts (more details below).
- Invoices and sales sheets that may help verify income.
Prepare Your Books
During an audit, you can expect an auditor to want to see the books of a small business. Note that the tax code does not require a small business to keep a formal set of books, so if an auditor attempts to tell you otherwise to push you around, make sure you stand your ground.
Books and records can be as simple as documents that exist on a checkbook or cash register tapes, but you should always have some type of paper trail for all your income and expenses.
Prior to the appointment:
- Gather all books and records—formal or informal.
- Organize existing checkbooks and cash register tapes.
- Print out any books or records that are on your computer for a paper copy the auditor can review.
Even if your books and records are informal, something is better than nothing. When the IRS does not have adequate financial records, they are authorized to estimate your income and/or expenses, which rarely turns out in your favor. Additionally, the IRS may impose a separate penalty for failure to produce records regarding an audit, so try not to cut any corners.
Gather Appointment Books and Logs
Small businesses should (and need to) utilize everything to their advantage when facing an audit. Case in point: appointment books, logs, and/or diaries. The vast majority of small businesses have this type of information logged and stored somewhere. When you have additional paper trails that record who and what you were doing business with, it helps support your version of events when undergoing an audit.
Don’t Overlook the Small Details
Small businesses are generally scrutinized much more heavily than your typical single filer or joint filers. However, this can give you some advantages. There are several types of business expenses that small business owners can write off each tax year. This privilege can also become the source of why you are getting audited, so don’t overlook the little details.
Make sure you gather up paper records of business expenses, such as:
- Office rental space and utility charges related to the office.
- Office supplies and other tools used for a job.
- Business expenses, such as food needed for work.
- Mileage accumulated that was related to your work.
Tax Help on Your Side
When the IRS comes after you, it can feel like your small business is going against the world. It doesn’t have to be that way. Levy & Associates is on your side. Contact us today to find out how we can help you create an effective audit defense: Call 800-TAX-LEVY or visit www.levytaxhelp.com.