Struggling To Audit Proof? Here Is How To Make It a Daily Routine
Audit proofing protects your business, and you from losing an IRS audit. It also protects you from having your tax write-offs being denied by the IRS. However, talking about audit proofing is one thing, and actually doing or practicing it is another. In order to succeed in actually doing it, you need to make it a daily routine. This article will help you understand a few tips that you can use to make audit proofing part of your daily life.
Here is what to remember about audit proofing
The process of audit proofing is systematic, it is not random. Therefore, you, as a taxpayer needs to understand that you ought to work with your own processes. These must support what the tax code expects from you as a taxpayer. I could have said more about the tax code, but honestly, it is too long for most taxpayers’ liking. Therefore, tax professionals, like myself, spend hours flipping through it so we give you relevant information, according to your needs.
As such, whether you received a tax notice, or are not sure about your itemized deductions, instead of trying to read the tax code on your own and try to fix your tax mistakes, call a tax professional for complete help. It actually saves you a lot of trouble – and money, if that was your initial concern.
Nevertheless, what are the most important things to remember about audit proofing? These are;
- Internal controls
Do you have your own household budget? Do you keep tax records in your house? Do you have your own internal control processes, both as a business and as a household? If you ask yourself these questions and can’t give a direct response, then you need my help. You need help because, without these three, it will be hard to substantiate your tax write-offs on any given day. I like the use of the phrase “in any given day” above because that is what happens when the IRS audits you. They never give you a heads-up. They just send you a notice any day, any time. Your best method of protection is audit proofing every day.
What does recordkeeping entail?
Budgeting and internal controls are straightforward. But when it comes to recordkeeping, it can confuse a few taxpayers because there is more than one set of activity/action/type of records involved. Tax records are diverse; hence, they need a further explanation. This helps you to fully embrace the idea of audit proofing daily, knowing fully well what to do with each type of record.
As such, tax records include receipts, invoices, and any paperwork relating to your income and expenses. Recordkeeping, therefore, is the process of systematically storing/keeping these records. Some taxpayers keep their records in a safe, some do keep them in a box inside an office or storeroom. These are just physical examples where records are kept. Many taxpayers now embrace technology and are making digital copies of all their tax paperwork. Keeping them online makes them readily available, in case the IRS wants to see them. Also, it protects them against theft, destruction, and loss.
When keeping records digitally, remember the word ‘systematic’ in defining this process. It has to follow a certain order. Date your paperwork according to transaction date, type of record, etc. This helps you to easily access specific records when called upon. If you just save a paycheck from Nov. 2019 as Doc.1, how on earth will you find it a year or two later after saving other documents with almost the same name? It needs to be organized. This is how you make audit proofing part of your daily life. It is never going to be easy, but it will take your desire to save and build generational wealth the same way that rich people do.
What is tax paperwork?
I understand that many of you, individual taxpayers know receipts and invoices. But when tax professionals keep on mentioning tax paperwork, some of you raise eyebrows. What is it? Besides receipts, you must keep some documents that show that you made certain purchases, or that you own certain assets. For example, if you go to a doctor, the note or prescription you get for deductible medication is not a receipt. But it is part of the tax paperwork you must keep. The same applies to deductions you claim against interest paid on a mortgage. You need to use paperwork to prove that you are the owner of the property and that you are the one making those monthly payments. Finally, if you are claiming any children, you must also use paperwork to prove that they spend at least 18 hours in a day in your house. If they are your children, there must also be paperwork substantiating the same.
Therefore, it is not just the receipts you must keep, but the paperwork is also very important to validate your tax write-offs. Once you know how to identify these tax records – to process, and store them every day, you would have made audit proofing part of your daily life. This will make it easier for your taxes going into the future.
People have also asked the following
1. How do I process tax paperwork?
Processing tax paperwork is what you do with the receipts, invoices, checks, doctor notes, etc. as soon as you receive them. The first part is never to lose them. Secondly, if you are a business, give them to your bookkeeper. And if you are a household, have your own ‘household bookkeeping’ where you record all these transactions. Clearly show income and expenses when you record them. The next stage is to make digital copies before storing them physically in a safe place.
2. What Are Tax Audits?
Tax audits are when the IRS decides that there is something out of the ordinary with your filed return and decide to look at your income and expenses more closely. The IRS uses three main types of audits, and these are the mail audit, the office audit, and the field audit.
3. Why does the IRS audit people?
The IRS will decide to audit people if they see that something is off in their filed tax return. For example, if you run a small business and your expenses are way above the average in your line of industry. They may also decide to audit you if you claim too many deductions, or when there is one deduction item that has outrageously grown above what you claimed last year. For example, if you claimed travel deductions of $5,000 last year; claiming $20,000 this year will have you audited.
4. What is the difference between tax deductions and tax credits?
Tax deductions affect the taxable income – they reduce it so that the taxpayer is taxed on a reduced amount. Whereas tax credits affect the tax owed or actual tax amount. They reduce it dollar for dollar. For example, if the IRS calculates that you owe $500 tax, a $100 tax credit results in you paying $400.