Would You Be O.K. If You Were Audited?

18 Sep Would You Be O.K. If You Were Audited?

IRS Audit Rates/Statistics Based on Tax Filing Type

My business prepares every clients financials from day one to protect them in an IRS audit or prepare them for an internal audit.  Our policy is basic.

Keep the paper records (scanned and digitized or real paper) organized so that you can find them within one minute even 7 years from now.  Every transaction has three basic parts.  What did you buy?  How did you pay?  Why was it necessary?

Top  4  ways to be ready for an audit.

1. Don’t lie.  It is hard to get caught at something you didn’t do.
2. Have clear notes on anything unusual.  Internal Revenue Code allows for deduction of all reasonable and necessary business expenses. Test your expenditure.  For example, if your advertising requires you to buy a live donkey vs. a stuffed kid’s toy to be effective, then it is reasonable and necessary regardless of the amount spent.  If you buy a donkey for your advertising firm maybe you better make a note in the records of why in case the purchaser is no longer with your business at the time of audit to explain.
3. Paper records match the bookkeeping and the bookkeeping matches bank and financial statements. Verify this with regular reconciliations and sampling.
4. Don’t mix personal and business expenses.  This will limit the IRS questioning the legitimate expenses.
5. Store your records in a safe place at the end of the year when you turn over the filing.  Digitizing and storing the records electronically off site with a secure system and redundant back up is best.  If this isn’t feasible use plastic boxes and store in a dry environment.

Thanks to Peter Lamb, C.P.A. of Burke & Lamb, P.C. for his proofing.  Graph courtesy of http://www.taxdebthelp.com