If you're a small business owner, you likely have a wide variety of skills. You're running a company and bringing your dreams to life. That requires things like creativity, passion, determination, and strong leadership. Getting your business off the ground can involve personal investments, long hours, and a whole lot of risk.
As you manage day-to-day business activities, the last thing on your mind is the chance of being selected for an IRS audit. However, as a small business owner, your chances are actually higher as 2.5% of small business owners are selected for an audit, compared to a mere 1% of the general population.
These audits are triggered due to mistakes in your filing, which can be more complicated due to your status as a business owner.
If your small business is up for an IRS audit, there are some things you'll want to be prepared for and know. There are also times when you might be interested in performing an internal audit. Fortunately, we're on your team!
What is a business audit?
A small business audit involves examining your business's accounting books and tax returns to ensure that they are wholly accurate and in compliance with applicable tax laws. This process is often initiated by the IRS, but there is tremendous value in choosing to do regular audits of your business. Remember, examining your business's finances doesn't just have to be an end-of-the-year or emergency decision.
Having an up-to-date record of your finances can have myriad benefits for your small business, including:
- Boosted confidence of investors
- Increased profit margins by eliminating unnecessary expenses and determining where your largest returns on investment derive from
- Simplified and less stressful tax seasons
Choosing to do an audit may seem like choosing to be punished, but it doesn't have to be that way! Simply gather your records of expenses, as well as documents that attest to the costs and values associated with all of your business assets. Employing a trusted CPA or accountant can also help to manage the accounting side of things. Once you've gathered all of the relevant information, a trained auditor can fully examine all of the data and ensure that your financials are in order. The more frequently you complete this process, the easier it will be the next time!
Types of audits
There are three primary types of audits that you may find useful for your business, or that your business may be subjected to. No matter what type your business undergoes, there are ways to prepare and ensure that everything is completed smoothly.
Internal audit
As previously mentioned, an internal audit is often conducted by the company for itself. This type of audit is used for development and for keeping the organization in check. Beyond financial documents, an internal evaluation can also consider the company structure, leadership, and governance. Taking a close look at how your business operates can help you to identify frivolous expenditures and opportunities for improvement.
External audit
An external audit follows a similar process as an internal audit. However, it can sometimes add increased trust to the process as the audit is carried out by an outside, third-party financial institution. If stakeholders or employees have wavering trust in your organization or financial statements, conducting an external audit could ensure that everything is confirmed by someone who does not have a vested interest in the organization.
Conducting an external audit can also be useful when you're interested in bringing on new stakeholders or board members, who may not already be aware of the ethics and the stability of your small business. If you've previously conducted an internal audit, switching to an external audit the next time can help confirm your results and ensure that you are on the right track.
IRS audit
Finally, an IRS audit will examine the same financial documents as the previous two options. The primary difference is that the actual auditing will be completed by the IRS, and that being audited by the IRS is not a personal or company decision. In order for this process to go smoothly, you'll want to provide the IRS with any and all available financial and bookkeeping documents.
The IRS looks for a few different variables when considering small businesses to audit. Certain things on your tax filing, such as unusually high food and travel expenses, or large deductions, may raise suspicions. Of course, these filings may be an accurate reflection of your business. Your best bet is ensuring that your filing is as accurate as possible, and making sure that you're always prepared.
How to prepare for an audit
No matter what type of audit you're planning for or may be facing, there are easy steps you can take to be better prepared.
- Update and review your financial documents throughout the year. It's tempting to avoid thoughts of taxes until the end of the year or April 15th. However, the old "practice makes perfect" adage certainly applies to having a successful audit. The more you familiarize yourself with your business's finances, the easier executing an audit will be.
- Keep all of your financial documents in a secure and accessible place. Audits don't have to be stressful - especially if you have all of the materials to conduct one on hand! Taking account of your assets and retaining prior financial documents will make tax season and an audit significantly less painful.
- Get an expert on your side! A professional accountant or CPA can be an extremely valuable member of your team. Not only can they help you avoid the mistakes that trigger an audit, but they can guide you through money-saving decisions and invest knowledge into your company.
Schwartz & Associates
Schwartz & Associates is a group of highly-experienced CPAs who are ready to take your company to the next level. While you manage your small business and bring your dreams to life, we can handle the financials! Contact us today to get started.
