How small businesses can avoid a tax audit
Keeping business and personal expenses separate is one way to help yourself if the government decides to audit you.
Other tips on how to deal with an Internal Revenue Service (IRS) tax audit include saving documents, minimizing paper storage and hiring a bookkeeper.
These steps were outlined in an article posted on abovethelaw.com, which features stories about the world of law.
An audit is when the IRS examines accounts and financial information of an organization or individual. The IRS said audits are done to ensure information is reported correctly, according to the tax laws, and to verify the reported amount of taxes paid is correct.
Enduring a tax audit is at best inconvenient and at worst an ordeal
The IRS chooses businesses and individuals for audits based on either random selection or cases of related examinations, such as if a business partner’s returns were audited.
Tax agencies like the IRS require that businesses keep detailed records. Even honest taxpayers can have difficulty in an audit if they fail to keep records.
This can result in disagreements with tax auditors, which can lead to expensive and time-consuming negotiations, in addition to taxes, penalties, and interest charges.
Here’s how to deal with a tax audit, to make it as painless as possible:
- Avoid commingling: One of the biggest problems in a tax audit is when the taxpayer mixes business and personal finances by using one bank account for everything. It might be difficult to remember which expenses are personal and which are business. This can be a problem because an IRS audit can happen several years after a tax return was filed. Another problem is that even if you can remember everything, the auditor might not believe you and may disallow any expense they think might not be business-related.
- At a minimum, you should set up a separate bank account and a separate credit card account for business expenses.
- Credit card statements can also help. While they are not a substitute for detailed receipts, it might be worth producing if you don’t have any receipts.
- If you have commingled bank accounts, note which transactions were for business and which were personal.
- Save documents as soon as possible Including:
- Tax returns
- Bank statements
- Canceled checks for business expenses
- Business expense receipts
- Lease agreements and rent expenses
- For meal and entertainment expenses, a log that details who you met, location and meeting purpose
- For transportation expenses, mechanics’ bills that show mileage, along with lease agreements, gas receipts, insurance bills, and registration
- If you are claiming standard mileage, have a log that shows the date, starting and ending locations, number of miles driven and trip purpose.
- Minimize paper storage: While some people like to keep paper copies of everything, that has disadvantages. Paper can consume an abundance of space. Paper can fade with time, and paper can get damaged through natural disasters, food spills or a hungry dog.
- To minimize the chances of loss, invest in a high-quality computer scanner to save documents. Some tax auditors will accept an external drive containing scanned files instead of paper copies.
- Change habits or hire a bookkeeper: Carrying out these tips can be cumbersome. It won’t seem as hard if you make saving documents a habit. If you are too busy to organize your paperwork, hire a bookkeeper or an assistant to do it for you.
Contact The Law Firm Of Brown & Jensen in Arizona today for help with a tax audit.