CONTACT US

Preparing for Taxes and IRS Audits

It is that time of year – tax time. No business owner enjoys preparing business tax returns, but it is the “nature of the beast” in the business world, a fundamental aspect of running a business. As Benjamin Franklin wrote in a letter to Jean Baptiste Le Roy: “in this world nothing can be said to be certain, except death and taxes.”

We understand that preparing for taxes is the last thing you contemplate over the course of managing and running the daily operations of your company. Yet, being prepared for taxes can help you avoid a dreaded audit. We’ll discuss both areas here – a quick overview of preparing for taxes and, if necessary, preparing for an audit by the Internal Revenue Service (IRS).

Are You Ready for April?

You have more than likely been getting your tax documents ready throughout the prior year, but there are some last-minute tips you can do to prepare for taxes. First and foremost, you should confirm that all of your business transactions have been done with separate credit cards and bank accounts. The last thing you need is to have to sift through bank statements and credit card receipts to figure out what transactions were for business and what were personal. A personal transaction allocated as a business transaction could trigger an audit (more on that below!).

You’ll want to have an understanding of some of the most common business taxes, such as your company’s income tax, any estimated taxes you paid over the year before, additional taxes on goods and services (excise taxes), and any self-employment or employment taxes (Medicare, social security, and so on). You should also prepare the correct tax forms; for example, do you need a Schedule C for a sole proprietor or a Schedule K-1 for an S-Corp or partnership?

If you have any employees, you will want to remind them to submit any of their last minute reimbursements so you can finalize your payroll and ensure any deductions or benefits are included. You should also have a tracking method for keeping the receipts of your own business deductions – vehicle mileage for business travel, any business meals with clients, business-related cell phone payments, and home office expenses are wonderful business tax deductions!

What About an Audit?

This is the word no business owner wants to hear, but audits are a fact of business life. The IRS defines an audit as a review or examination of an organization’s accounts and financial information to ensure they are reported correctly on our tax documents. Basically, an audit is just a mechanism to ensure your business has filed your taxes correctly according to the federal tax laws. The definition itself isn’t overly intimidating, so why do we get so stressed out over the process?

It is because many business owners think an audit is automatically triggered by a problem with their reported revenues, expenses, or deductions. Yes, there are some red flags that could trigger an audit – higher than normal income returns, wages or salaries that aren’t reported correctly, or the most common problem – way too many business deductions! Other triggers could be if your business is mostly run on cash, or you consistently report embellished business losses. However, that isn’t always the cause. Unfortunately, the IRS may choose a business randomly for an audit.

So, if you got the dreaded letter that the IRS will be conducting an audit of your business, you can take a deep breath and just prepare.

Preparing for an Audit

Remember one thing – the IRS will NEVER email or call you! The IRS will ONLY notify you of an audit (or any other tax issues) by mail, so if you receive any other communication it is fraudulent and you can breathe a sigh of relief.

If you did receive a letter from the IRS, there are a few ways the IRS may conduct an audit. If the IRS simply needs a bit more information about your tax filings, they may just request that you send supplementary information by mail: itemized deductions, expense information, or more specific data about your income. They will specify in your letter what information they need to see. The IRS may also request that you come to them; that is, you head over to your local IRS office with the requested documentation (and your staff accountant) and answer their questions about your business’s finances. However, a standard audit usually means the IRS will send a representative to your business.

If the IRS is making a visit, you will need to have a separate area ready so that the auditor can work privately without being disturbed by you or your employees. Figure out where this area will be right away so you can then focus on what documentation is requested by the IRS. We usually recommend gathering the following records and documents in order to be prepared:

  • Organize your business’s financial records: income, losses, expenses, and deductions. More specifically, you may need the following:
    • Tax documents
    • Receipts
    • Bank statements
    • Cancelled checks
    • Books and electronic records
    • Listed property
    • Any travel expenses like car usage, business lunches, hotel stays, etc.
  • Review the IRS’s Audit Techniques Guide (ATGs). ATGs help the IRS auditor figure out any problems or issues that are unique to your specific industry. Yet, you can also look up your industry by name and then assess what to re-review on your own tax returns before audit day.
  • Consult a tax professional, if necessary. We find it is imperative to reach out for professional advice, whether it is from a certified public accountant (CPA) or a tax attorney. That way, you can figure out any unintentional transgressions that you may have accidentally completed. And we do say “unintentional” because intentional discrepancies on your taxes usually means two deadly (and illegal) words – tax evasion.


If you have a tax preparer or accountant on staff, you will want them with you on audit day to answer any financial questions. In addition to being prepared for the audit by following the steps above, you also want to be professional. Don’t get defensive, angry, or accusatory during the audit. The auditor is there to simply do a job – it is not his or her fault that your tax reports triggered an audit (or you were randomly selected by a pesky algorithm).

The IRS will give you plenty of notice and time to prepare for an audit. You should be just fine as long as you stick to what we like to call “the 3 P’s of auditing”: prepared, professional, and polite.

NetSuite is Your Tax Solution

Having timely and accurate financial data that is organized throughout the entire year will help you prepare for taxes and help you avoid triggering an audit. However, as you add employees and expand your product offerings, you may find your basic spreadsheet becomes too convoluted. And, the more numbers you are calculating means the more potential numerical errors, which can trigger an audit. Luckily, Critical Connexion can help. Implementing a cloud-based ERP and Financial system like NetSuite will help you analyze your business transactions by line item, create detailed tax reports, and determine tax calculations so you don’t have to do anything manually. Critical Connexion can help you automate and keep track of your financial needs by helping you take the next step of employing a cloud-based ERP like NetSuite so that you are ready for the IRS every tax season.