Why Small Business Owners Should Keep Accurate Records
This post was originally published on July 17 2013, and updated on October 11 2018.
If you haven’t heard recently that audits are on the rise, you might want to start paying more attention because small business owners are being attacked more often than individual tax filers. When we hear that our government does not have money to balance the budget, we can assume that they are going to do something to generate more revenue. The biggest revenue stream we have as a government is income taxes; this is why we will see an increase in audits. Because small business owners have the greatest opportunity to under-report their income and over-report their expenses, the IRS has made a conscientious effort to guide its revenue-generating efforts towards small business owners.
The question is not “What can I do as a small business owner to prevent an audit?” but instead “What can I do as a small business owner to safeguard myself when an audit occurs?” Small business owners spend quite a bit of time running their businesses and rarely have enough time to do much else. An audit can monopolize a lot of your time as a small business owner and can pull you away from what is important, like generating revenue for your business.
Bookkeeping also called record keeping, can be considered as the financial information infrastructure of a business. The information should be complete, accurate, and timely. Every record-keeping system needs built in quality control.
There are some really simple steps you can take to make sure your record keeping as a small business owner is exactly as it should be in case of an audit. The first place an audit begins is with the verification of income; therefore, you want to make sure your small business records are together to support exactly the amount of income you report on your return. If you are using an accounting program to track your income, this is wonderful but it is not enough when an audit arises. As a small business owner, you want to make sure you keep track of all the money that is deposited into your account. If you receive checks from your customers, make sure to copy the front of all checks that are deposited into your account. If you are using debit cards or credit cards, make sure you have copies of all the signed slips from your customers. It is also equally as important for a small business owner to keep track of all the credits to your bank account from your merchant company. At the end of the day, you will want all your checks, cash deposits, and merchant deposits to equal what went into your small business bank account. You will also want to keep the invoices and statements and match it to the customers’ payments. The IRS has several ways to detect whether a small business owner is reporting all of its income. Using the small business record keeping strategies above for tracking your income will keep you and your small business running smoothly during an audit.
When it comes to your small business expenses, the IRS is just as aggressive in making sure these tax deductions are valid as they are in making sure that all your income is reported. Small businesses need to make sure they are keeping the invoice from the vendor they are purchasing from as well as the canceled check and credit card slip if they want to get the tax deduction. No longer is the IRS just accepting the credit card slip from small business owners. They are now requesting the credit card slip, invoice, and business reason for the tax deduction.