Good documentation helps small businesses prepare for audits

By Jim Conroy.

The Cut Inflation Act of 2022, with its provision to add $80 billion in federal spending and potentially up to 87,000 additional IRS employees over the next 10 years, is of concern to many. those wondering where these resources might be concentrated. While the Treasury Department has said these resources will not be used to increase audit scrutiny in small businesses and low-income people, it’s still a good idea to make sure your clients are prepared for any scenario. .

Addressing these types of concerns, Karen Kerrigan, President and CEO of the Small Business and Entrepreneurship Council, said small businesses will be hit the hardest because “the tax data shows it’s small businesses to the middle-middle, not the “rich”. who are most frequently targeted. As bad as the risk of being caught up in error or fraud might be, Kerrigan noted that the real burden would fall on companies that are unable to hire the necessary lawyers and accountants, which would be a direct drain. on their business, loss of productivity and anxiety.

Compounding concerns, the Tax Cuts and Jobs Act 2017 treated small businesses and big businesses differently. “Passthrough” entities such as Limited Liability Companies (LLCs), partnerships, S-corporations and sole proprietorships have the advantage of being taxed only once. However, some critics, like Jim Blasingame of The Small Business Advocates Radio Shownoted that the IRS has the autonomy to determine which small businesses qualify for the qualified business deduction defined by this law.

If Kerrigan and others are right, accountants will be dragged into the next decade having to document their clients’ expenses as audits increase in number and intensity. As unfortunate as it may be, you know that small business clients too often neglect their accounting, expense documentation, and other tax-related responsibilities.

The onus of any audit will rest with the CPA, and whether or not the CPA has prepared the tax return in question. If so, you can be reasonably certain that the necessary documentation exists. You will always be asked to help prepare for the audit and to participate. You could, however, be crushed by 16 tons of misrecorded paperwork, missing invoices and receipts, and best-guess estimates when a new client comes to you after being asked for an audit by the IRS. So now – before the start of the next tax year and the IRS employee job interviews are underway – it’s time to find the right tools to ensure the best possible outcome if your clients are taken by audits.

For existing customers, reinforce any previous advice you’ve given them about what to follow and when. Remind them that the future of their business depends on precision. Explain how an audit will rob them of time they could be spending on their business, and that the more sloppy or incomplete their records are, the longer the process will take. Remind them that there are financial, and sometimes criminal, penalties for inaccurate tax returns that can also put their business at risk. Also remind them that accurate financial records provide other benefits that help them better grow their business through smart decisions based on real data, and even improve their ability to secure financing from a lender.

At the very least, make everyone’s life easier by making sure the client knows what to record. This checklist can help the customer cover the basics. Customers should avoid a shoebox or desk drawer. A system to record their expenses as they go is essential. Cautious and organized businesses may find themselves able to use a spreadsheet for the same purpose. However, you and they should be skeptical about their reliability. Too many people have learned over the years that items can be forgotten, entered in the wrong cell, added incorrectly, or accidentally overwritten.

Suggest that customers have a simple tool that makes it easy to capture and organize financial documents in any format: scan paper, take a photo with your phone, or capture email receipts directly into a system financial management as they become available. These platforms can even use artificial intelligence to allocate expenses to the right account because they are secure, which makes the task even easier. Your job as a CPA is to remind your client to be consistent in entering their invoices and receipts into the system.

Only time will tell if the backbone of America’s small businesses will be shattered by the government’s intention to strengthen the IRS. But even if clients of competing accounting firms are harmed, your clients can be protected from harm if you insist that they take advantage of technology to capture the information you need to file your taxes accurately. Auditing them will be simple if that happens, and your job for them will be easier for you and your office.


Jim Conroy is CEO of The neat society.

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