Accounting Tips So You Don’t Dread an Audit

Does the thought of a business audit make you feel stress and anxiety? Even if you are proactive about following all the rules and regulations, it can still be a worry that you will be audited at some point. The truth is that there is nothing to worry about. In fact, many businesses choose to follow a consistent schedule with internal audits throughout the year, ensuring they are prepared if an external audit is required in the future.

Take a moment to consider your preparation for an audit. Do you have all your financial documentation, accurate reports, and other details that create a solid financial foundation for your company? If an audit happens, then you’ll need to back up your claims with solid information about each transaction that is moving through your business.

One thing you can do is learn about potential red flags in your business that could potentially trigger an audit. These things don’t necessarily mean that you will be audited. But they are factors that could play a role in the likelihood of your business falling on the IRS audit list. Here are a few mistakes you can avoid, helping to minimize red flags that could catch the attention of the IRS.

Creating a good system right now gives you the peace of mind to know that you don’t have to dread a potential audit in the future. Keep reading to learn more about the specific things you need to know about small business audits.

Watch Your Entertainment Spending

Every small business owner takes advantage of the opportunity to write off certain business entertainment expenses. For example, if you often take clients out to meals or activities, then talk to your accountant to see if these costs can be deducted. Taking high deductions in this category could potentially raise a red flag that triggers an audit.

You can write off a meal, just make sure that you are present at the meeting and you avoid extravagant beverages and food. If you are hosting a business contact – such as a consultant, current customer, or potential client – then you can deduct 50% of the meal. Since the government cut business-related entertainment deductions in 2017, avoid writing off tickets to a sporting event or concert. Also, make sure that you always keep receipts for these business meals.

Smart Business Deductions

Taxes can add up, which is why every accountant suggests that businesses take advantage of every legitimate business deduction available. If you are spending money on business costs, then those costs can likely be used to manage your tax burden.

The IRS has a system in place to compare your number of deductions with others in the industry. So, too many deductions could throw up a red flag. For example, if most companies in your industry take 30 deductions, and your company takes 250, then the IRS might want a closer look to see what is happening.

One other deduction tip is to use caution with deductions that fall in the miscellaneous category. You need to be sure that every transaction is “ordinary and necessary” based on the requirements of your industry. If you aren’t sure which deductions meet these categories, then talk to your small business accountant to optimize your tax preparation and filing.

Filing and Payment Deadlines

Missing a filing or payment deadline not only results in penalties and fees, but you could be attracting unwanted attention from the IRS. As a small business owner, your best approach is to file everything correctly and on time, because it increases the likelihood that you can stay under the radar.

Missing the filing date can be a bad idea! Too often, small businesses wait until the last minute to start the filing process. You don’t know what challenges will come up and delay the schedule. So, it’s best to start everything as early as possible. Your accountant can provide recommendations about filing dates and deadlines. Additionally, if you see that a late filing is inevitable, then talk to your small business accountant about options to request an extension.

Once the tax filing is submitted, it doesn’t mean that you are done with the paperwork for the year. Your accountant will provide a schedule for quarterly payments and other paperwork that must be filed throughout the year. Mark your calendar right away so you don’t miss any of these deadlines.

Business Structure: Corporation or Sole Proprietor

It’s possible that small businesses are audited more frequently than corporations. When a business owner takes the time to incorporate, then it shows a higher level of operational and financial structure. On the other hand, self-employed taxpayers have a high risk of IRS auditing because it’s assumed that a self-employed business owner will claim false deductions and report a lower income than what was actually earned.

If you are thinking about incorporating, then it’s best to consult with a financial advisor and an accountant. You might find other motivating reasons to incorporate your business, such as more available deductions, increased likelihood of securing business loans, and protecting your personal assets.

Reporting Taxable Income

Every penny that comes into your business as taxable income should be reported. Even though it’s assumed that you should include all income on your tax filing, some people overlook small transactions or earnings. If there is any suspicion that you aren’t reporting all of your income, then there’s a pretty good chance that you will be audited. Don’t let your business or your name be associated with the practice of withholding income.

You need to be detailed in reporting and calculating income, especially cash payments that are received. Also, watch out for money in offshore bank accounts. Your accountant can help with the review of all of your income and expenses, so you can be sure that everything is reported accurately.

Be aware that digital currency, such as bitcoin, can increase scrutiny from the IRS. If your business deals with any type of digital currency, then be extra cautious about how all transactions are recorded and reported.

Be Cautious About Spending Patterns

A sudden burst of unusual spending activity could be a red flag for the IRS. For example, if you donate a large amount of money to a charity organization, then it might be suspicious if it isn’t a regular practice.

Sometimes, businesses want to donate a lot of money to charity as a strategy to minimize their tax burden. This method could be viewed as an abuse of the tax code, triggering an audit. You can still donate to the charities of your choice. But it’s best to give in smaller increments throughout the year, instead of one large sum right before filing your tax paperwork.

Detailed Transactions: Accounting and Bookkeeping

When your books are kept up-to-date, then you can always have peace of mind in knowing that you are prepared for an audit in the future. It’s essential that you are focused on the details of each cash transaction, recording every detail of the transaction in your books. Even digital transactions require detailed recording, which is why it’s critical for every small business to have an experienced bookkeeper to help.

Transactions of all sizes can be hard to verify, especially when cash is involved. It’s ok to pay in any manner that you’d like. Just makes sure that you always create a clear paper trail in case there are questions about the transaction. Consider using a business credit card or debit card whenever possible to track all payments that are moving through your company. These digital transactions make it easier to prove transactions and file the necessary paperwork.

Small Business Audit Help

The easiest way to reduce your stress about future audits is to make sure that you are working with a trusted accounting and bookkeeping provider. Investing in these financial services gives you access to ongoing support from a team that can help you avoid potential audits in the future. A bit of organizing and work right now is critical so you can stay ahead of the financial requirements in the future. Then, you can have confidence knowing that you are ready for anything that comes your way – such as an audit.

What questions do you have about small business accounting, a business audit, bookkeeping, or taxes? We provide a full-service solution for small business owners like you. Our accounting services are personalized to fit your unique needs, with the goal of providing the long-term support required to help your business thrive in the future. Many business owners find that their stress levels go down when they are working with a qualified industry expert. Outsourcing accounting services allows you to turn your attention to other responsibilities within your business.

We are here to help with all of your accounting and bookkeeping requirements. For more information about these quality services, contact us at Easier Accounting. We’ll talk about your business needs, offer recommendations, and assist in building a solid financial foundation for your small business. Call for a consultation with an accounting expert: (888) 620-0770.

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