When you own a business, tax time can seem like a nightmare. Between deductions and expenses, it can be challenging to know what you are supposed to do.
After feverishly working through filing your taxes, it can seem especially frustrating to find the IRS has chosen your business for an audit.
Understand the type of audit
Audits are typically not like the ones you see on television, with papers stacked high and an auditor pouring over the materials at an empty conference table. While the IRS does conduct some on-site audits, it is not the most common scenario.
In many cases, an audit will consist of mailing or emailing documents to demonstrate answers to the auditor’s questions. The auditor will start by looking at either a specific tax return or returns from a particular period and continue the audit by asking for supporting documents.
The most important thing you can do before an audit is to organize your records. Ideally, you already have a system in place for keeping your records categorized and readily available.
If your records are disorganized, it is essential to establish a system right away to help your audit go smoothly. An effective system may include the following:
- Subfolders in your business’s email account for categories of expenses
- Hard drive and cloud-based files
- Spreadsheets with organized lists and charges
In many cases, you can keep digital copies of your records, so you do not have to store paper copies, but remember to save your documents in more than one place. While there are exemption processes in place for misplaced or lost files, it is always better to have copies of your relevant documents readily available.