Protecting Your Business From A Tax Audit

An audit is one of the business-related processes that business owners want to avoid at all costs. Underpayments, excessive deductions and miscalculations can alert the IRS at any time and order an audit. Internal auditing and proper bookkeeping should be in place as soon as your business gets off the ground and creating good audit trail practices will ensure that you can avoid an audit. Take a look at some of the tips below on how to protect your business against an audit.

 

• All receipts and paper work for expenses and income should be kept, properly recorded and dated in separate folders. It is also good business practice to scan or photocopy receipts for business expenses that have been printed on thermal paper, as these receipts will fade in time.

 

• Your accounting department should carefully record and monitor bank statements regularly to ensure that income and disbursements tally. Use good bookkeeping software to keep track of income and expenses. Keep hard copies of monthly financial reports for your record as well as a backup copy of your accounting records on an external storage disk to safeguard against computer crashes.

 

• Use only the allowed tax deductions on your income tax returns. Excessive deductions usually alert the IRS to order an audit. It will only take some small deductions that may look out of place for your business to be subjected to a tax audit. The IRS is always on the lookout for ways to exact taxes from businesses and punish those that are negligent.

 

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  It is good business practice to maintain the services of a good business attorney to help you in the legal aspects of business transactions and taxation. You should have an external auditor to go over your accounting records annually. This will help to countercheck all your financial records and help you to streamline your accounting process.

• Make sure that you maintain separate bank accounts and credits cards for your business and personal finances. Some single proprietors make the mistake of using only one bank account and credit card for both personal and business dealings. This practice will make if very difficult for you to track and separate your financial transactions.
  • Make it a point to reconcile proof of payment with your credit card receipts and keep both. You should also track and keep accurate record of cancelled checks, bank and credit card statements that pertain to all your business transactions. It is very important that you have a keep a physical record of these as well as an electronic record if you are using an accounting software application. Back up all electronic files and store them in external storage disks.
  • Make sure that you and your accounting staff are aware of all the current tax and business laws applicable in your state, particularly those that cover allowable deductions. This will help you to prepare your income tax returns in accordance with the current applicable laws and prevent errors.
  • Establish an internal audit of your expenses and income so that you can keep track of all the financial transactions of your business. This will help you to keep accurate records and remove the worry of an audit from your mind. This is also sound business practice that you should continue to improve as your business grows.
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