When it comes time for your small business to be audited by the IRS, it’s important to be aware of what they’re looking for. The IRS training manual explains to its auditors that they need to look at the owner as much as the business, and make sure that everything matches up in terms of income reported on the return. At Verdeja, De Armas & Trujillo, LLC, a premier Miami audit firm, we want you to be prepared with this checklist to get your business through an audit successfully.
1. Does your lifestyle fairly fit with your reported income? An audit firm, if given the chance, will observe certain things that stand out about your appearance and lifestyle (jewelry, clothing, furnishings, the type of car you drive, etc.) to see if it corresponds with your reported income.
2. Does your business conduct many cash deals? If your business conducts a lot of transactions via cash, it could make the audit firm suspicious of you diverting income into your own funds without declaring it.
3. Did you write off auto expenses for your only car? It’s difficult for an audit firm to believe that you use your one and only car strictly for business. If you do operate your vehicle, mostly for work, it’s recommended that you keep good records of each trip.
4. Did you claim personal entertainment, meals or vacation expenditures as business expenses? It’s important that you record all travel and entertainment deductions to prove that each transaction was solely for business purposes.
5. Did you report all of your business sales or receipts? If you fail to report significant business income – 10,000 or more – we recommend that you remove yourself completely and hire Verdeja, De Armas & Trujillo, LLC to take over the audit.
If there is evidence of large amounts of unreported income and it seems intentional the auditor will notify the IRS investigative team. However, if it seems as though you forgot to report last month’s sales, the audit firm will assess the additional tax you should’ve paid plus interest and a 20% penalty.
6. Did you write off personal living expenditures as business expenses? There are times when small business owners write off a personal matter as a business one. If it’s something minor, like a long distance phone call, it’s not that serious. However, if it’s paying for a family vacation to Disney World, an audit firm will notice and include a penalty.
7. If you have employees, are you filing payroll tax returns and making tax payments? Employment taxes are a regular part of every audit of a small business.
8. If you hire people you call “independent contractors,” are they really employees? The IRS routinely conducts audits of small businesses that hire independent contractors, because of the tax savings related to hiring contractors instead of employees.
At Verdeja, De Armas & Trujillo, LLC, the premier Miami audit firm, our auditing department adheres to the firm’s simple philosophy of “Know Your Client”. Our Miami audit firm provides our customers with assurance services such as compliance auditing, reviews and compilations. We believe that communication between the client and the auditor is the most important part of any audit. Contact us today for a consultation!