Being “audit-proof” is a piece of mind that you get when you work with an accounting professional. However, even your CPA is only as good as the information you provide him or her. While filing your taxes properly is (of course) a precursor to avoiding an audit, there are many things that happen between when transactions occur and when they are actually included in your taxes that can impact your odds of getting an audit. Here is our top list for being audit-proof.
1. Document Everything
First, make sure you document everything. If it is going to be included on your taxes, you need to make sure you have an exact record of the transaction, including the business, date of transaction, amount, items purchased, and purpose of items. These should be in paper form as well as listed in your accounting or bookkeeping software and reviewed for accuracy. Think of it as a self-audit. When you keep all your records accessible and organized, it takes no more time than balancing your checkbook. While it is an additional step, it is one that any good bookkeeper is going to do for you.
2. Be Accurate
Next, be accurate. When you try to manage your own books, there is a temptation to estimate (or guesstimate). Just don’t. The IRS is fully aware that most transactions are not whole numbers. If they look at your records and see a series of 5’s, 100’s, and 1000’s, they are going to assume you rounded, and likely rounded up. It puts you at a risk for audit. Likewise, if your numbers don’t add up across your forms, it looks like you are trying to pull one over on the IRS. Professionals make sure that the numbers match. You need to as well if you are going to be audit-proof.
3. Be Informed
It is also important to be informed. Many audits are triggered by home office deductions, sole proprietorship activities, passive losses, and other activities that significantly reduce the taxes a person might owe – but never be afraid to take deductions to which you are entitled. It is going to look funny for someone who claims to have a sole proprietorship and to not claim a home office deduction. Make sure your financial “story” makes sense.
4. Be Honest
Finally, be honest. If you want to get flagged for an audit quicker than anything, try reporting W2 wages (those are earnings you get from working for someone else) on the same tax return that you report significant losses on Schedule C (the form you file for a Sole Proprietorship). While these expenses and/or losses could be legit – many people start businesses while they are working for someone else – it is also a popular way for people to reduce their tax burdens, albeit fraudulently. However, if you are simply honest about what you spend on your business and which expenses are truly attributable to running a business, you are going to see your risk of getting an audit go down considerably.