Easy Things To Make With 2 And 4 Yr Olds Ten Simple Rules For Self-Employed Small Business Owners That Make Winning An IRS Tax Audit Easy

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Ten Simple Rules For Self-Employed Small Business Owners That Make Winning An IRS Tax Audit Easy

Every American dreads the words tax audit.

A letter from the IRS, especially one ordering a tax audit, will unnerve even the calmest person. But, for a small business owner who does all of their bookkeeping, it’s not just scary, it could spell disaster.

If you receive an IRS audit letter, call your tax accountant and set up an appointment right away; representing clients at tax audits is part of a tax professional’s job. Your job will be to find and provide all the documents necessary to win that review. If you have kept audit records, this will be easy.

Since most small business owners do not have bookkeeping, few realize how easy it is to keep audit records. Some end up turning a register into a complicated computer task, and many simply ignore everything until tax time.

Business record keeping does not have to be complicated or time consuming. There are only two things you need to do to make tax audits easier. The first is to adopt a registration system that is super simple; the second is to learn exactly what the IRS expects from the small business owner at tax time.

Registration for a one-person or two-person business is done primarily to satisfy the IRS, so why not keep audit records. Follow these ten simple rules throughout the tax year, and you’ll not only be prepared for a tax audit, but you’ll also simplify your filing obligations.

Rule # 1 – Documentary Income. Absolutely all business income, including all cash and tips, must be deposited into a separate checking account used only for business funds. Do this and all you’ll need come tax time are 12 bank statements to add up your income.

Rule #2 – Keep a Paper Trail. Every penny spent or charged to your business needs a paper trail. If a receipt is not provided, you can make your own; be sure to include all necessary details. Working from expense receipts simplifies the recording process for a small business owner.

Rule #3 – Record Exchange Exchanges. Every business exchange requires a paper trail assigning value to your time or the product you traded. The trade-in value of a trade-in is the same amount you would pay if it were a cash sale.

Rule #4 – Track Every Expense. Sorting expense receipts is easy when you use the business expense alphabet. From advertising to Ziploc bags, if you use it in your business, there is room on your tax return to deduct that expense.

Rule #5 – Depreciate Equipment. Any equipment purchased that has an expected life of 2+ years must be depreciated or expensed at tax time. It is important to keep a list of all business equipment purchased, the date you purchased it and the price paid, with your tax records.

Rule #6 – Log Your Miles. Unless your car is used only for business, keep a small notebook in your car to track business miles. If you do not keep a mileage log, and are asked to provide one for a tax audit, you will fail the audit.

Rule #7 – Track Inventory. The IRS considers all items you make or buy for resale to be inventory; inventory costs cannot be deducted until that inventory is sold. Spending inventory is easy once you learn how to calculate the cost per item value.

Rule #8 – Educate yourself. No matter how good your tax professional is, if you don’t provide all the necessary information and calculations, your tax return will be incorrect.

Rule #9 – Plan Ahead. Tax laws change every year. During your annual tax visit ask if there are any new changes that affect you, what tax laws are in effect, how those will affect your business, and what you can do now to lower future taxes.

Rule #10 – Save Everything. Without receipts you will fail a tax audit. Boot or bag all your tax receipts every year, and keep them for a minimum of six years. If you receive an audit letter from the IRS, simply take the box or bag containing receipts for the year being audited with you when you meet with your tax professional.

I can’t tell you not to worry about a tax audit, we all do. But, if you followed these ten rules, the receipts and the audit should be in the bag!

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