Business Auditing 101
Created by FindLaw's team of legal writers and editors | Last reviewed June 20, 2016
What You Need To Gather For Your Business Audit
Whether this is the first time your business is getting audited or your tenth, dealing with the Internal Revenue Service (IRS) is rarely a pleasant experience for most people. First you need to decide whether you're going to do this alone, or with the help of a tax professional. Business auditing can be expensive, complex and time consuming, so it often pays to have a tax professional and/or an attorney assist you during the auditing process.
Here are some guidelines on how to prepare for a business audit:
- Locate any records that validate your tax returns: When auditing a business, the IRS has the right to examine any records you used to prepare your tax return. So gather and organize those records in a meaningful way, handing the auditor a pile of documents is a bad way to start. Typical documents include checks, accounting records and receipts.
- Organize, organize, organize: Keep your audience in mind. Most auditors are accountants and they like things neat and tidy. An IRS agent is more likely to suspect wrong-doing and look harder at the person who dumps a series of confusing documents on the desk. It indicates that the person likely didn't file their tax returns correctly, so don't do it. Organize and present your documents in a logical fashion, and you will build credibility with the auditor.
- Prepare your justifications for claiming tax benefits: You will need to demonstrate why you thought you were entitled to a deduction or other tax benefit. Consequently, you should do some research into tax law, and come with laws in hand to support your decision to claim a tax benefit. If you can't find justification in some written form, prepare a simple statement to tell the auditor why you honestly believed you could claim the benefit.
- Don't let the IRS guess: If you can't substantiate certain items, the IRS is allowed to estimate your business income/expenses, and it's never in your favor. Expect hefty fines if you force the IRS to guess.
What Kind of Records You Need During an Audit
The IRS will typically attach a list of items that the auditor wants to examine to your audit notice. Here are some of the most common items requested for auditing purposes:
- Checks, Receipts and Bank Statements: When providing information on accounts, you will need statements from both personal and business accounts. In addition to canceled checks and receipts, other sources such as invoices and sales orders can be helpful, so bring them along as well. Finally, if you paid for things in cash, bring any paperwork that substantiates those transactions such as notes, receipts or petty cash vouchers.
- Electronic and Online Records: Credit card statements are acceptable forms of proof, but they must show the name, date, amount and address of the payee and are often limited because they don't detail the business nature of the transaction.
- Books and Records: If you maintain ledgers and journals, then supply them to the auditor. If you are a smaller business, you aren't required to keep a set of formal books, but bring whatever it is you use to keep track of your finances (checkbook, cash register tapes, etc). If you keep your records on a computer, then the auditor is entitled to a printed hard copy.
- Calendars, Diaries, Appointment Books and Logs: Service-oriented businesses often keep these kind of records, and an entry in one of these can help substantiate an expense if it seems reasonable.
- Renting or Buying Property : Bring a copy of your lease if you have rented property, or a purchase contract if you have bought property. These are crucial if you are claiming that an item has depreciated in value and is deductible.
- Records for Mixed Business and Personal Property : You must keep records for items, called "listed property", that are used jointly for business and personal reasons. Common items include computers, cell phones and vehicles. Bring any records accounting for business time on these items, such as travel logs and gas receipts for when your vehicle was used for business purposes.
- Travel and Entertainment Records : The tax code requires you to keep very detailed logs on travel and entertainment expenses, since they are the most likely to be abused. You must have written documentation regarding the specific business purpose for the travel or entertainment expense along with receipts.
Contact an Attorney During Your Business Audit
Getting audited can be a huge hassle and cost you thousands of dollars. Don't deal with the IRS alone. Consult with a business and commercial law attorney today who knows the tax code and can help you get your records in order and respond appropriately, as required by law.
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