There is a great deal of stress associated with business audits, but with proper preparations the entire ordeal can be a lot less intimidating. There are few, if any, people that are unafraid of the IRS—even if you’ve done everything right as best to your ability. When you are notified of an audit you should respond to the IRS as quickly as possible. Once you send in a response it’s time to start preparing all necessary documents.
If you do not come prepared to your meeting the auditor is forced to estimate income and expenses, which comes with a separate penalty for poor record keeping. Don’t let this happen to you. Fear not the IRS with DGK Group on your side! We help obtain and assess all necessary information for small business audits.
What You Need To Find & Assess Prior To Your Audit
Tax Return(s) For Years Being Audited
The first thing to look at is the tax returns being audited. You’ll need to dig these returns out of your files in order to understand how you or your tax preparer assessed and came up with all listed figures.
The most important factor is the ability to back up all claims listed on your taxes with hard facts. If someone prepared your taxes you are in luck because they can help you go through all figures and explain things in plain terms.
All Records That Back Up Data On Tax Returns
The IRS has the legal rights to investigate any records used to help prepare tax returns. These records include receipts, checks and anything else that will validate the numbers you claimed.
It’s important that all of this information is well organized and easy to understand.
If you simply toss a huge envelope of random receipts at the auditor things aren’t going to go well. If the IRS has to start digging through your records, chances are they are going to make it worth their time by finding other things to go after you for.
Avoid needless digging by providing the facts in a clear and concise manner. Auditors don’t want to do more work than they have to. As a result, they tend to reward neat recordkeeping. Auditors are usually accountants by trade, meaning neat record keeping appeals to them. On the other hand, poor or messy record keeping raises huge red flags.
Proof Of Tax Benefits
You may need to do some research on tax laws in order to back up deductions or tax benefits you received. This is where a professional really comes in handy. No matter how much research you conduct, there’s no way to have the same background knowledge as a professional accountant with vast experience working with and around tax laws.
What To Bring To Your Audit
The items you are required to bring to an audit should be listed on your audit notice. The most basic documents required include:
Bank Statements & Receipts
You will need to bring bank statements for both personal and business accounts in your name. Even canceled checks or invoices should be kept in your records and brought with you. Any payments made in cash should be backed up with receipts, handwritten notes, petty cash vouchers or some other form of proof.
Books & Records
Tax code laws state that small businesses don’t have to maintain formal books, but that doesn’t mean an auditor won’t try to tell you otherwise. It is legal for a small business to keep all records using a checkbook, cash register tape or other documented measure. If you do maintain more formal and detailed records be sure to bring them, as they can be very helpful.
Print out bank and charge card statements in order to produce proof of payments and expenses. These electronic records must list the amount, date, name and address of payee. These details are not always included in online bank statements, which is why other forms of record keeping remain so important.
Appointment Books & Logs
If you schedule appointments your business likely maintains an appointment book or log full of services provided throughout the year. If this helps back up some of the things listed on your taxes, bring it along. If the entry appears logical it may be accepted as proof.
Records Of Office Equipment
‘Listed property’ used for both business and professional purposes include computers, cell phones and vehicles. This category does not include materials used strictly for business. If equipment is used for both business and pleasure the auditor may request a copy of all records of usage. If you don’t have records of this, you’ll have to create a working list from memory using things like documented projects as reference.
If you use vehicles for business make sure to keep careful record of expenses and uses. For instance, a collection of fuel receipts marked with the use of the vehicle at the time of filling up. You could also add up all gas receipts and then divide the total number by the gas mileage your vehicle gets in order to show mileage traveled.
Travel & Entertainment Records
If you included travel and entertainment expenses on your taxes make sure to bring documented proof of these charges. In order to be considered valid you need written record as well as receipts. Keep detailed logs of all business expenses as you go to help make this less challenging.
Learn about the common misconceptions with IRS Tax Audits here
DGK Group is here to help make your audit go smoother, reducing your risk for paying steep back taxes and fees. Contact us today to learn more.