Fearing a Tax Audit? 5 Things You Can Do to Prepare
Tax preparation can be difficult for business owners, who must constantly strive to strike a balance between claiming as many deductions as possible and avoiding an IRS audit. The fear of the dreaded visit from a tax auditor can even drive some entrepreneurs to dismiss some deductions, including home office space, which has traditionally been rumored to be a “red flag” for auditors.
Many businesses don’t realize that an IRS audit is not the end of the world. In fact, with plenty of preparation, professionals may find the process is relatively painless. Here are a few things you can do now to ensure you’ll be able to sail through a tax audit with minimal work.
Use a Professional Tax Preparer
If you’re still doing your own taxes, you’re likely doing yourself a great disservice. Sure, the do-it-yourself method may save hundreds of dollars in preparation fees, but a professional can pinpoint deductions that you might not be able to find yourself. By keeping up with the current tax laws, an accountant also has the knowledge necessary to save you money. As a bonus, some tax preparers offer to handle the audit for you if one ever takes place. You may not even have to be present for it. At the very least, your preparer will guide you through the process, appearing alongside you during the audit and taking some of the pressure off of you.
Retain Your Records
The most important thing you can do is keep meticulous records every tax year. Track your expenses using an automated system and make sure you save everything for at least three years. If possible, scan supporting documents like receipts and save them to a secure cloud server, where they will be backed up and safeguarded in the event of a disaster. A fire or natural disaster could wipe out paper records, but cloud-based electronic records will remain safe no matter what happens. As a bonus benefit, electronic records don’t take up office space and you won’t have to box them up and move them as you change locations.
If an audit ever happens, you’ll immediately discover the documentation you’re lacking. For that reason, it’s important to make sure you have all of that information in place as you file your taxes and keep it in an easy-to-find place in case you ever are audited. When you are well prepared, you won’t fear the audit as much, since you’ll know all you have to do is gather your documents and sit down for a meeting.
Respond to Requests Promptly
When an audit notice comes from the IRS, it’s important to respond as soon as possible. Sometimes the IRS will notify taxpayers via a phone call, but notifications are also sent by mail. Contact your tax preparer and begin gathering your documents immediately. This will help you identify any information you might be lacking so that you can get that documentation together in time for your audit. You may have to go to your online bank accounts to print out the data you need and, if that fails, you may require a visit to your bank to get proper documentation to satisfy the IRS’s requirements.
Don’t Live in Fear
Successful leaders move forward without fear, and you should exhibit the same fearlessness as you build your business. Deductions that might serve as audit red flags shouldn’t hold you back, as long as you’re being completely honest in your tax filings. As long as you’re doing everything by the book and you have the documentation to prove it, you shouldn’t have to waste time worrying that the IRS may come knocking on your door. If they do, you’ll be ready for them. For home office deductions, be aware that the IRS auditor will likely want to see the space where you work, so be sure you’re following the guidelines for claiming home offices, including ensuring the area is used exclusively for your business.
While many professionals fear a tax audit, the reality of an audit is far less frightening than people imagine. If you work with a tax preparer who knows the laws and is willing to help you through the process, you’ll have the peace of mind of knowing you’re doing everything the way you should. Then if an audit notice appears in your mailbox, you’ll simply prepare to face the situation, knowing that you’ll come through it unscathed.