What to Avoid and How to Prepare for an Audit

It is common knowledge that a tax audit is any business’ or employer’s worst nightmare. Though these types of investigations are unusual, it is best to be prepared for them by knowing exactly what an auditor would be looking for if they were to check in on the internal record keeping within your company. Here are the most common factors, red flags, and other key pieces of information that auditors typically search for when they are dealing with a business.

The Most Important Things Auditors Want to Know

When the Internal Revenue Service begins a tax investigation, there are certain critical data they are on the hunt for. The more transparent you can be on these numbers and necessary components of your business finances, the better off you will be in the circumstance of an audit.

Having comprehensive, thoroughly documented, and easily accessible bookkeeping records is one thing auditors will look for as an indication of how organized your accounting department is.
Auditors will necessarily look into your tax activity regarding your employees. If you have paid your appropriate payroll taxes and made the obligatory contributions to your employee tax accounts, such as social security, you have satisfied your legal duty.
One of the most basic things auditors look for is to make sure that all aspects of your business’ income were reported on its income tax return. This includes cash assets, property or material assets, and services that have been received by the business. It is essential to report all of these components of business income on each calendar or fiscal year tax return.
If your business seems to be thriving beyond what its numbers seem to indicate, this may look suspicious to an auditor. Your spending should fit into the picture of your revenue, and anything outside of this may be marked as a red flag for further inquiry.
A related aspect of your business that auditors will investigate is whether your business expenses appear to go along with the nature of your business itself. Any inconsistencies will be noted.
Deductions are another major issue that auditors will check into. All business deductions must necessarily be business-related, and if they find that deductions were made that were, in fact, personal expenses, this will be counted against you. Common deductions like business travel and transportation, meals, and entertainment are most often examined, as it can sometimes be ambiguous as to whether these are business or personal expenses.
One other major point about deductions that auditors will look into is whether or not your business made their deductions during the correct tax year. While most current deductions must be accounted for in the year they occurred, capital deductions can sometimes cover a period of more than one tax year.
Keep in mind that a business audit means that your personal financial records can also be scrutinized. In these situations, your business records and personal records may be checked against each other to be sure that they match up.
If your business has any related party transactions, auditors may investigate whether any revenue has been moved to family members or their companies as a business deduction.

By keeping aware of these potential pitfalls in your business’ accounting records and bookkeeping documentation, you can ensure that an auditor will have easy access to whatever information they need. The more open and available you are to an auditor, the more likely it is that your case will be dealt with smoothly and efficiently. Making the above aspects of your business finances clear will make it easier for you and your employees to deal with an audit should it occur, without having to scramble for further documentation and necessary records.

Legal Disclaimer

The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.