If you are an investor/entrepreneur Tom Wheelwright has some tips for you below:
One of the biggest fears people have is a tax return audit. The key to surviving an audit is not to panic but to be prepared. Here are the rules I follow to do this.
Rule #1: Neatness Counts
The government has a right to look at your records and neatness counts. Messy records could mean more digging – and more digging means more findings.
Auditors are fairly easy to work with if records are well organized and neatly presented, which gives them no reason for further investigation.
Be prepared to show that your tax return is based on well-kept records.
Rule #2: Expect Scrutiny
Certain expenses will always be scrutinized.
Here are a few expenses that are regularly scrutinized during an audit:
- Home office
Expect these expenses to be scrutinized. Prepare your documentation as you incur the expenses so you have the proper documentation in place.
Rule #3: Use a System for Your Documentation
Systems provide tremendous leverage. If you have a system in place for your documentation, it will take less time to get your documentation in place and your documentation will be more accurate.
Many people wait until they are audited to put the proper documentation in place. This is a costly move as it often ends up in poor documentation and expenses being disallowed.
Here’s an example of a system I use for my documentation.
I go to lunch with my business partner to discuss a new product.
I pay with my credit card and get a receipt.
I write notes on the receipt about who was there and the business discussed.
I give the receipt to my assistant who scans it to a PDF file format.
My assistant pulls my credit card activity online every week and verifies I have handed in receipts for all the charges. If there are receipts missing, my assistant tracks them down. The summary of charges and the receipts are then saved in a single PDF file.
The PDF file is forwarded to the bookkeeper. The bookkeeper records the credit card activity in QuickBooks and files the PDF file in a designated area.
With this system, if an auditor needs to see my documentation for that lunch, I know exactly where it is. The best part – I’ve spent very little time on it.
This system works because I follow it every single time I use my credit card – it works for all expenses, not just lunch. This is why I make it a point to always use my credit card.
Occasionally I have to pay with cash so I have a system for that too.
Rule #4: Do Not Go at It Alone
If you are audited, do not go at it alone. Have your tax advisor involved from the very beginning.
An audit can be highly technical and your tax advisor is someone who has studied the tax law and is well versed in the language of the tax law. Your tax advisor can easily handle all the questions and issues that may arise and translate any confusing details back to you.