An IRS audit of your business can cause anxiety and stress. While an audit certainly isn’t something to laugh about, don’t start imagining scenes of yourself being led away in handcuffs just yet. There are far more productive things that you can do with your time after being informed of an IRS tax audit.
While mistakes or willful exclusions on your company’s tax return cannot be altered after the fact, that doesn’t mean your fate is sealed the moment an audit letter arrives on your doorstep. Remember that the audit itself still counts for a lot, so being prepared for it—and knowing what IRS auditors are going to be looking for when they arrive at your business can go a long way in making sure an audit goes as well as possible.
Red Flags That IRS Audits Are Looking For
The first step to preparing for an audit of your small business or sole proprietorship is understanding which red flags IRS agents are looking for. While IRS auditors could be on the lookout for any number of things, their core focuses are usually among the following items and documents:
- Your Write-Offs: Small businesses, sole proprietors, and even freelance workers or self-employed taxpayers will often make liberal use of the write-off and deduction sections of their tax forms. Every business, no matter how small, has expenses, and those expenses can and should be written off to ensure tax relief. Auditors will often target these write-offs to determine 1) whether or not they are actually related to the business, and 2) whether or not you reported accurate spending totals for those expenses. If you claimed deductions—whether for business use of your vehicle or for necessary materials—have your receipts and a journal of your business expenses to present to an auditor.
- A Record of Cash Earnings: Businesses that handle a lot of cash—particularly cash on top of transactions, such as tips, or any “under the table” payments—need to make sure they are keeping track of that money and reporting it. The IRS knows what types of businesses tend to deal mostly in cash and knows on average how much money businesses like yours should be bringing in on an annual basis. If your reported business revenues are way off of what the IRS expects, they might suspect you of pocketing cash rather than declaring those earnings.
- Your Monthly Earnings Reports: If the IRS is auditing your business, there is a good chance the auditor is going to want to see your monthly earnings reports. Auditors are always looking for unreported business earnings, and will even look at your personal lifestyle, the furniture and assets you have in your home or your business, and other signs of wealth to determine whether or not they think you are making more money than you reported. To avoid scrutiny, have monthly itemized reports or files that record every dollar you or your business pulled in throughout the year. The more detailed these records are, the more satisfied an IRS auditor will be that you aren’t leaving income unreported.
- Employment Taxes: If you are self-employed or operate a sole proprietorship, you can ignore this one. If you have employees, though, then you should be paying employment taxes for those employees. You will need documentation to prove that you filed payroll tax returns to reflect your entire staff.
Preparing Your Business for an IRS Audit
Now that you know which materials IRS auditors will be looking through during an audit of your business, you can get to work preparing yourself for the audit. The easiest and best way to get ready is to get all of your files organized into a paperless document management system. Auditors will dig through file cabinets and boxes of receipts and earnings reports if they need to, but they will be much more willing to give you the benefit of the doubt on any tax mistakes if you make life easy for them. For most auditors, that means an easy-to-navigate digital document management system.
To start the process of going paperless and putting together a digital document management system, turn to eFileCabinet. With our program, you can easily set up a digital filing system that mirrors your existing paper filing system. Perhaps you have a filing cabinet drawer devoted to monthly earnings reports, with documents from each month split up with dividers or folders. With eFileCabinet, you can set up different digital filing cabinets, drawers, and folders to make your files easy to find.
If all of your business’s accounting documents and tax forms currently exist in paper form only, have no fear. With eFileCabinet, you can easily scan paper documents into the system and create paperless versions of the same information. Best of all, by using optical character recognition (OCR) technology, our program can read your files and fully digitalize them. In other words, instead of storing scans of your accounting records in eFileCabinet, our program will convert your scans into actual digital versions of those files. These digital versions can then be found using the same text search feature that allows you to navigate the rest of the eFileCabinet system.
Lastly, eFileCabinet makes the entire audit trail easier by allowing auditors to access your documents from afar. Our Enterprise Access feature allows you to give auditors the permissions and login information they need to access your company’s financial records from a distance. This feature not only saves the auditor from having to come to you—a fact that might earn your business even more leniency—but also helps you avoid the productivity-killing hassle of having an auditor in your office making you and your staff nervous.
By organizing all of your company’s tax and accounting files into one easily accessible and searchable document management system, you can take a lot of the fear and stress out of an IRS audit. eFileCabinet’s software is versatile, too, and is loaded with additional features. For a free 15-minute preview of the program, fill out the form on this page with your information.