All Americans fear the words tax audit.
A letter from the IRS, especially one ordering a tax audit, will make even the calmest person nervous. But, for a small business owner who does all his own record keeping, it’s not just scary, it could spell disaster.
If you receive an audit letter from the IRS, call your tax accountant and schedule an immediate appointment; Representing clients in tax audits is part of the job of a tax professional. It will be your job to locate and provide all the documents necessary to win that audit. If you’ve kept audit-proof records, it’ll be easy.
Because most small business owners don’t have accounting training, few realize how easy it is to keep audit-proof records. Some end up making record keeping a complicated computer-controlled task, and many just ignore everything right up to tax filing time.
Business record keeping doesn’t have to be complicated or time consuming. There are only two things you need to do to make it easier to pass a tax audit. The first is to adopt a record-keeping system that is super simple; The second is knowing exactly what the IRS expects from the small business owner at the time of filing taxes.
Record keeping for a one or two person business is primarily done to satisfy the IRS, so why not keep audit winning records? Follow these ten simple rules throughout the tax year and not only will you be ready for a tax audit, but it will also simplify your record keeping tasks.
Rule No. # 1 – Document income. Absolutely all business income, including all cash and tips, must be deposited into a separate checking account that is used for business funds only. Do this and all you will need at tax time is 12 bank statements to total your income.
Rule No. # 2: Keep a record of documents. Every penny spent or collected by your business needs a paper record. If a receipt is not provided, you can make your own; be sure to include all the necessary details. Working from expense receipts simplifies the record-keeping process for a small business owner.
Rule # 3 – Record barter exchanges. Every commercial barter exchange requires a paper trail that assigns value to your time or the product you traded. The value of a trade-in is the same amount it would charge if it had been a cash sale.
Rule No. # 4: keep track of all expenses. Sorting expense receipts is easy when using the business expense alphabet. From advertising to Ziploc bags, if you use it in your business, there is a place on your tax return to deduct that expense.
Rule No. 5 – Depreciate equipment. Any equipment purchased that has an expected useful life of more than 2 years must be depreciated or expensed at the time of tax return. It is important to keep a list of all business equipment purchased, the date it was purchased, and the price paid, with your tax records.
Rule No. # 6: record your miles. Unless your car is used for business only, keep a small laptop in your car to track business miles. If you do not keep a mileage log and are asked to provide one for a tax audit, you will not pass the audit.
Rule No. 7: inventory tracking. The IRS considers all items it makes or buys for resale to be inventory; Inventory costs cannot be deducted until that inventory is sold. Spending inventory is easy once you learn how to calculate cost per item value.
Rule # 8 – Educate yourself. No matter how good your tax professional is, if you don’t provide all the necessary information and figures, your tax return will be incorrect.
Rule No. # 9 – Plan Ahead. Tax laws change every year. During your annual tax visit, ask if there are any new changes affecting you, what tax laws are in the works, how they will affect your business, and what you can do now to reduce future taxes.
Rule No. 10: keep it all. Without the receipts, you will not pass a tax audit. Pack or pack all of your tax receipts each year and keep them for a minimum of six years. If you receive an audit letter from the IRS, simply bring the box or bag containing the receipts for the year being audited when you meet with your tax professional.
I can’t tell you not to worry about a tax audit, we all do. But, if you’ve followed these ten rules, your receipts and audit should be in the bag!