How to Audit Proof Your Biz in 4 Simple Steps!
Many entrepreneurs and business owners are terrified of being audited and the uncertainty and stress it can bring. I’ve seen people deducting everything including their personal groceries (because they work from home) to deducting basically nothing because they’re afraid they may claim something that’s not a qualified deduction. I have both good and bad news for you - if you own a business, your chances of being audited increase, but in this blog, I’m going to lay out the 4 simplest ways to audit proof your business!
Separate your business finances from your personal finances:
This means opening up a separate checking (and ideally, savings and credit card), that you run ALL of your business transactions through. This not only makes it easier to add up your income and expenses at the end of the year, but also makes a clean break and shows the IRS you’re treating your business as a real business, not just as an extension of your personal finances.
Keep images or copies of all receipts, especially travel, and anything over $75:
Just because it shows up on your bank or credit card statement doesn’t prove what you actually purchased to the IRS. Transaction from Amazon? Could be a pair of shoes, OR promotional pens for advertising purposes. Unless you save the invoice or order receipt that they email you, there’s no proof. Same thing goes with stopping by a store or going on a trip - snap pictures of your detailed receipts and save them.
QBO and Xero both have receipt snapping apps you can utilize to match your images of receipts to your bank transactions, but you can also organize the receipts in Google Drive. I recommend sorting them with a folder by year, then by month, and then saving each receipt with the naming convention: STORE.DATE.PURPOSE. For example, Amazon.01.15.2019.PrinterInk. This makes it super simple to find your receipts and prove to an auditor what the business purpose was.
Keep meticulous records:
This includes mileage logs, calendar event emails, tickets to events, etc. When you meet with a client and pay for a coffee or a meal, log who you met with, what the purpose was, and where you met. Same thing with your mileage log. By doing this, your email thread will match with your calendar, which will match with your mileage log, which will in turn sync up with your receipt/expense notes. All of these build a solid case for claiming the expenses for your business.
If you don’t have proof, don’t claim it as a deduction:
Going back through your expenses for last year and think you might have transactions that are business expenses, but you’re not sure? Don’t claim them. If they’re large expenses, spend a bit of time digging through emails to find documentation that supports the expense and the business purpose. Just because you have proof of an expense, doesn’t inherently tie it to your business as a deduction.
No matter what, you can never have too much documentation. Back everything up with receipts, corroborate travel expenses with copies of emails, calendar invites, or continuing education seminar tickets, and make it a habit you keep. Batching this into a 15-30 minute time once a week can be a huge help and I even schedule a 30 minute window into my calendar each week to make it happen!