Dreading a Business Tax Audit? Here Are Four Ways to Make It Easier
Few words strike more fear or annoyance in the heart of business owners.
While the IRS estimates that small businesses have a less than one-half of 1% chance of being audited, the thought of facing a business tax audit is still enough to have some anxiously curling their toes.
We’re here with some good news: there’s no reason to panic. Whether it’s an occasional Form 990 audit for your nonprofit, a correspondence audit (where you respond in writing to an IRS inquiry) of your business tax forms, like Schedule C, or a face-to-face field audit of your business tax returns, there are ways to stay prepared that will make the event far less stressful and far more efficient.
Better yet, if you use Bill.com, you’re already ahead of the process. You can think of Bill.com as your audit-preparedness kit – your way of knowing you’ll be ready in the unlikely event a business tax audit occurs. (Bill.com also helps you prepare for a stress-free financial statement audit.) In the meantime, there are things you can do to make sure you’re in great shape if a federal, state or local tax authority contacts you.
Always be prepared.
You already know what tax auditors will look for – they want to make sure you reported the maximum amount of income and minimum amount of deductions for the year. The best way to be prepared is to have all your paperwork in order, with income and expenses labeled and organized by tax year. All the information on that paperwork should be reconciled with bank records. Once you have all your files in order, make sure they’re easy to access and ready to be shown to the auditor. The quicker the auditor can obtain the information he or she needs, the more painless the audit will be.
Join the digital revolution.
We live in a digital world, with plenty of technology on hand to make record-keeping easy.
The best way to organize large amounts of files is to digitize them. Chances are you’re already using various accounting solutions to help streamline your workflows. Now is the time to bring your older files up to the same standard.
If you’re facing an audit that looks back three years ago, electronic documents are easier to locate, access and organize than traditional paper files. Waiting until you’re facing an audit to digitize increases the likelihood of data entry errors and other mistakes that can throw a wrench in the audit process. Electronic files aren’t just useful for audits – they’ll also make your life a lot easier in the case of natural disasters or other disruptions.
Keep an audit trail.
Auditors want to be able to easily piece together what happened and when – especially when it comes to business expenses. An audit trail of your deductions is a record of your ordinary and necessary business expenses that includes legitimate invoices, when payments were approved, by whom and proof of payment. Essentially, an audit trail makes it easy to show that you followed proper processes and procedures when approving and making payments that were part of your business operations.
If you regularly maintain audit trails, you’ll be able to revisit payments in detail, viewing the reasons for the expense, actions that were taken and the steps that were followed.
Let Bill.com do the heavy lifting.
While each of these steps is crucial to a stress-free audit, that doesn’t mean they aren’t time-consuming if you try to undertake them on your own. Thankfully, Bill.com can handle all these tasks for you – automatically.
When you use Bill.com, your paperwork is transformed into electronic documents that are searchable. Better yet, electronic storage isn’t limited to just your bills – you’re given unlimited space for storing all your financial files such as receipts, contracts and notes, as electronic documents, all in one secure location.
When you use Bill.com for your day-to-day operations, your payments are synced with your accounting system, ensuring that your expenses will always reconcile without the need for additional data entry to prepare for an audit.
Audit trails are captured automatically for all bills, approvals, changes and payments, meaning there are no canceled checks or contracts to chase down. Everything is time and date-stamped to prove you have deducted your business expenses in the proper tax period. You can even give your field auditor read-only access to Bill.com – doing so has been known to cut a week-long audit down to just one day.
Audits will never be fun, but with Bill.com, they can be as stress-free as possible. A little preparation goes a long way – especially if Bill.com is involved.