Advice for Business Owners on How to Avoid an IRS Audit

by Stephanie

Here is some advice for business owners to help them avoid an IRS audit.

Business owners of all sizes often do not realize that they may be putting themselves at risk by only just punching numbers into a tax preparation software program, without giving any thought to audit triggors.

The result is that the business owner may either miss deductions and in effect pay too much in taxes. Or they may also misrepresent their deductions and pay too little in taxes. Neither of which is a benefit to the owner, while the latter puts them at risk for an audit.

Many CPA firms advise business owners on ways to help defend against an audit. Here is the top advice for business owners on how to avoid an IRS audit:

1. It is important to use accounting or bookkeeping software to input all financial transactions on a daily basis. It also important to use two separate databases for business transactions vs. personal transactions. Co-mingling of business and personal transactions is a no-no and doesn't hold up well in an audit.

2. If you are using a tax preparer to do your taxes, make sure they are licensed. Ask if they are specialized in exceptions for businesses.

3. Your tax preparer should give you a list of questions to get any missing information and should be able to prove that proper review and analysis is being conducted.

4. Larger deductions should be substantiated with copies of all documents received from banks and vendors, with the balances matching to the tax return in order to help in an audit.

5. A list of any adjusting journal entries made by the tax preparer to the financial database should be provided to the business owner. Once the tax return is prepared, the owner or their bookkeeper should add the adjusting journal entries to their own database so that all financial statements match to the tax return.

Preparing for a tax audit in advance allows business owners to take the maximum number of tax deductions allowed by retaining the proof needed in case the tax return is ever audited. An audit isn't a problem when all deductions are substantiated in advance. All of this in turn gives the business owner peace of mind.