What to do when your business is audited
If you own your own business, guess what? Even if you know your tax law and do everything right, even if you file on time and pay in full, the chances of you getting audited are greater than for the public at large. Why? Because small businesses are audited more than any other entity.
If you do get that dreaded letter and have to attend a tax audit, here is what you should do:
Prepare, and then prepare some more. And then prepare some more. Your chances of beating that audit are highest when you have documentary proof of the return(s) in question.
Get Organized: Make sure your papaerwork in order. You need yo have your receipts organized, your canceled checks and credit card receipts in order, and have all logs and other records are ready. Having your ducks in a row builds credibility.
Without adequate records, the IRS auditor can legally make assumptions about your income and deductions.
The thing to understand is that the success of your audit depends on your ability to document your income and expenses, especially when you are self-employed. So in addition, you will want to have ready for the auditor bank statements, cancelled checks, receipts, invoices, sales slips, petty cash vouchers, printouts of electronic records, bills, checkbook registers, ledgers, journals, appointment books, and any other physical documentation of your records. Without adequate records, the IRS auditor can legally make assumptions about your income and deductions.
Prepare your Listed Property List: Equipment that has both personal and business use, such as computers, cell phones, and autos, is called “listed property.” You must provide the auditor with business records of your listed property.
Get Your Travel and Entertainment records in order: Travel and entertainment expenses must be proved by written record (see IRS Code § 267). One way to document these expenses is with an appointment book or log.
All of the above makes a differencet, but maybe the most important thing you can do is this:
Get some help: Your accountant should be not only be your accountant, but your financial business advisor as well, and this is when you need him or her most. So, while you might want to save some money and not get professional help for this problem, that would be a mistake. Hiring help helps.
But what if you can’t afford an accountant? In that case, you must do on your own what the accountant would do: prepare. You need to look at the return(s) in question and be able to substantiate (with those good records!) what is in the return. You, or you and your accountant, need to prepare all documentation for the audit.
As you can see, winning an audit is much more likely if you have a practice of maintaining records, keeping receipts, and chronicling what you do.