Defending against an IRS Audit in San Francisco: Helpful Record Keeping Practices for Small Business
August 22, 2012. An IRS Audit can be a very scary thing. Everyone fears the IRS, often without good cause. The government is doing its job of collecting taxes in a fair way; our job as a leading San Francisco CPA firm is to help our clients support all legal and legitimate defenses against IRS audits. Record keeping is one of the most important aspects of successful IRS Audit Defense. If you have any questions, please contact us now.
Record Keeping Basics vs. IRS Audits
Ultimately, defending against an IRS Audit comes down to proving expenses vs. proving revenues – anything that increases revenue increases your taxes, and anything that decreases expenses can increase taxes as well. So the simple point is to maintain records that substantiate all your expenses and revenues in an organized, systematic way.
Moreover, the more detailed the record the better; the more a record occurs at the time of the event, the better.
Bank Statements. Bank statements are a good example of good record keeping at work. We advise our San Francisco business clients, for example, to maintain their bank statements in both paper and electronic form if possible. Cancelled checks are also important to keep as the IRS wants proof that checks were written and actually used for the stated purposes. Be sure to you can access your cancelled checks, as some banks do not retain them long enough.
Credit Card Statements. Credit card statements should also be kept. But remember that the mere existence of an expense on a credit card may be insufficient. The IRS will require a more extensive documentation of what the expense was, when it occurred, and for what reason. If you take a client out to dinner, for instance, they want to have a record of who that client was, when it occurred, and what was discussed to substantiate it as a business expense. Just a credit card charge with ABC client can be insufficient!
Loans to/from Your Business. Loans to and from your business are another area where IRS audit defense can be helped by good record keeping. You need to track any loans to/from your business accurately so that they do not get misconstrued as income.
Invoices from Suppliers. Keep an accurate list of all suppliers (for 1099 and other purposes), as well as all paid invoices. Nothing is better than an external invoice from a supplier with the related check to prove a legitimate business expense! As a leading San Francisco CPA firm, Safe Harbor helps our clients with their bookkeeping including the required 1099 documentation for vendors.
Summing Up: Good Record Keeping and IRS Audits
Summing up, good record keeping is your first line of defense against an IRS audit. Working with a professional CPA firm like Safe Harbor is your second defense; we prepare our clients’ taxes in such a way as to minimize the risk of IRS audits. Third, should an audit request come from the IRS, having good records in place is a real help.
Whatever your status – individual, corporation, partnership, LLC – if you are facing an IRS audit, we can help. We can work with you on whatever tax issues you have and whatever your record keeping status is; then moving forward, we can help you put into place effective, systematic record keeping to help prevent IRS audits in the future and/or defend against them should they occur.