How outsource accounting prepares clients for IRS audits
So you got the official notice from the IRS? Now what? Don’t worry - the process is not as bad as some make it out to be. A quote I read by Robert Baden-Powell describes thoughts on how to prepare: “Be Prepared... the meaning of the motto is that a scout must prepare himself by previous thinking out and practicing how to act on any accident or emergency so that he is never taken by surprise.”
Getting caught off guard can throw anyone off their game and into a tail-spin of panic. At LUXA, we prepare small business owner’s books for more than just sound accounting. We have some helpful advice and 4 important suggestions you should follow when the auditor comes knocking on your door!
Watch out for deducting those expenses that don’t match up with your records. Be especially mindful to be complete and avoid re-creating your records as well. Additionally, be sure you have enough supporting evidence proving that your expenses are “ordinary and necessary but not lavish” in your business field. Receipts are only part of the requirement. You also need to explain your business purpose that you can prove.
Deductions for Travel, Meals, and Entertainment
In order to deduct that last trip to Vegas you it needs to follow specific requirements. For example, as an owner of a business you must maintain some type of documentation log such as an account book, diary, log, trip sheet, as well as documentary evidence, such as receipts and canceled checks. These items account for the time, place, and people you met with and the business event that took place for your expenditures.
How Long to Hold on to those Receipts
So, how many shoe boxes do you have of receipts? I don’t know about you, but I prefer boot boxes - plenty of room! Knowing how long to keep those receipts varies, however. “The IRS recommends that records be retained for “as long as they may be needed for the administration of any provision of the Internal Revenue Code.” What that means is you have 3 years until you can be audited by the government, in general, or until the statute runs out. The statute of limitations varies by state. Check with your tax CPA for more information on statutes. Generally, if a substantial error is identified, the IRS will not go back more than the last six years.
Some documents need to be held for longer amounts of time. Documents such as copies of old tax returns, divorce decrees, adoption papers, retirement plan documents and basis records for real estate, stock, assets and depreciable property. If you have access to a scanner, I would highly recommend digital copies and a separate zip drive to archive in case of a fire or building damage.
Keeping an eye on activities such as these won't help decrease your chances of an IRS audit but we hope sharing this information can help you sleep better at night. LUXA Enterprises is an outsource accounting firm based in Tulsa, OK. To get more helpful bookkeeping advice visit our blog where we discuss this and more on Tulsa bookkeeping.