No business owner welcomes IRS audits as they can bring out many skeletons from the cupboard and lay bare the weaknesses of the business because of poor bookkeeping. No one can predict which business would face IRS Audit because the criteria for selecting the business for audit are kept secret. Therefore, staying prepared to face IRS audit will relieve business owners from all worries as they would know about all financial matters by practicing good bookkeeping, believes Brian C Jensen.
To avoid audits, you must file your tax returns accurately, which is only possible when your bookkeeping records are up to date and error-free. Although good bookkeeping alone cannot prevent IRS audits, business owners should be aware of some standard audit triggers to stay better prepared for filing the taxes accurately supported by adequate documentation.
Data integrity and document matching is critical, says Brian C Jensen
While verifying tax documents, the IRS uses a computerized system for matching all tax forms issued to your business with the documents and figures submitted in the tax returns. If there is a mismatch in the document number or some document is missing, it will trigger human intervention to review the case. However, suppose there is any genuine reason for the different numbers and known to the business owner. In that case, an explanation accompanying the tax return should be enough to satisfy the auditor.
Repeated losses
One of the outcomes of bookkeeping is the generation of the Profit and Loss statement that highlights the company’s health. Business owners do many kinds of accounting jugglery to avail higher business deductions and could keep showing repeated losses year after year by manipulating the bookkeeping records. Since businesses strive for profit only, occasional losses are pretty average, but when there are some recurring losses, it makes IRS suspicious about the motive of the company. Brian C Jensen suggests that to convince the IRS about the genuineness of the losses, keeping a record of all expenses of the past three years should help clarify matters to the IRS and satisfy them.
High income or assets
Businesses with higher income or asses are more likely to face IRS audits as such companies are potential sources for collecting high taxes. Being careful about reporting assets correctly in the balance sheet should help minimize the chances of IRS audits if the assets are less than $250,000. Exceeding the limit will double the chances of IRS audit, which would be about 2% compared to 0.9% for companies staying within the limit. Since the balance sheet indicates the prospects of facing audits, ensuring its correctness depends on good bookkeeping that captures all details of financial transactions no matter how big or small it is.
Tax-Exempt status
Companies that enjoy tax-exempt status should be extra cautious to ensure flawless bookkeeping to convince the authorities with accurate supporting data the genuineness of their claims. IRS can often examine the records of such companies to be sure that the claims are genuine and the authorities have reasons to accept them in the future too.
Good bookkeeping ensures effective tax compliance that gives peace of mind to business owners.