Tax audits are on the rise, especially for the Schedule C sole proprietor, which is what most small online business owner and entrepreneurs are.
One of the top challenges for entrepreneurs and online business owners is preparing for a tax audit.
Getting ready for an IRS tax audit is tedious, time consuming and scary all at the same time.
Being in the tax industry for over 14 years, and being online business owners and entrepreneurs, we thought it would be helpful for you, if we shared a few tips on how to prepare for a tax audit.
We got the “dreaded IRS audit letter” about a month ago and have been putting off getting organized until a few days before the audit. Since I’ve returned from my New York City vacation, it’s time to prepare for the IRS tax audit.
One of the challenges for entrepreneurs and business owners is constantly keeping good records in case you do ever get audited.
So when you get that “dreaded letter,” like I did, what do you do?
There are many steps and organization techniques that you can use to prepare your taxes, which we will go into in a different article. These are the steps for online business owners to get their papers organized and ready for the actual IRS audit.
1. If you prepared your own taxes, which we do not recommend for online business owners and entrepreneurs, we suggest taking the letter into a professional tax preparer to get help. One of the challenges for entrepreneurs and online business owners is knowing exactly what part of the tax return is being audited. A tax preparer will be able to tell you exactly what the IRS is auditing and what you will need to prove your deduction. Remember the burden of proof is on you; meaning if you do not prove the deductions then your deductions will be disallowed. We would also recommend that you have a professional go to the audit with you.
2. One of the challenges for entrepreneurs and an online business owners is determining exactly what is being audited. You will need to find and organize all your paperwork. In every tax audit they will want to see your
- tax return,
- any amendments that were made to the tax return,
- all your bank statements and
- credit card statements if you use a credit card for your business.
Get these main documents together first.
3. Write out what the IRS is auditing and the amount that you claimed on your tax return. For example, many times, for online business owners or entrepreneurs they audit miscellaneous expenses, which can include many things. Write out what they are and the amount that was claimed on your taxes and treat them as individual numbers. Then get the back up documentation for those numbers. Say finance charges were included in miscellaneous expenses, get all your credit card statements in a flat pile, highlight all the finance fees, then use a calculator with ticker tape to add them all up.
4. Color coordinate all your expenses with different highlighters. For example, if they are auditing professional dues, finance charges and advertising. We would highlight all the professional dues in orange, finance charges in green, and advertising in pink. This way when they are looking at statements they know what the expense is for.
A few key tips to remember for an online business owners and entrepreneurs:
1. As online business owners and entrepreneurs, never go to an audit with your papers in the envelopes and unorganized.
2. As an online business owner and entrepreneur your goal is to be as organized as possible. The more organized you are the quicker and easier the audit will be.
3. If you do not have all the documentation they want, get everything that you do have. This is better than nothing.
4. If changes are made to the year they are auditing they will look at additional years, so one of the challenges for entrepreneurs is taking the time getting everything organized.
These tips will help all you online business owner and entrepreneurs if you receive an IRS tax audit letter.
We wish you the greatest success in your online business and we are here to help you achieve your dream life.
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To Your Life Without Limits…
Elena & Jean
P.S. Have you ever been audited? We would love to hear your experience. Share your knowledge by leaving a comment below. We love it when our posts are shared. Feel free to share the love with your family and friends.