Business bookkeeping services like My Small Business Pro know the thought of receiving an audit notice from the IRS strikes panic in the hearts of even the bravest professionals. Many small business owners lose sleep over finding one of those letters in their mailbox, fearful that the audit process will be painful and leave them with nothing.
The good news is, an individual’s chances of being audited are fairly slim. According to Forbes, the average American has about a 1% chance of receiving one of those dreaded letters. What’s more, you can decrease your chances of ending up the target of an audit by being honest, organized and intelligent—here are some solid tips to keep the auditor from showing up on your small business’s doorstep.
Keep receipts and records
Every small business owner incurs a significant number of expenses throughout the course of a year. This includes rent on your office space, stocking up on office supplies, payroll for your valued employees, and more. Taking the additional (relatively minimal) effort to record the money that goes out the door, organize those bills and receipts, and report honestly and accurately on your tax returns can help safeguard against audits, because you’re demonstrating you have your goods together, and that your expenses are legitimate. If you don’t have those records organized and backed up, the IRS may disallow these deductions. If this is something you find challenging, business bookkeeping services like MSBP can help you straighten up and stay on top of things.
Stay straight with travel, meals and other expenses
Sure, business travel and lunches with clients are legitimate expenses.Just don’t overdo it, and don’t stretch the limits. Common sense goes a long way here. A two-day road trip to another Midwestern town for a convention relevant to your small business is fine. So is a lunch with one or two folks from an important client or vendor. What likely will attract a raised eyebrow is a two-week sojourn to Cancun when you’ve never done business in Mexico, or a lavish meal and drinks at Morton’s where one of the “clients” is your aunt Francis. If you cannot legitimately call the meal, plane ticket, equipment or other expense business related, don’t try to run it through your business, or you could end up run through by the IRS. This brings us to the next important tip…
Build a wall between business and personal expenses
We touched upon this vital topic when we discussed good habits small business owners must have if they want to succeed, but it bears repeating. It can be tempting to put personal expenses through your business because of the reduced tax liability, but do your best to resist that temptation, unless you want to draw attention from the IRS. This is not to say you should panic if you throw in a bag of coffee for home consumption when you’re stocking up on provisions for the office on your weekly Staples run, then forget to account for that when you’re tallying deductible expenses. Be honest, be mindful, and be aware that it’s not going to look good to the auditor if you try to paint your daily Starbucks habit as a business expense to the tune of $1,500 or more. If you’re having a good year, you may be tempted to run personal purchases through the business to mitigate your tax liability. One problem: large personal purchases will be easily identifiable by an IRS auditor, and they might not be appreciated by any partner with whom you split the profits. Again, business bookkeeping services like My Small Business Pro can help.
Avoid ghost-payroll employees
A “ghost” employee is someone who’s drawing a check from a company, while not doing any actual work for the organization. The practice is more common to larger companies, and government organizations (the city of Chicago is notorious for it). Small business owners might be tempted for a few reasons, including greed, but more kind-hearted motivations (such as helping out a sick friend using company funds, or securing health benefits for a loved one by giving them a no-show job at your outfit). However, the risks likely outweigh the potential benefits. If the government learns your company is guilty of this brand of payroll (or insurance) fraud, you could end up with stiff financial penalties, or even jail time (and it’s hard to grow your business from a cell).
If you do get pinged for an audit, it isn’t cause for alarm, especially if you know what to expect. Arm yourself by anticipating what the auditor will ask for, and responding quickly. For example, they’ll ask for records related to any income and deductions, and bank statements. Also, brace yourself for a bill from your CPA in the thousands, as well as a bill for tax on any disallowed expenses (i.e., expenses found to be illegitimate), as well as interest and penalties on that tax.
My Small Business Pro offers over a decade of experience dealing with small business finances, leaving us equipped to help professionals like you better avoid audits. Our business bookkeeping services can help you understand what expenses are legitimate and how to manage your records in the unfortunate case the IRS come knocking—and, if you’re facing an audit, we know smart, experienced CPAs and other professionals that can help you mount a capable defense. If you’re nervous about your taxes, fearful of audits or just want to chat, reach out to me at Daliah@MySmallBusinessPro.com; I’d love to set your mind at ease.