By A.J. Gross
Do you want your business to be IRS Audit Proof? Follow these 5 tips to insure that you don’t get in trouble with the tax man.
Tip #1 – Properly record deposits. The IRS Revenue Agent will request all business and personal bank statements to do a deposit analysis. The deposit analysis is then compared to the business income reported on your tax return. If there is a large discrepancy between the deposit analysis and the business income reported on the tax return, the auditor will assume there is unreported taxable income unless you can prove otherwise. I recommend keeping good records of sales, loans, and bank or credit card transfers.
Tip #2 – Use accounting software. The IRS will select a return for tax audit about 1.5 to 2 years after the tax return was originally filed. It is difficult to remember every sale and expense from 2 years ago. It is significantly easier to trace back what happened 2 years ago if accounting software was used.
Tip #3 – Keep good records. The IRS Revenue Agent will ask for proof of expenses. This may include check registers, credit card statements, and receipts. Purchase banker boxes and three tab filing folders from your local office supply store. Then create a folder for each expense type. When you have a receipt for a particular expense type, you will place the receipt in the perspective folder. Finally, place all expense folders for the given year in a banker box for storing. If your 2014 tax return is selected for audit, all you have to do is pull out your 2014 banker box and you have all the records.
Tip #4 – Extra requirements for meals, travel, and mileage. It is not sufficient to only keep receipts for these types of expenses. There is additional record keeping requirements. For meals expenses, you are required to keep track of the cost, date, name, address, business purpose, and business relationship. For travel expenses, you are required to keep track of cost, date, destination, and business purpose. For mileage expense, you are required to keep track of date, beginning destination, ending destination, and business purpose.
Tip #5 – Don’t commingle business and personal funds. This is a large red flag. Commingling personal and business funds will cause major headaches during an IRS audit. Use your business bank account for business and your personal account for personal expenses. If you need money for personal expenses, then move money from your business bank account to your personal bank account for the expense.
A.J. Gross, C.P.A., E.A. is President of ALG Tax Solutions. A.J. Gross can be contacted at AJGross@algtaxsolutions.com or www.algtaxsolutions.com.
This was printed in the October 17, 2015 - October 31, 2015 edition.