I have heard clients say before, “If it wasn’t for the IRS, I wouldn’t need a bookkeeper or accountant”. Of course, this is far from true, as a good accounting system consistent with GAAP (Generally Accepted Accounting Principles) provides consistent, useful financial information for external users (investors, for example) and internal users (owners and managers). However, when this belief is verbalized, I generally keep quiet and hope I get the opportunity to show this small business owner that there is so much more than just accurate books for tax filing. Either way, the point is clear. A large portion of small business owners first hire accounting help to avoid making mistakes on their tax filings that potentially lead to a dreaded audit.
It is important to note that anyone may get pulled for an audit. It may be from the IRS or even a local state or city organization. A portion of audits are pulled randomly, so it is important to always keep supporting documentation such as receipts, invoices, check stubs, etc. I always recommend keeping digital copies and include digital storage options in my bookkeeping packages. Besides the random audits, there are additional factors that could increase your likelihood of being selected.
Barbara Weltman’s blog with the SBA goes over five of the factors that could affect your audit chances. It is important to note that some factors you might not or should not change just to decrease your chances. For example, do you want to stunt your sales just so you don’t get bumped into a bracket with a slightly higher audit rate? Of course you don’t. However, there are some things, like deducting large business expenses, that you can do your part to not throw up a red flag. Make sure you only deduct business related expenses. This is especially true for things like Travel and Entertainment, which are most often misunderstood by business owners and often carry expenditures that are actually more personal in nature. Whenever in doubt, assign an expense to “Ask My Accountant” or some other similar account to bring up with a professional that can provide objective insight.
Read more on Barbara Weltman’s article here