The dreaded audit… it’s not if, it’s when. At least that is the mentality to practice in order to properly prepare for the audit process.
There are a few general rules to follow to prepare for the audit and ensure the smoothest experience.
Small actions over a long length of time can go a long way and help you prepare for the audit. When an audit happens, the government wants to make sure you are being honest with you and your business expenses and finances.
Save receipts for EVERYTHING. Create a paper trail for all purchases with notes. A credit card statement will not do. Receipts detailing what the expense was for and why.
Be as organized as possible. Keep a spreadsheet of your expenses, better yet use a bookkeeping software that will help you clearly track. This will save a lot of time later down the line.
Stay up to date on what qualifies as expenses and write-offs.
There is not one specific thing to do or not to do that will prevent an audit from occurring. Many things can trigger an audit but the big three are meals, mileage and medical. How can you be sure to avoid unnecessary scrutiny by the auditors or avoid an audit altogether? Here’s a closer look into each category to help prepare for the audit.
There is a great app that helps people track their mileage while on the job. It is called Mile IQ and is made by Microsoft. All you have to do is turn on your location so your phone can follow your miles and it automatically logs them. This app is incredibly easy to use. For example, you can swipe left for personal driving trips or swipe right for business. It also notifies you if you forget to log a trip. This is great for business owners and entrepreneurs who do a LOT of driving for work!
When there is a medical expense, it needs to have a prescription by a certified physician. You also need to state why this specific product or medical service is required. For example, if you need an orthopedic bed for staying healthy while sleeping, you need to have a prescription and state why that bed works for you. The auditor might ask you for a letter from the physician that explains why the purchase of that specific bed was best for you versus another model or brand?
Every time you buy food or go out to dinner, ask for the receipt of the bill that you paid for. Write on the back some key information. Make sure to note who the meeting was with, what was discussed and how it relates to your business. In the instance you don’t have your receipt, you will also want to note the date, the location, and the cost.
Even with all this information, the auditor has the ability to decide whether or not each item listed is a reasonable expense. It is necessary to find an excellent accountant who can represent you in the case of an audit as he/she will be most familiar with the laws. This will also allow you to not have to be present to further incriminate yourself saying something you shouldn’t that may cause the auditor to change their tune as to what is accepted as a legitimate expense or not.
Take it from me, someone who has been an entrepreneur for as long as I can remember. I started selling chocolate bars for soccer and then magazines for middle school sports, babysitting and tutoring in high school. I have never really worked for anyone else. This allows for some freedom to choose my hours and also be creative with write offs. I have been under the naive belief that I work really hard for every dollar that I make and the government shouldn’t have the right to take it away. I have been able to justify to myself numerous expenses that ought to be a tax write off as I can tie them back to a work expense. Not until entering my 11th year in business did I need to really defend each thing I qualified as a business expense. 2019 was the year of the audit.
As I write this, I am in my last leg of the audit and hope to close it before the first quarter of 2020 ends. I have taken my own advice, hired a great accountant who has represented me well. I still had to show up and tour my facility so the auditor could see how our business operations were run. When asked to do so, I had to prove and read the tax code to show the auditor what the IRS deemed appropriate to qualify for expensable continuing education. Hiring incredible people is a necessity and it still will not protect or prevent you from doing your own research and being in the know about taxes. In the end remember, to keep incredible records and stay organized.
Wishing you all a smooth business journey but in the event that an audit does occur, be ready! For more information on this and other business tips, contact us today.