Could Your Books Withstand A Tax Audit?

Here’s how to prepare for a successful audit. Image: Unsplash

Tax audits can be time-consuming, taxing, and possibly expensive.

Small business proprietors who might be navigating complex tax policies for the first time or who work in businesses such as restaurants where errors are easy to make are particularly likely to draw unnecessary attention for the IRS.

An audit doesn’t need to be a painful, endless, and invasive process if you follow these tips.

Back Your Claims

Having documentation that proves you qualified for all the deductions is worth it during the audit. However, not all taxpayers can maintain such documentation for 3-6 years.

In the event that you’re missing some documents, for instance, mileage logs or receipts, it might be possible to produce a reconstruction that will stand up to scrutiny by an auditor. For instance, if you didn’t maintain a mileage log and the auditor has doubts regarding your deduction, pull out the year’s daily planner and use it to generate a mileage log.

If you lack a daily planner, you could use letters, emails, or invoices to establish the days you met clients or used your vehicle for business reasons. When you issue the newly generated mileage log, explain to the auditor that the reconstruction is based on that year’s scheduling information.

Maintain Precise, Updated Records

Poor record keeping is common among small business proprietors. It’s advisable you consider accounting software to handle your books. You must install an updated program to ensure compliance. You simply need to enter your information frequently.

It’s helpful to communicate with your accountant frequently because he or she will identify the applicable deductions. Bear in mind that you’re liable for any errors or omissions, so it helps to be up to date.

Don’t Conduct Reconciliations Last Minute

Don’t wait until the end of the year to conduct reconciliations. Instead, do so quarterly or monthly throughout the year. This permits you to recognize, resolve, and investigate reconciling items in a timely way.

If you wait until the end of the year, you might not have sufficient time to resolve the matter before the audit and the effect of several reconciling items might make it more time-consuming to resolve.

Check in with the Tax Representative

Even if you have employed somebody to assist you through the audit, you can’t neglect the task altogether. You’ll find that accountants are frequently swamped between May and June, so it’s easy to overlook certain things. If you aren’t obtaining regular communication regarding the process, it’s important to follow up to ensure things are moving along.

You have Rights

Most audits are rather professional and reasonable during audits. If you’re unfortunate to have an auditor who’s overly hostile or abusive, you can request him to stop. The Taxpayer Rights Bill gives each taxpayer the right to obtain a courteous, prompt, and expert assistance in their IRS dealings.

Therefore, you don’t have to tolerate behavior that breaches those standards. If confrontation doesn’t help, obtain the manager’s name and call to file a complaint. The manager might or might not assign a different auditor but this will probably get the auditor to treat you more courteously. Similarly, you must be respectful and polite to the auditor, not rude. Remember, the auditor is simply doing his job.

Ask Questions throughout the Year

If an unusual transaction takes place or you’re thinking of entering into a new transaction, call your auditor. When you contact your auditor beforehand, they can help you with applying the appropriate accounting treatment the first time rather than rectifying it on the back end.

In addition, if you’re considering a new transaction, the auditor could enlist the help of state, federal, and local tax experts to offer a three-pronged approach to evaluating likely implications to the transaction before it takes place.

Final Thoughts

The thought of undergoing an audit can overwhelm any business owner. However, implementing these tips will help you prepare for a successful audit.

Dailey Bookkeeping Services is a Xero Certified SILVER Partner and a QuickBooks Online Certified Advisor, so if we can help you with your audit needs, just give us a call, we would love to help you!  The owner, Jacqueline Dailey is a Certified Public Bookkeeper, an Advanced Certified QuickBooks and QuickBooks Online ProAdvisor, a Sleeter Group Certified QuickBooks Consultant and a Xero Certified Silver Partner. We work remotely so we can work with any company located in the U.S. If we can help you with this process or provide you with custom reporting, please give us a call. If we cannot help you, we will refer you to someone who can!  Feel free to visit our website at http://www.daileybookkeeping.com.

Dailey Bookkeeping Services
Dailey Bookkeeping Services

One thought on “Could Your Books Withstand A Tax Audit?

  1. In terms of your books with a tax audit, this past year has some tricky areas with the Tax Cuts and Jobs Act (TCJA) whereby small business deductions tax treatment are changed under Section 199a. For CPAs especially, please be careful as to the new regs.

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