All businesses and individual taxpayers have a chance of being audited by the IRS. Anything from income level to seemingly insignificant tax return errors can trigger an audit. However, certain groups or businesses are more likely to face an audit, and in the professional world, lawyers and law firms are near the top of the IRS’s target list.
In a 2011 article titled “Dear Lawyers: Get Ready for IRS Audits,” Forbes contributor Robert W. Wood noted that the IRS had “recently released to agents a guide to auditing lawyers.” The specific document Wood was referencing at the time has since been deleted from the IRS website, but the directions it supposedly gave to agents likely still hold true.
Specifically, Wood said that IRS agents were instructed to investigate everything from a law firm’s internal accounting documents and billing software to their billing adjustments and trust accounts. The article also made reference to an attorney who had, at the time, recently been criminally charged with paying personal expenses out of his law firm accounts.
Preparing for an IRS Audit
Of course, there are ways that lawyers and law firms can avoid IRS audits, or at least drastically reduce the likelihood of one taking place. First of all, most experts would tell you that law firms dealing with large sums of cash—personal injury and real estate law are two such fields—are more likely to be audited. Just as waiters and waitresses sometimes get audited due to IRS suspicion that they failed to report tips and other cash earnings, law firms that could feasibly leave much of their earnings unreported are targeted by auditors. There isn’t much you can do about the type of law that your firm practices. However, you can avoid audits by taking care to report every dime your firm earns.
Strong record-keeping principles are not just the best way for your firm to keep in compliance with IRS taxation rules, but also the best way to prepare for an audit. Good records help prove the information you furnish to the IRS each tax season is accurate, which means that they can be among your most powerful weapons for eliminating any suspicion of wrongdoing in an audit. If your firm did make a mistake in reporting tax information, good records will make it easier to locate that mistake and rectify it. And if an audit does take place, you can bet that auditors will be friendlier and more lenient to firms with good records.
How to Keep Good Records for Your Law Firm
Bottom line, being smart about the record-keeping policies and procedures can save your law firm a nightmare in tax confusion, IRS audit pressure, civil penalties, and even criminal charges. But how can you implement document management software at your firm that will keep you organized, guarantee that you are prepared for the possibility of an IRS audit, and make life easier for your potential auditor(s)?
Start by going paperless—or at least partially paperless. Law firms tend to use a lot of paper—more than most other types of businesses. Your file room is probably huge, filled with client documents, information about past casework, employee files, and more. The prospect of digitizing all of these files is no doubt an extremely daunting one and provides a good reason for why many law firms have not yet gone paperless.
Still, even if you don’t go fully digital for your firm’s record-keeping processes, consider adopting paperless policies for accounting files and anything to do with taxes. Having time records, journals, billing statements, receipts, billing adjustments, and other similar documents ready to go in a digital document management system will help your firm prepare for taxes each year, quickly find necessary files for auditing purposes, and help present auditors with an intuitive and well-organized digital records system.
Using eFileCabinet as Your Paperless Record-Keeping Software
If your firm is looking for paperless software for record-keeping purposes, then you might be interested in trying out eFileCabinet. Designed for a range of enterprise applications, eFileCabinet has been utilized by businesses across a broad range of industries. From document collaboration to digitalization of paper files, eFileCabinet has a plethora of features that are perfect for adopting a straightforward and comprehensive digital document management system.
For law firms looking to establish digital record-keeping systems for their financial records, eFileCabinet is optimal. Whether you are creating and storing forms, invoices, billing sheets, or other documents digitally, or scanning receipts and journals or ledgers into the computer, eFileCabinet can make all types of files easily searchable in the system. For example, if you need to find a specific invoice or tax form for an auditor, you no longer have to dig through a filing cabinet or a stack of papers to find it. Instead, you can locate it instantly with eFileCabinet’s text search function.
In addition to easy searching and organization features, eFileCabinet is secure. All files are safeguarded with 256-bit AES encryption, and only users with proper permissions can access certain files. You can even make it possible for an IRS auditor to access your firm’s tax-related documents and financial records remotely through our system with a secure client portal called SecureDrawer.
The bottom line is that law firms in this day and age are targets for IRS auditors. As a result, those who work and run businesses in the law profession need to be prepared each year to be audited based on their taxes. With eFileCabinet, your firm or practice can be ready for anything, with smarter record-keeping processes across the board. Learn more about our paperless software at www.efilecabinet.com, and get a complimentary 15-minute demo of our program.