This is how much not audit proofing can cost you

If you don’t audit proof, you will be hurt, it is as simple as that. In this blog post, I will show an example of how this happens. I will show you how not audit proofing can hurt your bank account. The failure to audit proof your tax write-offs does have consequences. These are real monetary losses that you can experience any time after claiming deductions and tax credits that are not audit proofed.

Does it all comes down to money?

Indeed, it all comes down to money. There is a monetary value attached to every mistake that you make in your business. When it comes to your taxes, your returns filed are either prepared strategically so that you will gain some of your money back through tax refunds. Or, you will have claimed many itemized deductions, resulting in you paying a lesser amount in taxes. This proves that everything has a monetary value attached to it. It is better, therefore, to count this value on the plus side than when subtracting from your business. Consider the example below.

Let’s say you run a small business and have traveled to other states for business meetings. The IRS allows you to deduct travel expenses. You can also deduct the money you spend on meals while you are away for business. The amount can even go as high as $15,000. If you come back from your travel and just tell your accountant that you spent $15,000 and you need it deducted from your taxable income, you better have proof to verify those transactions you carried while on the business trip.

How do you prove this? You can use a travel log to enter each transaction as soon as it happens. You must also keep receipts that show where you made a purchase, when, and for how much. If you used services such as Uber, make sure that you have the receipts emailed to your work email address and then safely keep them somewhere. What your collection of receipts says must match what is in your travel log.

Now, if you cannot produce the above and the IRS decides to verify your travel expenses, you are likely to see your travel expenses being denied. The effect on this is that your taxable income increases by the $15,000. If you are on a 29% tax bracket, it means you pay an extra $4,350 towards taxes. This is the money that your business loses just on one deduction item. What about others, including tax credits? At the end of it all, you might lose tens of thousands of dollars in a single tax year!

It hurts because the money you lose on travel expenses alone can be used to hire a social media manager on a part time basis. Or, you can use it to renovate your office and so forth. In the end, your business fails to grow because you did not audit proof your deductions. I mentioned a travel log above. Well, there are a couple of ‘overnight’ tax professionals out there claiming to know all about deductions and the audit process. Well, don’t believe everyone who says can rescue businesses under audit or does have the right logs. If you want to know the real thing, join others in my upcoming Audit Proof Masterclass. I have prepared an excellent line-up for you to equip yourself with the right knowledge about saving your business.

What if I have done some form of bookkeeping and audit proofing?

I will be honest with you; audit proofing is not a job you can do in bits and pieces. This is a complex process that starts with a piece of paper where you write your own internal processes about handling transactions, income, and expenses. If you claim to have somehow done a half job on it, don’t ever think that you are safe. You are on your way to losing a couple of thousands of dollars in the next few years.

Some people also think that audit techniques applied by the IRS may result in them being safe. It is not true. Whether you go through a common audit or complex audit process, the results are likely to show that you erred when you filed your tax return. The IRS responds to this with heavy penalties or refusing to allow you to claim tax credits. In the end, you will owe more taxes.

People have also asked the following

     1. 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.

     2. Why the IRS audits 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.

     3. What happens when you disagree with the audit findings?

The IRS has procedures in place if you do not agree with audit findings. You may first appeal to the IRS (using channels stated on their website). If the appeal does not bring results you want, you may consider a tax litigation. Please note that you can only file a petition in Tax Court if you have received a Notice of Deficiency, or 90-Day Letter, from the IRS.

     4. Why am I being selected for an audit

The IRS selects you for an audit if they suspect foul play on your tax return. For example, if you claimed a child who may be claimed by someone else, this raises questions of fraud, so the IRS will select you for an audit.

     5. How do I know if the IRS received my response?

To know if the IRS received your response, always make a follow up with your courier service to know if the response was sent. That is if you sent physical documents. Use their specific services for follow ups.

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