If your small business is being audited by the IRS, there are several steps you can take to prepare yourself. A tax audit can be very stressful for small business owners, but the key to surviving it is preparation and keeping your panic to a minimum.
Before you meet with the auditor, you should go over the tax returns in question. Be prepared to explain how you or your tax preparer arrived at the figures on your returns. If you are unable to do so, call your tax preparer or another tax professional. You should also be able to backup your tax deductions and other tax benefits. If need be, do some research on tax law.
Go through all of your records that support your tax return, and organize them. Put together receipts, checks, and anything else you believe substantiates your tax returns. Be sure to make everything you put together, neat. If you give the auditor a mess, it is more than likely that the IRS will dig more than you thought necessary. Plus, auditors tend to give people the benefit of the doubt if their records are neat and tidy.
What Should I Bring to the Audit?
Anything that you can find that supports your tax returns, should be organized and brought to the audit. Usually, a list of items that the IRS wants to see will be attached to the audit notice. Additionally, you will be expected to bring the following:
- Receipts, bank statements, and canceled checks: You will need your bank records from both your personal and business accounts. Keep all business-related canceled checks, sales receipts, and invoices. If anything that was paid in cash, show those payments with any receipts, handwritten notes, or petty cash vouchers.
- Records and books: Tax law does not require small businesses to keep a formal set of books, regardless of what an auditor may say. Whether you keep a checkbook and cash register tapes or ledgers, journals, or computer data, put it together and give it all to the auditor.
- Property records: Special records for equipment that is used for personal and business purposes, called listed property, should also be given to the auditor. Items such as computers, cell phones, and cars that are used for both purposes, are common. Anything that is used strictly for the business is not included in listed property.
- Electronic records: Gather your bank and credit card statements, and make sure they show the date, name, amount, and address of the payee.
- Appointment logs: If you have written accounts of appointments, activities, and expenses that may be on your calendar or appointment books, these may help justify business expenses.
- Vehicle records: Any car that you drive for personal use may be deemed listed property. Logs of miles, gas, and repair receipts that show when, how, and where the vehicle was used are helpful.
- Travel and entertainment records: Federal tax law requires business and travel expenses to be accounted for in a written record, along with receipts.
Should I Consult a Lawyer When Preparing for an Audit?
If your small business is facing an audit by the IRS, you should contact a tax attorney. Your lawyer will be able to advise you on what is needed for the audit and assist you in gathering necessary documents. Preparation means peace of mind, and an experienced attorney will ensure the process is as painless as possible.