3 Best Practices to Avoid an Audit

January 31, 2015

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 help 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 should think of it in relation to your 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 virtual assistant, it’s probably less likely that you’ll be finding clients this way. When adding an expense that seems to fall in a grey area, consider if it sounds reasonable relative to your industry.

2 – Stay organized 

There are a few levels of an 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, hand-written payment records, 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 help prevent a more in-depth audit.

3 – Keep your records 

For U.S. residents: The IRS outlines how long to keep your records based on your filing situation. Three years is the general rule of thumb, but it’s best to check the IRS’ guide to find out where you land. In most audits, a lot of time and resources are spent on simply searching for the relevant documents.

For Canadian residents: The CRA requires you to keep your records for six years. They can ask you to keep them longer, but you will receive a communication from the CRA if you’re required to do that. 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 you time, money and possibly preventing a deeper investigation.

about the author

FreshBooks is the #1 accounting software in the cloud designed to make billing painless for small businesses and their teams. Today, over 10 million small businesses use FreshBooks to effortlessly send professional looking invoices, organize expenses and track their billable time.