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Tag Archives: small business audits

Small Business Accounting

Maximizing Efficiency: Tips for a Successful Small Business Audit Preparation

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For small business owners, the mere mention of an audit can evoke feelings of stress and uncertainty. However, approaching the audit process with a proactive and organized mindset can significantly alleviate these concerns. Audit preparation ensures a smoother audit experience and reflects positively on the financial health and transparency of your business. ***

Here are some practical tips to maximize efficiency and achieve a successful small business audit preparation.

  1. Organize financial documentation. Ensure that all relevant financial records, including income statements, balance sheets, bank statements, and tax returns, are neatly organized and easily accessible. Categorize documents chronologically and by type to streamline the auditor’s review process. 
  2. Maintain accurate and updated records. Regularly reconcile your accounts, verify transactions, and address any discrepancies promptly. Keeping your records accurate and up-to-date facilitates the audit process and shows your commitment to financial transparency and compliance. 
  3. Documentation of internal controls. Internal controls help safeguard your business assets and ensure the accuracy of financial reporting. Providing the auditor with a comprehensive overview of your internal control policies demonstrates your commitment to maintaining a robust financial system.
  4. Collaborate with your auditor. Establish open lines of communication with your auditor well in advance of the audit. Understand the specific requirements and expectations for the audit process, and discuss any potential challenges or concerns. Collaborating with your auditor fosters a positive working relationship and ensures that everyone is on the same page from the outset.
  5. Train your staff. If your small business has a dedicated finance team, ensure that they are adequately trained on audit processes and procedures. Familiarizing your staff with audit expectations and protocols can prevent last-minute scrambles and contribute to a more efficient and less stressful audit experience.
  6. Address previous audit findings. If your business has undergone previous audits with findings, address these issues before the next audit. Demonstrating a proactive approach to resolving past concerns showcases your commitment to continuous improvement and can instill confidence in the auditing process.
  7. Understand regulatory compliance. Stay informed about relevant regulatory requirements and compliance standards applicable to your industry. This knowledge is crucial for ensuring that your financial practices align with current regulations and can help you anticipate areas that auditors may scrutinize more closely.
  8. Perform a preliminary internal audit. Before the external audit, conduct a preliminary internal audit. This self-assessment allows you to identify potential issues and rectify them before the external auditor arrives. Addressing any discrepancies in advance helps streamline the audit process and minimizes the risk of unexpected findings.
  9. Create a detailed audit plan. Develop a comprehensive audit plan outlining specific tasks, timelines, and responsibilities. A well-structured plan serves as a roadmap for the entire audit preparation process and ensures that everyone involved is aware of their roles and deadlines.
  10. Utilize technology. Leverage accounting software and technology to enhance the efficiency of your audit preparation. Many accounting platforms offer features that automate financial processes, generate detailed reports, and facilitate seamless collaboration between your team and auditors.
  11. Engage external professionals. Consider engaging external professionals, such as accounting consultants or auditors, to conduct a pre-audit review. Their fresh perspective can help identify potential issues and provide insights that contribute to a more successful audit.
  12. Conduct mock audits. Simulating the audit process allows your team to identify weaknesses in your preparation, fine-tune procedures, and ensure that everyone is comfortable with the audit expectations.

A successful small business audit preparation is not only about meeting regulatory requirements but also an opportunity to showcase the financial health and transparency of your business. The key is to view the audit process as a collaborative effort to enhance your financial practices and provide stakeholders with confidence in your business operations.

A.K. Burton, PC, has been working with the IRS for our clients for many years. Our firm has experienced accountants who can help you do your tax planning, file your tax returns, and represent you to the IRS. We do individual and business tax returns. Call us at (301) 365-1974 for a consultation.

We serve the Bethesda, Rockville, and Montgomery County, MD area.

*** For more information on small business tax forms, visit the IRS website.  

Tax Advice, tax preparation

How to Avoid an Audit on Your 2021 Tax Returns

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Audit!

That word sends shivers into any honest taxpayer. You do everything you know to do on your tax returns. Your CPA has signed it and filed it. 

However, despite all that, the audit notice from the IRS has arrived. You’re stressed.

It doesn’t have to be that way. You can avoid an audit on your 2021 tax returns if you take the right preventative steps to do it. Here are some smart and legal ways to do it: 

    1. Don’t lie or attempt to cheat the IRS: This is the first and foremost reason! SO many people try to cheat the IRS every year. Some get away with it but most do not. Besides that, it’s just wrong. Dishonest tax filers claim excessive or unreasonable tax deductions. They are so obvious, that the IRS flags them and begins investigating. Their agents will ask for additional information. If discrepancies are found, the agency may levy penalties. Instead, be truthful in all your deductions and credits.
    2. Keep accurate and detailed records: There is a boatload of different forms that are available based on deductions and income. They can be confusing and it’s easy to make mistakes or forget them. Thus, the importance of keeping accurate and thorough records during the year. Keep all expense receipts in a file labeled for that year. That file should be accessible at all times. File your taxes only when you have all the required forms so you won’t have to amend your tax return.
    3. Don’t overdo it with your home office deduction. Self-employed people who have businesses in their homes are considered independent contractors. The deductions designated for that should be “reasonable” as the IRS defines it or it may become a huge red flag, especially if the home office is where you derive most of your income. So, claim just a percentage of your mortgage or rent that is your true workspace. Other expenses, such as phone, AC/heat, supplies, and other expenses can be claimed as business-related.
    4. File electronically. A good way to avoid audits is to file them online. The IRS encourages this for one big reason: paper filing usually contains many more errors than electronic files. Hard copy errors are 21% as electronic filing is 0.5%. The IRS software has protections in place so that filers have fewer errors. 
    5. Hire an experienced bookkeeper, accountant, or CPA. Tax laws change every year. It’s almost impossible to keep up with them unless you are an accounting professional. So, protect yourself and hire an accountant or bookkeeper to file your taxes for you. Most good accountants will also represent you to the IRS, which can be invaluable to prevent an audit. 

Tax Day is April 18, 2022, which is only a few weeks away as we publish this blog. No one wants to be audited. It can be agonizing. If you have not done the above steps or wonder if you are going to be audited, please contact an accountant for a consultation. 

AK Burton, PC, knows the current tax laws and how to work with the IRS. Our experienced tax preparers can file your business and personal tax returns and represent you to the IRS. Call us at (301) 365-1974 for a consultation. 

We serve the Bethesda, Rockville, and Montgomery County, MD area.

Tax Advice

Small Business Accounting Advice: Avoid Red Flags That May Lead to an Audit (Continued for 2019)

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It’s not a pleasant topic. Business owners hate them. Accountants despise them.

We are speaking of small business accounting audits, of course. We blogged about this topic in 2016. It can be one of the most agonizing experiences of your life. Certainly, and we are being candid here, it is not enjoyable or without its stresses.

The good news is this: According to the IRS, just over 1 million individual income tax returns were audited in 2016. That is only a 0.7% tax audit rate which is the lowest in more than ten years.

There are three types of IRS audits:

  1. Correspondence (letter): information requested through the mail
  2. Office audit: visit the IRS office for the audit
  3. Field: IRS agent comes to your business to perform the audit.

So, no matter how you are audited, the likelihood of you or your company being audited are pretty slim.

However, if your tax returns have some “questionable” records, you may see the IRS auditor looking at you through the peephole early on a Saturday morning. Here are some red flags to avoid so you won’t be audited:

  1. File late consistently: If there is any tax filing behavior that will get you in trouble, it’s filing late, year after year. The IRS begins to wonder why it takes you so long to file even though you know it is due in April every year. Be smart: start working on your tax documents and records in January. File them by April 15 or, better yet, before that date.
  2. A large number of deductions: Tax deductions allowed by law are fine. However, a large number of deductions for a small business may draw some suspicion. Instead, be consistent on your deductions. Do the same ones each year, if appropriate, for your returns. The IRS has a rule for deductions: They must be ordinary and necessary in your type of business.
  3. Excessive business vehicle use: Claiming 100% business use of a vehicle will bring the magnifying glass from the IRS. Instead, use the IRS standard mileage rate. Don’t deduct both the business use and mileage. Don’t claim 100% business use unless you can prove that by showing every single business trip you made.
  4. Failing to report taxable income: HUGE MISTAKE. Small business owners are required to report all of their income. Don’t ever hold back on income reporting.
  5. Schedule C Filings: A schedule C Form 1040 allows sole proprietors to take deductions. You can deduct items like monthly cell phone bills, home office space, website subscriptions, and other items. It may get you audited if your items are questionable.
  6. Donations in large sums for charity: We all appreciate businesses which donate to charities. It is a noble practice. However, a large sum that is given to non-profits might appear suspicious to the IRS. A common practice of some businesses is to give lots of money to charity to avoid paying taxes on it.
  7. Unusually high salaries for employees: Be careful that you pay reasonable salaries. High-income earners who are also shareholders may bring questions from the IRS.

No one wants to be audited. The IRS probably doesn’t like to do it either, as they are costly and require extra labor. It’s not a positive experience for anyone involved. So, avoid these filing red flags and do your best to file your taxes. It will decrease stress and costs, for sure.

If you need small business accounting help and guidance, contact our experienced tax advisor team at A.K. Burton, PC. We provide the services that you need. We can advise you, talk to the IRS for you, handle your IRS tax correspondence, and help you file your taxes accurately and efficiently. Taxes can be overwhelming, let us make it manageable. We serve the Bethesda, Maryland and Washington, D.C. area. Call for an appointment at (301) 365-1974 or email us at info@cpamaryland.com.