Tax Thursdays: 3 Best Practices to Avoid the Audit

Tax Thursdays Avoid Audit

Every business owner dreads receiving that letter with the words “you’ve been selected for an audit.” While it’s true that some audits are random, here are 3 tips you can use to stay in the clear:

1. Stay reasonable

Many times there is a fine line between personal and business expenses. If you and your friend have a business relationship it may be the case that your lunch meeting can be thought of as a business meeting. However, if you’re grabbing a steak a few times a week, it doesn’t seem all that reasonable that each lunch was really a business expense.

There is no rule of thumb to determine what is reasonable when it comes to personal vs. business expense, however, you can think of it in relation to your income level and industry. If you’re a marketing firm, it’s reasonable that you’ll be wining and dining prospective clients to win a large proposal. If you’re a neurosurgeon, it’s probably less likely that you’ll be finding patients this way. When adding an expense that seems to fall in that grey area, consider if it sounds reasonable relative to your industry and income level.

2. Stay organized

There are a few levels of audit. In a basic level, auditors may ask for the general ledger of a business and a few backup receipts or invoices. If they see that the books are not organized with proper accounting software (various spreadsheets, receipts in a shoebox, manual ledgers, etc.), that may raise red flags and trigger a deeper investigation. Keeping your books and records organized with software such as FreshBooks demonstrates that your accounting is in order and can prevent an in-depth audit.

3. Keep your records

In the U.S., theIRS outlines how long to keep your records for, but in Canada, the CRA officially requires that you keep records and supporting documents for a period of six years. If you keep your receipts and invoices in plastic bags, you may need to renovate that walk-in closet to create some more space. Yet many audits do in fact investigate periods going back a few years. In most audits, a lot of time and resources are spent on simply searching for the relevant documents. Luckily Freshbooks makes this part easy by allowing you to store invoices and receipts in the cloud. Not only does this save you valuable storage space, but it also ensures that finding an important document can be done in a few clicks – saving time, money, and preventing a deeper investigation.

About the author: Josh Zweig is the principal of LiveCA: Canada’s first online accounting firm allowing today’s mobile entrepreneurs to connect directly to a Chartered Accountant wherever, whenever. Our philosophy is that accounting is no longer just about doing taxes, but also about technology. The more accessible your accountant is, and the more informed they are about accounting technology, the more value they can add to your business.

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  • Rvo

    Thanks. The more I use FreshBooks the more I like it. They provide nice modern way of keeping invoices digitally. They try to help small business owners like me some money, give tax tips. Keep up the good work guys !

  • RevolutionWebStudios

    Thanks for the great tips guys. I don’t where I would be without FreshBooks!

  • Karen

    Thanks for the great tips!!!! Super job!!!

  • FirstLightWebDesign

    Good stuff to be certain, thanks FreshBooks!!!

  • Luetta Fox

    These auditing tips are indeed very helpful. Thank you for sharing this informative post.

  • Andrew Wall

    Hi Josh,
    I think all your points are valid strategies for reducing audit risk. However, reducing audit risk is not always the best strategy. By `Staying reasonable` and not being aggressive you can potential leave a lot of money on the table. Our approach is to lay out the options from aggressive to conservative and let the client decide where on that spectrum they choose to fall. I often user shark attacks as an analogy for an audit. They can both be horrific and chew up a lot of time, however, neither of them happen all that often. Although, it is true that you can avoid a shark attack by not going in the ocean this eliminates a lot of the joys that the sea can bring. Our solution is offer clients audit representation protection (we will represent the client up until the 3rd and final stages of appeals for no additional cost) and allow them to be as aggressive as they like, as long as they are not doing anything fraudulent.