Small Business – Being Prepared For An IRS Audit

Michael Lodge

by Michael Lodge

I have written a lot of blogs about documentation and being prepared for audits.  I found this great article written by Quickbooks (who is my accounting software) that addresses the issues of small businesses and being prepared for an audit.  It is written by Alison Ball.  Great article and worthy of sharing.

Small business owners and self-employed individuals have the greatest chance of being audited by the IRS because their returns are more complex. There are different types of audits, but field audits are most common for small business owners and those who work from home.

Luckily, IRS Commissioner John Koskinen said the rate for IRS audits has dropped to the lowest level in a decade. To ensure your business is compliant with the IRS, keep detailed records, all of your receipts and stay honest on your tax returns.

Keeping your books organized can protect your revenue and keep you safe in the event of a field audit. Avoid an IRS audit of your small business with these three pieces of advice.

Keep Business & Personal Finances Separate
The IRS won’t cite you for every client dinner where you pick up the tab, especially if the nature of your business is consulting or requires meetings and entertainment. The IRS will take notice if you’re expensing a laundry list of movies, shopping, and personal items. As a best practice, keep your business and personal finances separate. Use separate credit cards and bank accounts to track your business versus personal expenses and maintain clear, concise records.

In addition to tracking expenses and keeping personal and business charges separate, keep documentation accessible — itemized receipts, invoices, and credit card statements. In the event you’re asked to verify a claim, documentation will make the process easy and hassle-free.

Give Employees Some (But Not Too Much) Freedom
Do you know what your employees are actually expensing or how they’re using the company card? Even if your employees aren’t consciously submitting inaccurate expenses, they may not have a clear understanding of expense reporting protocols and company policies. A few key points to help:

  • Document your expense policy, even if it’s short
  • Create an expense reporting system and educate your team
  • Review expense reports regularly to ensure the right items are expensed

Ask your accounting team to hold a meeting and properly train your staff on expense reporting and money matters. Warn team members about the dangers of manually inputting expense reports and look into automated solutions to streamline your accounting. For example, use Connect to QuickBooks®, an app that comes with your Business Card from American Express OPEN that, once you are enrolled, automatically transfers your Business Card transactions to your QuickBooks every day.

Hire a Pro
There’s only so much you can do on your own before you need to hire a professional or invest in accounting software. Proper accounting practices help your business grow and ensure you are compliant. Invest both the time and money in finding the right person and systems to take your business to the next level.

There’s another reason to ensure you hire a quality accountant. According to the Association of Certified Fraud Examiners, approximately 77 percent of the frauds in the study were committed by individuals working in one of seven departments. The first on the list: accounting. Your accountant should be highly trained in the field of small business accounting, understand tax laws and protect the best interest of the longevity of your company, and not just your upcoming tax return.

Keep good documentation and stay IRS compliant. Since small businesses and sole proprietors are at the greatest risk of an audit, avoid any hassle by using these three simple steps to protect you and your employees.

For accounting and tax help – call our office at:  877.778.1770