Are your books “Audit Ready”?

The IRS set a goal last fall to increase the number of audits on small businesses this year.  For all small businesses, having pristine books is more important than ever!  Many business owners who are still doing their own books may not be cognizant of all the intricacies involved in maintaining financial accounting accurately.  All the more reason that a bookkeeper becomes necessary and helps avoid the pitfalls that the IRS may take note of and invite an audit. 

If you are ready to dust off your calculator, grab that overflowing box of receipts and dig into the numbers, there are many steps entrepreneurs can take to decrease the possibility of attracting this kind of unwanted attention.

Some of the bigger triggers are: 

  • Math errors and typos – take the time to get it right.  Make sure to triple-check all your math and don’t just rely on Excel to get it right.
  • Claiming 100% Business Use of a Vehicle – they don’t buy it.  Unless the car is literally left at the business 24/7 when not “in use”, it is not a “business vehicle”.  Deducting mileage and fuel is tricky enough, and claiming a lower percentage of the vehicle for the business, is a safer way to go.
  • The Home Office – doing business out of your home “remotely” is not the same as having a “home office”.  To start, a home office should be a space used exclusively for business, and be set up as a place of business.  Trying to explain why a television set and Barcalounger is in your “office” or how your family “never eats” at the dining table where your laptop lives just aren’t going to cut it.
  • Meals & Entertainment – A dinner with prospective clients to review the finer points of the contract, sure. A networking event to exchange business referrals, okay.  Grabbing a coffee at Dunkin on the way to work while on the phone with a client, no sir.  Swinging into the packie to grab a bottle (or seven) of wine and giving one to a client, not okay.  Flying to Maui with the family for a week and attending a half-hour seminar on something business-adjacent – nope.

There are things you can do to help deter the IRS from selecting your books for an audit.

  1. Have a document to support EVERY transaction.  And, no, your bank statement (or credit card, or any statement) is not a “source” document.  Statements verify transactions, reconcile them; they don’t document them.  For example, if you run an administrative business with no uniforms in sight and there’s a dry cleaning bill out of the blue, this would raise a flag, or at least an eyebrow.  Be sure that the transaction not only has a note that states that a client spilled their coffee and you offered to have it cleaned for them but make sure the dry cleaning ticket with the same note is scanned into the software as well, and the Expense Report as well.

2. Track your 1099s!  Someone is reporting the income you made to the IRS – besides you!  You are responsible to make sure that information is accurate and consistent with your own records.

3. Be well informed!  Life happens, and sometimes, things in business do not go as planned.  So be sure that if you know you are prime for selection, be Audit Ready!  Have the proper documentation; ignorance is not a valid excuse – it’s your job as a business owner to know your documentation responsibilities and relevant tax laws.  At the very least, it’s your job to hire the people who do know these things and have them advise you!

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