Audit Proof Your Records

For the Small Business Owner

Call Beucler Company CPA to help you with maximizing your income tax deductions.

Tax laws can be difficult to understand and are always changing. Make sure
You are maximizing your deductions and that your records are audit proof.

1.Identify source of each receipt to income.  When the IRS audits a business tax return, deposits to a bank account that are unaccounted for may be considered income.

2.Keep a separate bank account for the business. All disbursements payments should be made by check or credit card to document business expenses.  Avoid checks payable to cash, and avoid paying non-business expenses from the business account.

3.How long to keep records.  The statute of limitations is six years for omissions of more than 25% of gross income.  There is no limit when false or fraudulent information is entered on the tax return or no tax return has been filed.  Information supporting a tax return must also be kept when it may affect a transaction on a future tax return.  For example, documentation for purchases of fixed assets should be kept until the fixed asset is retired or sold.

In recent years we have had several clients which have run into difficulties with state and cities, where the taxing entity have claimed returns were not filed or payments were not made from prior years.  Several of these claims have been for returns which were in excess of ten years old with the record being a collection from 19 years earlier.  The taxing entities claimed the statute of limitations had not started because they claimed the return had not been filed or it had been filed but payment not received.  Based on these experiences there are several types of records we recommend keeping forever.  These would include tax returns, withholding documentation such as W2s, and the front and back of cancelled checks for proof of payment.

4.Substantiation Requirements for Business Deductions.  It is generally necessary to have documentary evidence, such as receipts, cancelled checks or bills.  These are important to not only support an expense was paid but also to support the business purpose.  In an IRS audit, a cancelled check by itself may not be enough proof of a business expense.  Documentary evidence is considered adequate if it shows the amount, date, place and essential business character of the expense. 

5.Do not forget to issue 1099s. – File a Form 1099-MISC for each person to whom you have paid at least $600 in rents, services (including parts and services), prizes and awards or other income payments.  When determining who to send one to, it is better to be safe than sorry.

In an audit poor or incomplete records will cost you money every time.

The taxpayer should seek advice
Based on the taxpayer’s particular circumstances
From an independent tax advisor

Beucler Company CPA, Inc.
2503 Summit St.
Columbus, OH  43202
(614) 784-1099

Internal Revenue Service Circular 230 Disclosure:  As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any transaction or matter addressed herein.