It’s understandable to have your heart sink down into your stomach upon learning you’re being audited by the IRS. Your time and focus will be better spent preparing yourself and your business in order that your upcoming audit will proceed smoothly and so that you can lessen your chances of being hit with a penalty. No matter how you might feel otherwise, keep your cool in order to keep your business.
Get Your Records Ready
Gather all of the tax returns to be audited and all records used to complete those returns. If a tax preparer helped you file your return, involve her or him with the preparation process as well as the actual audit. Organize your records logically and group them together as much as possible. This makes things easier for the IRS, which makes things much easier for you. The act of gathering all of your receipts and checks can also help you recall anything the auditor might ask you, so make note of your recollections as well. You should also be able to justify any deductions you claimed.
Bear in mind that a majority of auditors are accountants, and as such, they’ll appreciate a neat arrangement of all of the financial and business records you’ve organized. Not only does neatness help speed up the process, it also motivates the auditor to give you the benefit of the doubt, which you’ll need should any issues arise.
What to Bring to Your Audit
In addition to receipts and checks, there are a few more things you’ll want to make sure you’re able to provide your auditor. Have bank statements for your business account and your personal account. You should also supply cancelled checks, sales slips and invoices. You should also show paperwork for any purchases made with cash. When supplying electronic financial records for purchases made with a debit card, they should list a name, date, payment amount and the address of the payment recipient.
Small business owners aren’t required to keep a formal set of books, but they should at least supply auditors with cash register tapes or a checkbook log. In any case, it’s essential that you keep solid and up-to-date records. While the IRS can always guess your business income and expenses, doing so is likely to lead to a penalty for failing to keep proper records.
Business Equipment Records
If you use equipment to conduct your business (sometimes referred to as listed property), have records on hand for your audit. Common examples of such equipment include business computers (including those kept at home), cell phones and vehicles mostly used for business purposes. Note that equipment used purely for business purposes isn’t included in this category. Carpet looms, lathes and mechanics tools don’t require usage records. One exception to this rule is using business equipment for personal use, such as a computer you use to play games and do work. In this case, you’ll only need to keep records of using the computer for business purposes.
Auditors will also want to see records if you use a vehicle for both personal and business purposes. Just like with a computer, you’ll only have to keep records of the time you use the vehicle for business purposes. You can keep these records one of two ways. The first is to keep track of the number of miles driven for business purposes. The second is to keep up with maintenance, repair and gas receipts that note how and when the vehicle was used for business.
Know that a business audit from the IRS doesn’t automatically spell trouble, but it can if you don’t take the process seriously. Bear in mind that the IRS is willing to work with you to keep you from paying penalties and fees, but only if you’re well prepared and equally well organized.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.