How To Audit Proof Your Business.
Often, I hear entrepreneurs asking about the types of audits that the IRS can hit them with. They want to know what an office audit is, or what a face-to-face audit would feel like. Well, in as much as that information is important, I like to think that preparing yourself to never face it is key. Even when you do face it, you must be prepared to win, nothing else. And how do you ensure this? You must audit proof your business. In this article, I will introduce this important subject and then get deeper into it in the next article. As such, watch this space next week for the continuation of this topic.
What is to audit proof your business?
This is merely to ensure that your business is protected against audits. Which can mean any of these two, first, that you reduce the chances of the IRS ever picking you for an audit. Secondly, in the event that they select you for an audit, you must win it. This, therefore, is more of insulating your business against the risk of audits. This process eliminates unwanted issues such as math errors on your tax return. Doing this is not only to be safe against taxes, but also comes with several other benefits that we shall discuss shortly. See below.
Why must you audit proof your business?
The first thing that the process of audit proofing your business does is to instill a certain level of discipline in the entrepreneur running the business. And this has its own advantages. When you are disciplined, you do everything by the book. Even after your bookkeeper records all transactions, for example, you will always cross check if everything adds up. You will do this as a matter of principle, even if you see zero mistakes for years. I am saying this because, even when things seem to be highly organized for some time, a mistake can happen once and ruin everything. As such, don’t get tired of cross-checking numbers because your business depends on it.
Secondly, audit proofing your business protects your tax deductions and credits. In case you did not know, the IRS may make random selections of companies with returns that claimed more deductions. They may even do this when there is a group of returns with suspicious numbers. If yours happens to be part of that, you may receive an audit notice, which could be a mail audit. When it happens, you must be able to provide proof about all those transactions that led to the deductions. For example, if you made charitable donations during the year, there must be paperwork proving that. If not, well, you will be in trouble.
Finally, audit proofing your business helps you pay less taxes. How? Well, above, I mentioned providing supporting documents or paperwork for all deductions and credits you claim. Doing so will make all the deductions you claimed be accepted, unchanged. Many entrepreneurs who fail to prove their expenses are angry when they receive less tax refunds than they were expecting. Some of them even receive no refunds at all and end up owing more taxes. This is because they fail to prove their expenses. When your business went through this in the past year or years, it’s time that you hire a trusted bookkeeper. Bookkeeping, when done properly, is the foundation of clean tax returns that are backed by consistent numbers and paperwork.
Audit proofing your business is not some odd job you do with weird tools, covering up things, and so forth. But this is a systematic process you deliberately apply to all your business functions. You do this so that everything that you put down in your tax return is backed by a piece of evidence somewhere in your archives. In the end, it is all about recording and systematically storing all business information and transactions. This can be done electronically or physically. But, to keep copies in both formats will be the best thing to do. Also, remember that you are not proofing yourself against physical bullets, but against complacency – which can get you penalized. You do this so that when you pay federal taxes or state taxes, there won’t be any surprises when the IRS comes back to you saying that you owe unpaid taxes. This can happen when you missed some numbers in your returns and the IRS has found them through your bank or merchant accounts.
People have also asked the following:
1. What you need to know about IRS audits?
IRS audits are random. You just don’t know when, or how you will be audited. The best thing to do is to stay prepared and audit proof your business. Over the years, mail audits have been mostly used. When you receive your notice, respond as quickly and as accurate as possible.
2. How Long Does It Take? IRS Audit?
IRS audits move at different paces, depending on the type of audit you are going through. Mail audits are pacey, followed by office audits. But field audits last longer than the rest, lasting for up to a year, or even more.
3. How many people actually face IRS audits?
From past observations, the IRS audits around 1% of all tax returns filed. However, this could change given how much the IRS will be given more resources to upgrade their monitoring technology and hire more analysts.
4. What to Expect During an IRS Tax Audit & How to Prepare?
The IRS will obviously review your tax return for the current year and the past years if necessary. Therefore, have all paperwork ready – things such as receipts and invoices. Also, hire a tax professional to represent you in the audit. It makes things easier – way easier.
5. What are some tips for surviving an IRS audit?
Always start by hiring a representative before moving an inch. Together, you will prepare for the audit. And, during the audit, know your rights, but don’t argue too much with the IRS agent – stay within acceptable confines, which your tax professional will know.