Prepare for the worst. Hope for the best. IRS Edition.
With the passage of the Inflation Reduction Act, there is new concern that your business could be audited. While the risk of an audit is still low, no one wants it to be them. It may take a couple of years for the full effect of this extra funding to take place.
This gives you time to prepare in advance for the scrutiny of this type of investigation. Here are a few things to remember and start doing:
Record All Your Income
• Cash receipts
Save your receipts starting NOW!
The more organized your receipts are, the easier it will be to find things if you are audited, but use reason. Don’t spend hours with some elaborate naming scheme - simply organizing by year and month will suffice.
Here are some ways to organize:
• Take a picture of each receipt and save them in an online folder like Dropbox, Google, etc.
• Take a picture and attach it in your accounting software to the expense. Just be sure to double check that your software allows a mass download of the expenses should you decide to change software. We know that QB Online and Zoho Books allow this.
• Get a shoebox or folder and put everything in it. Not our favorite choice - but better than not saving these at all!
• For receipts that are emailed to you, save the emails in a folder or save the email and/or attachment to an online folder like Dropbox or Google.
• Hotel receipts are important. If you don’t have one, the IRS may assume there are meals on the hotel bill and limit your deductions. A receipt showing the meal (or lack of) will be the best way to ensure a full deduction. Of course, the business purpose of the trip should be clear as well.
• Document, document, document...date, business purpose, people, location.
• Get in the habit of writing the information on your receipt before you take a picture of it.
• Note that business meals, entertainment, travel and mileage are big hitters for the IRS.
• BANK STATEMENTS AND CREDIT CARD STATEMENTS MAY NOT BE CONSIDERED PROOF IN AN AUDIT. These don’t have much detail about what you purchased, only that you made a purchase. The IRS may not accept these as backup, so continue to save your receipts!
Stop Deducting Personal Expenses
• The IRS may assume every expense is personal until you prove otherwise. They may just look at a certain category or may look at all of your expenses, but it is never good when they find a lot of personal expenses deducted as business expenses.
• The IRS may request copies of your bank statements to see where your money is coming in and make sure you are recording all of it as income.
Keep your Personal and Business Bank Accounts Separate
If your business return is audited, you don’t want the IRS also digging into your personal stuff. If your funds are commingled, it’s all fair game for them. They can ask for your bank statements and may question every deposit as well as look at where your money is going out. On a side note, you also make it harder to tell how your business is really doing and creating more work when you don’t keep these accounts separate.
There are a lot of benefits to good accounting records. You want to keep good records primarily for your business and not the IRS, but the side benefit is that when the IRS comes calling, you’re ready.
Need help getting your records in shape? Give us a call.