A tax audit is rarely a pleasant experience for anyone in business. Whether in part or in full, the experience can be less of an issue if the audit involves only certain records, or a major accounting dilemma in a full business audit.
If your business is notified of an audit, you will be told which part or parts of your tax return will be examined so that you can gather the required documents. You also need to make a decision about who will represent you yourself or hire a tax advisor. Unless you are well versed in business tax law, it is advisable to hire someone with expert knowledge in the field. However, if you choose to represent yourself and encounter a problem during the audit, the taxpayer’s “Bill of Rights” allows you to request a stay of the audit until you consult with a certified public accountant, tax attorney, or until you are properly represented. Although professional representation costs money, you will be assured that the audit is performed efficiently, saving you time, stress, and money.
All available documents should be available for your examination to support several crucial areas of the business that you reported on your tax return. Starting with income, your bank statements and deposit records for the income you reported will be reviewed, along with sales records, receipts, general ledger, and other official accounting records. Proof of gifts you received, valuables, an inheritance, or the exchange of goods or services you received in lieu of cash, must be documented accordingly. Otherwise, the IRS might classify it as taxable income.
The accounting of indebtedness in respect of your business will be carefully examined. Expense items such as canceled checks, bank and credit card statements, receipts, and other business records can be compared to the amounts reported on your tax return. Special attention will be paid to business debts or losses, charitable contributions, travel expenses, meals and entertainment. Accurate records to validate these expenses are essential to confirm that only valid business expenses were accounted for.
Because business loan interest is a deductible business expense, financial records will be compared to bank statements and other financial records to verify that the money borrowed was actually used for business purposes.
Worker classifications will be reviewed to ensure that all workers are correctly classified. When a worker is classified as an employee, the employer must make mandatory deductions and contributions to the appropriate tax agencies and provide certain other employee benefits, including unemployment compensation. Contract workers are typically classified as independent contractors or self-employed and are responsible for their own taxes, with no employee benefits. For this reason, auditors will review data such as time cards, job descriptions, benefit plans, contracts, and other business records to ensure that independent contractors are classified separately from regular employees.
Your business payroll records, such as canceled checks, tax returns, deposits, and other business records, are reviewed to see if the data is being processed completely, accurately, and on a timely basis. Other information examined by the auditors includes state, federal and social security with holdings. Accounting practices for stewardship of Medicare taxes, unemployment compensation, along with wages and bonuses paid to your business owners and officers are also reviewed to ensure they are accounted for and within industry standards.
Inspection of other business records may include bank accounting records, customer records, vendor records, and especially financial records related to your tax return. In addition to business records, your standard of living and personal finances may also be inspected to compare your current lifestyle with the disposable income on your tax return to determine if they are consistent. A tax audit can be extended to anyone who has knowledge about you and your financial situation.
