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How Can I Prepare for a Small Business Audit?

There are two things that you should do to prepare for an audit of your small business:

  1. Locate all of the records that prove the validity of your tax return
  2. Identify any problems related to confirming income sources or expense deductions

What Should I Bring to the Audit?

There are several items that you should bring along to the audit, if you have them and if they can help show that your small business's tax return is accurate:

  • Bank statements, canceled checks, and receipts
  • Electronic records
  • Books and printed records
  • Appointment books, logs, and diaries
  • Auto records
  • Travel and entertainment records
  • Expenses for renting or buying property

Bank Statements, Canceled Checks, and Receipts

As a rule, you should not discard any business-related canceled checks, invoices, or sales slips. If you paid some expenses for your small business with cash, keep any paperwork showing the payments, such as receipts or withdrawal slips.

Electronic Records
Bank and charge card (Visa, MasterCard, American Express) statements are now accepted by the IRS as proof of payment. These statements must show the name, the date, the amount, and the address of the payee.

Books and Records
The auditor will ask to see your "books". However, the tax code does not require small businesses to keep a formal set of books. Checkbook and cash register tapes are acceptable forms of recordkeeping for small businesses. If you maintain more formal records such as ledgers and journals, the auditor is entitled to see them. If your data is on a computer, the auditor will want to see a printout.

Appointment Books, Logs, and Diaries
An entry in a business diary helps justify an expense to an auditor as long as it appears to be reasonable. Additionally, you must keep special records for certain equipment, called "listed property," that is often used for both business and personal purposes (e.g. cell phones, laptop computers, and vehicles).

Auto Records
Any business use of your personal auto requires detailed records showing the portion of vehicle use for work.

Travel & Entertainment Records
By law, out-of-town business travel and entertainment expenses require greater record-keeping than most other expenses. You must have a written record of the specific business purpose of the travel or entertainment expense, as well as a receipt for it.

Expenses for Renting or Buying Property
To prove business rental expenses, bring in a copy of your lease. If you purchased the property or equipment, bring in a copy of the purchase contract. This establishes grounds for claiming these expenses as a tax deduction, as well as a beginning tax basis of the property if you claim depreciation expenses.

Should I Consult a Lawyer When Preparing for an Audit?

Preparing for an audit can be both difficult and time consuming. A tax attorney can assist you in the preparation process to help you get through the process. An attorney can also help you sift through financial documents to determine what is relevant to the audit and to ensure that you are not missing important documents.

Photo of page author Kristen Johnson

, LegalMatch Legal Writer

Last Modified: 10-21-2014 05:03 PM PDT

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