Navigating an IRS Audit When Your Business Records Are a Mess

Most for-profit companies in the U.S. can be defined as small businesses: Typically, they are independently owned and operated, with fewer than 500 employees. For many of them, maintaining complete, accurate financial records is a significant challenge, and can lead to an increased risk for an audit by the IRS. If you are a small business owner facing an audit, know that yours is a common predicament, and there are ways to navigate it, even if your records are an incomplete, disorganized mess.

Take Audit Preparation One Step at a Time

1. Start by reviewing the scope of the audit the IRS has provided—are they asking a few specific questions, or is the audit more comprehensive?
2. Next, gather the records and information you will need to respond to the IRS. As you do so, note changes you should make in your recordkeeping going forward to reduce the likelihood of another audit.
3. Assemble the records that you do have and organize them by category, for example, revenues, expenses, payment records for employees and independent contractors, etc.
4. Identify the records that are missing. For example, if you reported business meal expenses of $1,250 but you only have receipts for $750, you need to document $500 in this type of expense.
5. For each instance of a missing record, provide secondary documentation. For example, you misplaced the receipts for two of the monthly lunches you have with a client. You can provide records from your calendar showing that the client’s lunch is scheduled every month and credit card statements showing restaurant charges on the dates for which receipts are missing. If no secondary documentation is available, make a reasonable estimate that is compliant with IRS guidelines and consistent with other items you have in the same category.

During the audit, the IRS will determine whether the documentation you provide for each issue they raise is acceptable. They may disallow deductions, assess a higher tax liability, impose a penalty for inadequate recordkeeping, or charge interest on any additional taxes you owe.

Responding to an IRS audit can be overwhelming, even with an organized strategy. The tax experts at Highland Tax Resolution have experience helping taxpayers successfully face this challenge. We know what the IRS is looking for and can advise you on the best way to handle any gaps in your records. Set up a consultation today and learn more about your options.