How to Prepare for An Audit

If you’re a small business, you may not be prepared for the possibility of an audit by the IRS. And while it’s true that the IRS spends the lion’s share of its time looking at large companies, small to medium-sized businesses (SMBs) are not exempt. 

If you do get audited, the IRS or other agencies may perform an examination of your company’s accounting books and tax returns to ensure they are accurate and comply with all relevant laws and statutes. While it may never happen, it’s a good idea for all SMBs to be prepared for the eventuality of an audit. This will involve ensuring that you’re following good practices for accounting and bookkeeping. 

Following, we’ll cover some of the things you can do to prepare for an audit. 

Conduct an internal audit. 

Audits aren’t just for tax compliance. Small businesses should follow the example of larger companies and regularly conduct internal audits. The benefits are many: not just to position your company for an outside audit, but to paint an accurate and honest picture of your finances in case you wish to raise more capital, make tax season less of a headache, improve your internal productivity or prepare to apply for any industry certifications such as ISO 9001 your business needs. 

Consider paying for an external audit. 

If you don’t have anyone on staff who has the time or expertise to conduct an internal audit, you may wish to bring in an outside company to do it for you. This outside auditor can work from either a physical copy of your books or via login access to your accounting software solution. Once the audit is finished, you’ll receive a final report that will let you know if your books are accurate. This report will be an ideal tool for preparing your company for the possibility of an IRS audit. If there are significant problems uncovered by the auditor, it’s a good idea to correct them and then redo the audit. 

Keep your books to industry best practices. 

If your bookkeeping is a bit of a mess, the audit process will become unnecessarily complicated and painful. It’s a good idea to ensure that your financial records —whether you keep them on paper in physical files or in an accounting software solution —should be properly organized by year and category of income or expenses. 

Understand the risk factors. 

Some companies are more likely than others to be audited by the IRS. If you take a wide variety of deductions, for example, claim losses several years in a row, accept certain types of government stimulus payments or report abnormally high income in a certain year, you may be more likely to trigger an IRS audit. 

There are two types of IRS audits: Correspondence audits and Field audits. In either case, you’ll get notified by mail. In a correspondence audit, the IRS is simply looking for clarification on several points of your tax returns. In a field audit, the IRS will send an agent to examine your books onsite. In either case, significant pain can be reduced by keeping your finances in good shape. 

To learn more about keeping your small business finances in excellent condition, or if you’re being audited, consult with a professional. DOAAR is a small business bookkeeping, tax, and consulting services firm, with an additional focus on its client’s personal finances. Specializing in bookkeeping, controller, and CFO services, DOAAR’s offering spans daily accounting, month-end close, complex financial modeling, and oversight. From execution to analysis and strategy, DOAAR provides clients a powerful and fully integrated back-office accounting solution. We have locations throughout California and the rest of the U.S.

Visit our website for more information or to contact us.