The Dirty Truth of IRS Audits

It’s that time of year. Your taxes are filed or soon to be. The [potential] headache of preparing your taxes is almost over. But then a new form of anxiety sets in. Did you do everything correctly? Will the IRS want to take a closer look at anything? Will my small business be audited? Will I owe more money??

These are normal fears for small business owners. Because at the end of the day, a potential audit is stressful, disruptive, and possibly costly.

How can you avoid an audit? By taking the steps below throughout the entire year.

Why You Need to “Audit Proof” Business

The problem is that the fears small business owners have of audits are very warranted. The ugly truth is that the IRS presumes guilt, so you are not innocent until proven guilty in their eyes. They aren’t satisfied until they find enough evidence that you are in fact innocent. The result is that even honest small business owners can fail an IRS audit.

Basically, these types of investigations don’t care if you’re ignorant, made an honest mistake, or thought you were doing the right thing. They only care about meticulous records and making sure they are impeccably in order.

But don’t worry. There are steps you can take for your small business to ensure you pass any potential audit with flying colors.

Financial Records Need to Be Detailed and Comprehensive

The best way to ensure you can prove to the IRS that you are doing everything honestly and correctly (remember, you are presumed to be guilty) is to have excellent records. Collect, record, and organize information regarding your income, expenses, losses, and deductions. Do this throughout the year, not just close to tax time, or else it will be much more difficult to do right.

The law says to keep these records for up to three years, but it is to your benefit to keep them even longer. We recommend at least seven years.

Use a Bookkeeping Software

Cloud bookkeeping software keeps your records nicely organized, up to date, and lets you retrieve them quickly on demand. Software will help you save hours of compliance work every month and serves as your centralized hub for accounting information. That way, if the IRS has questions or wants to view certain pieces of information or receipts, you have easy to access to the right answers.

Always Use a Payroll Service

Discrepancies between payments and payroll tax withholdings are some of the most common red flags that kick off an IRS audit. Even a minor error can lead to serious fines, penalties, and interest. Using a reputable payroll service will ensure you establish the proper federal and state deposit schedules and rates, file and make tax payments on time, and handle everything correctly with new hires.

Don’t Try to Hide Your Cash

If you run a business that deals in a lot of cash transactions, like restaurants, then you have a higher likelihood of being audited. Pocketing and not reporting cash is not a good method to reduce your tax liability. If you deal with cash, then you should create a separate asset account to track all cash inflows and outflows and treat all cash activities the same as you would any other type of transaction.

Know Your Tax Obligations and Deadlines

The best way to avoid an audit in the first place is to make sure you are filing everything correctly, paying what you are supposed to pay, and doing it all by the proper deadline. Make sure your gross sales according to your sales tax filings add up to and match what is reported on your income tax return.?Be ready to explain the rationale for any exempt sales, and be cautious when changing invoices and payments from prior periods in your accounting system. These changes could create discrepancies in gross sales and sales tax liabilities.

You can audit proof your business by relying on trusted accountants and bookkeepers. They will help you take the right steps throughout the year to eliminate your stress, anxiety, and fear around IRS or state audits.

If you want reliable bookkeeping and accounting services for your small business, then please reach out to me today. I can help you get rid of the tax and IRS anxiety and focus on the growth of your business.?