When running a business, you cannot escape the inevitable – taxes. Taxes will always be there, so you need to be well-prepared when tax audit season comes. Making a mistake in your taxes, whether big or small, may result in enormous fees or, worse, jail time.
What Is a Tax Audit?
A tax audit is an assessment of your organization’s financial accounts to ensure that you are paying the right amount of tax and complying with tax laws. Tax audits are usually annually conducted. The IRS will go into your office to get the necessary documents for their tax audit.
How To Prepare?
Since tax audits result in either fees or jail time, if done incorrectly, you should be well-prepared for it. Being well-prepared doesn’t only mean knowing what a tax audit is. It also means that you need to keep your company in order and be more knowledgeable about the whole process of a tax audit.
Here are some tips on how to prepare for a tax audit:
- Know the Types of Audit
There are 3 different types of IRS tax audits that will be carried out during audit season.
One type of audit is a correspondence audit, which is usually done via a letter asking to clarify some things, correct errors, and ask for additional documents. The second type of IRS tax audit is office audits. This is when the IRS requests you to visit their office and bring documents with you.
On the other hand, the third type of IRS tax audit is a field audit. This is where the IRS comes to your office space or place of business to do a more comprehensive check. Within the time that the IRS is in your office, they can request for any kind of form, document, and previous tax returns. Be prepared for surprises because they can ask for anything to help with their audit.
Onboard a Professional
If you’re not an expert on taxes or studied the intricacies of accounting, take note that not having someone well-versed in taxes or accounting could result in fees and court cases. To an ordinary person, the tax code can be very difficult to understand. Missing out on the fine prints is a mistake that you’re expected to make.
To save time and money, you should hire professional tax attorneys and CPAs to prepare your financials for audit. CPAs and tax attorneys will know how to organize your financials and ensure that you are not breaking any tax laws. On top of this, your CPAs and tax attorneys can answer the questions of tax auditors come audit season.
Ensure Good Record-Keeping
At the start of your business, ensure that you already keep good records of your financials. It’s best if you can prepare back up files for your records up to the past 3 years. Get the habit of keeping a filing system so that you can keep your tax returns on record.
Having all your information organized will make it easy for you to pull up records when tax auditors ask for certain files.
Alert Your Banks
As a tax audit is conducted, they will also be looking at your dealings with your banks. This includes confirming on your loans, deposits, and bank statements.
To confirm your loans, the auditors will ask your bank for a document certifying how much your loans are and how much is outstanding. To make the process smoother, you need to give your banks a heads up that it’s tax audit season.
When the schedule is set for tax audits, remember to always be kind and accommodating as possible. Your presentation and how you act towards them is very critical.
So, be as polite, professional, and prompt as you can. When you have meetings with your auditors, be in good business attire, and show up on time. Also, promptly send all the documents that they request so as not to inconvenience them.
Here is just a list of the usual documents that the tax auditors will ask for:
- Legal documents (settlements and property acquisition)
- Canceled checks
- Loan agreements
- Investment or bank account statements
- Financial statements
Even as early as the start of your business, make sure that your books, records, and documents are all in place. Try to be as accurate and organized as you can with your taxes.
By following the tips above, you will be able to protect your organization from committing tax law crimes when you get audited.