Keep Your Accounts Payable Journal Entries for IRS Audit... With the October 15th tax deadline around the corner, a word of advise to all business owners!
Many businesses don’t keep accurate financial records. They may have read the study from Consumer Reports showing that the risk of being audited is only 2%. You shouldn’t let such studies lull you into a false sense of security. A number of factors can increase the risk of being audited. One of the biggest problems companies face is that they don’t have accurate accounts payable records for expenses. It is crucial to keep accurate accounts payable journal entries in case the IRS chooses to audit your business.
Maintaining accurate accounts payable records is extremely important to reduce the risk of being sanctioned by the IRS. Here are several reasons that you need to keep records carefully.
Accurate Reporting to Reduce Audit Risks
One of the most important reasons to keep accurate records on accounts payable is to reduce your risk of inaccurately reporting your expenses. Companies that don’t keep records may accidentally report expenses multiple times or record figures incorrectly while filing their tax returns. The IRS may be suspicious if your expenses are unusually high, which increases the risk of being audited.
You should always retain accurate records to reduce the risk of being audited. It is worth taking time to double-check your ledgers and expense reports to avoid the stress of an audit. Remember my words in the beginning: Keep your accounts payable journal entries for IRS audit.
Make Audits Go More Smoothly
You may have already received an IRS Notice of Audit. This can be especially stressful, but it will be much more stressful if you didn’t organize your records properly.
One of the biggest things that the IRS that the IRS evaluates is accounts payable records. They want to understand what expenses you are reporting. Here are a couple of things that they look for:
· They need to match your accounts payable records with the overall business deductions on your tax return. You need to justify all business expenses and prove that they match those reported. Your journal entries are the only way to prove it.
· They want to make sure that you aren’t conflating personal and business expenses. If a purchase was made for both business and personal reasons, they will want to see that you only deducted the portion applying to your business. They can only make this assessment if you have careful records.
Audits can be very stressful processes, but they will go much smoother if you have kept accurate journal entries and accounts payable records. Hopefully, you will never be audited, but you should be prepared in case. Keep accurate information on all accounts payable to make potential audits go smoothly.
Many small business owners have their own system to keeping track of expenses. Unfortunately, a system that works for you may not be compliant with the IRS. You need to understand their rules and abide by them carefully to avoid being audited. These rules need to be reflected in your journal entries. Here are some things to verify beforehand:
· Understand IRS requirements on payroll record keeping
· Make sure all accounts payable expenses are business related
· Always document which accounts were paid and only report those items on your tax return (payments for goods and services rendered after December 31 will be reported on the following year’s tax return)
There are a number of policies on recording and keeping your accounts payable journal entries for IRS audit. You need to understand the IRS requirements and comply with them carefully. Your diligence will pay off if you are ever audited.