Tax Thursdays: 3 Best Practices to Avoid the Audit
March 14, 2013
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., the IRS 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
This is a guest post for the FreshBooks blog. 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.