IRS audits, much like vampires and werewolves, are shrouded in lore. The difference, of course, is that audits are real and could actually happen to you, though the likelihood isn’t incredibly high. The frequency of audits remains low for businesses of all sizes, only increasing slightly with the size of the business. If your business does find itself in the uncomfortable position of being audited, it’s sure to be a huge headache, especially if you haven’t prepared for this scenario beforehand. The IRS calls for you to maintain detailed records for everything including bank and credit card statements, meal and entertainment expenses and for each mobile employee, a mileage log for IRS audit.
No matter how honest you were with them, failing to produce the proper trail of records will make an audit difficult. Taking proactive measures now will ensure that you won’t end up paying extra taxes, interest or penalties later on should you come under scrutiny. Follow these recommendations for the best possible outcome.
Find that Work-Life Balance
We all have difficulties establishing a healthy work-life balance, and that problem extends to our finances. Combining business and personal finances will make it hard to determine the purpose of withdrawals and transactions several years down the road, though. Remember, audits don’t happen immediately after filing your taxes. Most audits will occur within two years after the tax year in question, but the IRS could go back as far as six years if they think there’s an error. Obviously, the best way to solve any confusion is to keep business and personal funds separate, and if you ever need to use personal funds to purchase something for business – or vice versa – make sure to keep the receipt and get reimbursed.
Other than bank accounts and credit cards, another area where you want to ensure separation of business and personal expenses is your vehicle and your employees’ vehicles. We all travel for work, and some employees do so every day, racking up an impressive amount of mileage expenses. Unless these work vehicles are owned by the business, it would be unwise to claim that 100% of its use is for business. Therefore, it’s best to require everyone who uses their own cars for business travel to maintain a mileage log for IRS audit that records important trip information. Even if you know you’ve only been reimbursing for work-related mileage, if you can’t prove it, the auditor has no reason to believe you.
At the heart of every organization – company, nonprofit, government entity or otherwise – is copious amounts of documents. At least there should be. Usually they just sit around collecting proverbial dust, but during an IRS audit, they’ll get their time to shine. It’s best to save a copy of all business-related documentation, including tax returns, bank statements, itemized receipts and invoices, cancelled checks, T&E expenses and more. In short, you should be able to show documentation for the income, losses, expenses and deductions you claimed on your tax return.
Not only should you save the appropriate documentation, but you also need to make sure the information you save is adequate for the future. For instance, if you take a potential client out to lunch, you need to be sure to make a note of the purpose of the meal and how many parties were present along with saving the receipt. If you claim a standard mileage deduction, you need to make sure the mileage log for IRS audit your employees keep shows the date, the starting and ending location, the number of miles driven and the purpose of the miles driven for each trip.
If you didn’t save the necessary documentation, you may think you can retroactively create it later. You have a good memory, right? However, accounting for your finances after the fact can lead you to trouble. The IRS looks for signs that you fabricated records such as guesstimating with nice round numbers or inconsistencies between the recorded expense and the purpose of it. Listing mileage for a trip that doesn’t match the actual distance between the starting and ending points, the number of people who attended a business lunch not matching the number of entrees ordered on the receipt – these things could lead auditors to dig deeper.
Spare the Trees
I understand that we just finished telling you to save a copy of all relevant documentation for your business. Now, we’re telling you that saving paper versions isn’t the safest course of action. Some old-fashioned folks really like saving physical documentation; technology isn’t always reliable, after all.
Paper storage has plenty of disadvantages, though. First of all, it piles up quickly and takes up a lot of space. This makes organization difficult and tracking down the correct documents – especially from years in the past – akin to finding a needle in a haystack. Paper is also vulnerable to damage from water, fire and animals. Ink fades over time as well, especially the more it is exposed to light. For those who believe computers can be hacked and their personal data stolen, paper storage falls victim to the same issues. In fact, sensitive information can be stolen much easier on paper than if it were on a secure network.
If you’ve already gone to all the trouble of collecting and saving important documents, make sure the effort isn’t wasted. Storing everything on the cloud and investing in technology that will help you save and organize your data will make you audit ready even when you don’t have time to do it all yourself. You’ll be able to pull information from the year in question, assured that your digital database has been kept up to date.
Software for All of Your Problems
One unique problem that technology has been hard pressed to solve in the past is mileage expense tracking and reimbursement. Keeping a physical mileage log for IRS audit is not the most reliable method for businesses. Employees have been known to estimate and round up mileage numbers, include unrelated travel in the trip mileage or lapse in their mileage log responsibilities.
For a reliable method of mileage and expense tracking, CompanyMileage developed SureMileage. Instead of using GPS-based tracking, SureMileage calculates the distance between the starting and ending points of each trip, so you are always reimbursing for the most direct distance traveled. Employees can quickly check in at each location they travel throughout the day, and when they’re done, they simply organize their trips and submit them for reimbursement. Our software tracks the date, time, location and purpose so everything is kept organized come tax season.
Audits are not a common occurrence, but even if you’re never audited, practicing these recommendations just makes your business that much more efficient. By keeping your business expenses separate from your personal expenses, saving documentation, investing in time-saving technology and investing in SureMileage to automate your mileage log for IRS audit, you’ll find your business becoming much more productive. Request a demo with CompanyMileage to learn more today!