As a small business owner, you do not want to undergo a financial audit from the tax authorities. For example, if you run a small business, you may face an IRS (Internal Revenue System) audit. IRS audits a small business only when it finds flaws in its financial statements. However, with the right planning and internal audits, you can avoid IRS audits. Many small businesses tend to contact audit companies to make sure the regulations are followed.
Read on to know how small businesses can prepare for audits.
Why small businesses are shortlisted for IRS audits?
Before you prepare for audits, you should know the reasons that encourage IRS to audit your small business trolleys online. Some financial practices that can lead to an audit by IRS are as follows:
- You are vulnerable to an IRS audit if you are running a cash-centric small business. For example, laundry shops and restaurants are termed cash-intensive small businesses.
- Excessive spending on expenses like entertainment and meals can also put you under IRS audit.
- If you own vehicles for your small business and are claiming 100% use in your financial records, you may be placed under an IRS audit.
- If you are not paying your taxes on time for successive years, you may receive an audit letter from the financial authorities.
- Small businesses that pay high salaries to employees who are also stakeholders can be questioned by the IRS.
- If you are paying large reimbursements to your employees for business expenses, you may be placed under an IRS audit.
- Small businesses that are involved in large charitable donations are also shortlisted by IRS for audit.
If you are following the regulations while making your financial statements, there is nothing to fear from an audit. However, you can reduce the risk of being called for an audit by avoiding the aforementioned practices. Let us now see the necessary steps to prepare for a financial audit.
Keeping track of financial statements
Your financial records will be cross-checked rigorously during an IRS audit. You need to make sure there aren’t any flaws in your financial records. Simple accounting and bookkeeping mistakes can cost a lot to your small business. To make sure your financial records are well-kept, you will have to review them every day. Since hiring dedicated accountants is not feasible for a small business, one can outsource it to a bookkeeping firm.
Prepare for most-likely questions
When IRS flags your business for an audit, it will not ask you details of each penny. Instead, IRS will ask questions about the focus areas that make your business look flawed or illegal. You can review your financial statements to find areas that can attract IRS officers. By anticipating their questions, you can prepare a satisfying answer in your support. It may lessen the suspicion of IRS officers on your small business. At the end of the day, you also have to be sure that your small business isn’t involved in any illegal practices.
Arrange your documents beforehand
Small businesses should make sure their paperwork is accurate and updated. If the IRS officers arrive at your premises, they will straightaway ask for several documents. By gathering the necessary paperwork in advance, you can present them quickly to the IRS officers. It will create a good impression in front of IRS officials. By arranging documents in advance, you will have time to review them and make sure everything is in order. Some of the common documents/paperwork demanded by IRS officials are as follows:
- Bank transaction receipts and statements
- Books, ledgers, or newsletters
- Service logs
- Gadget and machine records
- Vehicle records
- Digital transaction records
- Travelling allowance records
- Entertainment and reimbursement records
Contact a reliable auditing firm
Many firms consider IRS audits to be the only type of audit. You can also conduct internal/external audits to make sure your business is running as per the law dining chairs online. Many audit companies help their clients in complying with the regulations and maintaining the accuracy of financial records.
In a nutshell
Hiring in-house auditors can take a toll on small businesses. It is better to outsource the internal auditing process to a reliable CA firm. Internal audits can help small businesses in avoiding IRS audits. Start preparing for a small business audit now!
