Everyone should have a proactive audit defense strategy. Whether you are a business or an individual, you can ensure you have the proper documentation for all of your financial arrangements and transactions. With the right documentation, your certified public accountant (CPA) will have the information necessary to defend you in the event the IRS decides to audit you. Plus, having all the right documentation also enables you to take full advantage of any deductions you’re entitled to receive, which will reduce your tax liability. Here’s a quick look at how you can make sure your documentation is up to date.
It’s often thought that minutes of your company’s annual meeting or board meetings only have applications for internal use. However, you can actually use them to substantiate your claims of business activities. Your meeting minutes won’t be included as part of your tax return, of course. However, you should preserve them for future use in an audit defense.
Your business should always keep detailed and up to date records of all of its transactions. By preserving your documentation related to sales and expenditures, you’ll already be well prepared to deal with an unexpected audit.
It’s common knowledge that you should always save your receipts for tax deductible expenses. These may include expenses for company-related travel and meals, as well as purchases like office supplies and new computer equipment. However, it’s not a good idea to simply toss all of your receipts in a shoebox. If you scan them into your accounting software before filing them away, you’ll stay better organized and be better prepared in the event of an audit.
Contracts and Agreements
If your business takes out or issues any loans, you should always save those signed loan documents. In addition, you should preserve any contracts and agreements that fall into the following categories:
- Agreements to purchase or sell assets, including vehicles, equipment, and real estate
- Agreements made between your business and other entities to provide or purchase any services
- Agreements made between one of your businesses or entities and a different business or entity owned by you for the exchange of any services
Many businesses are run out of a home office, either partially or entirely. If you have a home office, you should keep documentation of all the business activities you perform there. Note that if you wish to deduct a home office on your taxes, it must be the principal place of your business, and it must be regularly and exclusively used for that business. You will need to figure out the percentage of your home that you use for your home office.
If you deduct business miles on your tax return, you must be able to show proof of them. Before driving anywhere for your business, make a note of:
- Starting mileage
- Ending mileage
- Starting location
- Purpose of trip
- Total miles for that trip
Real Estate Activity
If you claim status as a real estate professional, you’ll need to carefully log your hours and activities. You must be able to prove that you spent more than one-half of your personal services time in real property trades or business activities. Additionally, you must spend more than 750 of your personal and investor services time in real property trades or business activities.
For tax preparation and audit assistance, you can rely on the experienced team at The Royce CPA Firm. Our CPAs work proactively with individuals, families, businesses, and nonprofits to provide accurate tax preparation, audit assistance, and bookkeeping services. You can reach us in Tucson at (520) 321-4626.