Tax audits are never desirable for any company because they are as intimidating as they sound. Businesses try to save themselves from the audits; however, in some cases, they cannot keep themselves away from the audits and must undergo IRS audits. So, in such cases, you must be aware of the step-by-step guide to prepare your business for audits.
This article will discuss the detailed process of preparing your business for audits. Audit failure can lead to business destruction; therefore, you must be well-prepared for the audits in Denver. You can consult an expert enrolled agent in Denver who can also help you learn more about tax audits and their processes. Meanwhile, in this article, let’s understand some essential points about business audits.
How to Prepare a Business for Audits?
Tax preparation is a difficult task, and preparing for audits becomes much more difficult; before, it was essential for businesses to know about audits in detail.
Understand the Reason for Audits
There are various solid reasons for having a tax audit, and it can be triggered by several red flags in your financial reports or other discrepancies in your filings. In some cases, there cannot be any specific reason but a random choice by the IRS department to conduct an audit. There can be particular reasons, such as reporting inconsistent income filing, unusually high deductions, late filing of returns, or operations in cash-heavy industries.
Keep Your Financial Records Organized
This is one of the essential steps in filing taxes; you must always keep your records accurate and organized. You can use different accounting tools to keep the reports more organized, making the audits easier. You have to keep clear records of income and expenses. You must also ensure that you keep the supporting documents for every expense and income. You must also ensure that the payroll is accurately documented, including employee classification and tax withholdings for each employee.
Review Your Tax Returns
It is important to double-check the tax returns, which are an essential part of the business. You have to make sure that every aspect of the financial details is recorded accurately, from deductions to credits. You should also compare the reports and income against financial statements and payroll records. You must verify that any tax deductions and credits align with your business activities.
Prepare an Explanation for High Deductions
You have to be ready to explain the amount in which there are huge or unusual deductions. It can be due to various reasons, such as investment in equipment purchases, charitable contributions, and other activities. You must support your explanation with required documents or proof of deductions such as bank statements, receipts, and other details. Tax authorities will analyze and scrutinize the significant deductions with the help of your papers and documents.
Avoid Misclassification of Employees
Misclassification of employees can be a big red flag for the auditing team. So, you have to classify the employees adequately based on their roles in the company. You must also be ready with proper documentation about the employees’ contracts, bonds, or other such details. If there is misclassification, the probability of facing penalties increases; therefore, you must ensure that you classify your employees efficiently.
Consult a Tax Professional
This would be an essential step while dealing with audits. You cannot deal with the audit team alone with all the compliance of tax laws and rules. So, it would be better to consult an expert tax accountant who can handle the whole auditing process efficiently and save you from penalties and fines.
Preparing for the tax audits might sound daunting. However, you must prepare your business for such tax audits as it will ultimately help you have all the organized financial data in the long run.
