Do you know how to avoid an audit? There are all sorts of things you can do to avoid bringing the unwanted attention of the IRS to your business finances.
Unfortunately, there isn’t a magic pill you can take or a quick software that you could download and install to avoid an audit. Although I can’t provide you with any tips that are that simple, there are things you can do to make sure you are audit proof.
Reviewing your finances and ensuring you are audit proof doesn’t have to be so daunting. And although no one can guard against a random selection audit, you can make yourself aware of some common pitfalls that can keep your books above reproach should that audit come.
With these tips on how to avoid an audit, you can breathe easy knowing your books are clean as a whistle.
To avoid an audit, there are some things you should do to ensure your books are clean. Here are three pitfalls to avoid with your business books.
A classic and favorite pitfall amongst the busy, many-hat-wearing entrepreneurs is keeping up with the paper trail of your finances.
Keeping up with your finances can often feel like a game of hide and seek with a two-year-old. If they can’t see you, you can’t see them. Sadly, this is just not true at all when it comes to your finances and business taxes. The longer you avoid keeping track of your finances, the harder you make it on yourself come year-end.
You are dealing with multiple hundreds and thousands of expense transactions and details of income. The IRS doesn’t tell you HOW you have to keep records, but they require records for all of it.
And guess what?
Your CPA knows this! If they are worth their awesome fees, they will ask you for “paper” trails (hello digital age!), proof, and appropriate backup.
If you wait to gather these items until the entire year has passed, you will find yourself in prime territory to make mistakes and waste time.
You or your bookkeeper should be using something easy like ReceiptBank or Bill.com to keep track of receipts and invoices. You should also be using tools like Quickbooks Online to make sure all of your income and expenses tie out to your accounts.
If you haven’t implemented these tools, do it now!
Don’t get caught in a last-minute panic. Utilize these tools to make records of purchases on the spot so you don’t make piles of “to-do’s” for yourself later. Your future self will thank you!
As the kick-butt business owner you are, you want to make money. As the savvy business owner you are, you want to take as many deductions as you possibly can so that you pay as little taxes as you possibly can.
We get that. But here’s the catch.
The IRS wants to make sure that you aren’t using a business to run a hobby in order to deduct your hobby expenses.
To help them keep a lookout for this, the IRS looks for a business to be profitable at least three out of five years. So if you are claiming a loss on your taxes three or more years out of a five-year span, you are inviting the IRS over for coffee. They may likely class your business as a hobby and deny your deductions. In one sense, what will be will be. If you legitimately have a loss four years in a row, you can’t fudge your numbers to try to hide that.
You CAN make sure that the items you are claiming as deductions are appropriate and within the latest IRS guidelines.
The bottom line here is to be as honest as you can with your business expenses.
This seems like an obvious one, but more often than not in the bookkeeping business, we have seen small businesses come to us whose sales come nowhere close to tying out to their bank account (if this is you, we can help!). This is a big one for the IRS. When your business makes money, you need to be able to prove how and when you made that money. Your sales, investments, expenses, and remaining profits should all add up, and there should be clear records of this.
Too many adjustments on your business books because you got your records “close enough’ - but not actually accurately tied to your sales and bank account - will definitely instigate further inspection from the IRS. If you do get selected for an audit and they can see everything neatly adding up, this process will be a breeze for you.
I can’t preach this loud enough, but investing in (and then using!) a quality, cloud-based bookkeeping software such as Quickbooks Online will be a lifesaver for your business come tax or audit time.
Remember ReceiptBank and Bill.com? If you pick the right software, these will automatically sync! It should also easily integrate with whatever sales software you are using so that you can conveniently tie out your sales to your profits and expenses.
I want to emphasize again that these are healthy practices, not magic pills. The idea behind these is to focus on accuracy and preparedness.
Don’t get yourself in a position where you are scrambling and liable to make mistakes. Make accurate record-keeping an easy part of your daily life as a small business owner. Lean on your financial gurus to make sure you are up to date with the latest deduction rules.
If you can implement time-saving tools and software, this can actually be a simple and - dare I say it - enjoyable part of your day! When you can see on a regular basis how your business health is doing, including if and how it is making money, I really think you will enjoy it. Not only will the IRS be satisfied, but YOU will be fueled to be a better leader and equipped to make smarter decisions.
At Two Roads, we believe that the success of any business exists in its financial numbers. We build relationships with clients to better understand the ins and outs of their business and help them grow and succeed. We understand there is more to good business than padding the bottom line. And we love working with businesses that share our vision!
Ready to get started? Click here to book a time to chat. For more information on the services we offer or how to become a partner, contact us at 865-212-0063.
Liked this article about how to avoid an audit? Here are three more articles that can help improve your business’s finances!
7 Ways to Reduce Your Employee Turnover (and Save Thousands!)
4 Unusual Financial Strategies for Small Business Owners
5 Benefits of Hiring a CFO Consultant
This post was first published in 2018, but was updated in 2023 just for you.