Tax audits are usually not a pleasant experience for anyone in business. Whether it is part or all, experience can be a minor problem if the audit is only about certain records, or a major dilemma in accounting for a full-fledged audit of a business.
If your business is notified of an audit, you will be notified of which part or parts of your tax return will be audited so that you can collect the necessary paperwork. You will also have to make decisions about who will represent you, yourself, or hire a tax advisor. Unless you are experienced in business tax law, it is advisable to hire someone with expert knowledge in the field. However, if you decide to represent yourself and experience problems during the audit, the taxpayer’s “Bill of Rights” allows you to request a deferral of the audit until you consult a certified public accountant, tax attorney or until you are properly represented. Although professional representation costs money, you can rest assured that the audit is performed efficiently and saves you time, stress and money.
All available documents must be available for review to support some of the important areas of business that you report on your tax return. Starting with income, bank statements and deposit records for the income you report will be reviewed, along with sales records, receipts, ledgers, and other official accounting records. Proof of gifts you receive, valuables, inheritance or exchange of goods or services that you receive in exchange for cash, must be properly documented. Otherwise, the IRS may classify it as taxable income.
The accounting for accounts payable regarding your business will be carefully scrutinized. 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. Particular attention will be paid to business debts or losses, charitable donations, travel expenses, meals and entertainment. Accurate records to validate these expenses are important to ensure that only legitimate business expenses are taken into account.
Since business loan interest is a deductible business expense, financial records will be compared with bank statements and other financial records to verify that the borrowed money is actually being used for business purposes.
The classification of workers will be checked to ensure that all workers are classified correctly. When a worker is classified as an employee, the employer must make mandatory deductions and contributions to the appropriate tax agency and provide certain other employee benefits, including unemployment compensation. Contract workers, as a rule, are classified as independent contractors or self-employed workers and are responsible for their own taxes, without employee benefits. For this reason, data such as time cards, job descriptions, benefit plans, contracts, and other business records will be reviewed by auditors to ensure that independent contractors are categorized separately from permanent employees.
Your business payroll records, such as canceled checks, tax returns, deposits, and other business records are reviewed to see if the data is processed in a complete, accurate, and timely manner. Other information examined by auditors includes state, federal and social security deductions. Accounting practices for Medicare tax maintenance, unemployment compensation, along with salaries and bonuses paid to your business owners and officers are also reviewed to ensure they are justified and in line with industry standards.
Other business record checks may include accounting for records such as banks, customers, suppliers and especially financial records regarding your tax reporting. Apart from business records, your standard of living and personal finances can also be checked to compare your current lifestyle with the available income on your tax return to determine if they are consistent. A tax audit can be extended to anyone who knows about you and your financial situation.