My Business is Getting Audited! 5 Things You Need to Prepare For
You’ve recently found out that you’re being audited. Luckily the process is not nearly as invasive as you may think. Unless you’ve deliberately done something wrong, the taxman is just looking to calculate your correct amount of tax owed and make sure you are current in your payments. Below are five areas you can prepare for to make your audit go as seamlessly as possible.
Set Aside Adequate Time
The amount of time you allocate will actually depend on the level of your audit. Some audits are conducted solely through the mail. The tax regulator will ask you to mail in further backup for anything they are questioning. They may ask for bank statements, receipts, copies of invoices, paystubs, or some combination of these.
If you are dealing with an in-person audit, you will need to allocate much more time. Typically you will meet with the auditor at their office first or via a phone call to discuss specifically what they are questioning and how the process will work. If the auditor requests to come to your place of business they will let you know how much time to set aside. Plan on at least half a day for any visits to allow several hours to meet with them. It is unlikely they’ll come out multiple times in one week, but possibly several times over the duration of the audit.
Why the Auditor Is There
If you’re flagged for an audit, there was a reason. It doesn’t necessarily mean you did something wrong, but they believe you did. It could be a simple error on your part, it could be that your revenue dramatically increased or decreased, or likewise with expenses. For example, a business that was making over a million in revenues for multiple years and all of a sudden makes less than a hundred thousand would be prime for an audit flag. The same with expenses, businesses that have less revenue but increased expense activity (and subsequently far less tax due if any), are prime for an audit. Again, this doesn’t mean it’s not the truth, but you’ll need to prove and explain why this happened.
Provide Proof to Avoid Estimations
When audit time arrives, the auditor will be asking for plenty of back up. They usually focus on the areas that triggered the audit. For example, if your payroll costs doubled but your revenue was half the prior year, they’ll focus on documents to prove your revenue as well as your payroll.
If you can’t produce documents, the auditors will automatically become suspicious. They can make assumptions based on methods they have established. For example, looking at a company’s bank statements will give them an indication of the money coming in, which will tie somewhat to the revenues. Businesses typically don’t have a million in cash receipts and only show half a million in revenues for example.
Your best move is to have all your documentation ready and prepared. Don’t let the auditor make assumptions based on other methods that might not work in your favor.
It Can Be a Long Process
Unfortunately audits tend to take a long time. Aside from the time spent in person with the auditors, you may be asked for additional documentation subsequently.
In between contact with the auditor their office will be working on your file. Most likely you will go months before hearing though, which can be frustrating and stressful. An audit from start to finish might only take a few weeks if it’s a simple matter, or could take over a year if it involves several back and forth contacts.
Be prepared to deal with the audit over a long period of time. If you ask your auditor they can give you an indication of when the next time you will hear from them is, so you aren’t waiting day by day for the next phone call or letter from them.
Time and Financial Burden
Be prepared to devote your time to assembling documentation and returns. Depending on their requests, this might take a long time, especially if several years are being audited at the same time.
The time burden turns into a financial burden as those hours spent are on non-revenue producing activities. If you are the main sales driver for your company, certainly your time is better spent prospecting and building relationships with clients than finding old invoices and expense receipts.
Depending on the severity of your audit, you may consider hiring a representative to deal with the busy work. By employing a seasoned professional to deal with the auditor, you can focus on the continual growth of your business instead. As well a representative, typically an attorney or enrolled agent, will have be experienced in handling your audit in a timely manner.
Of course, the downside to this is the cost. You’ll pay your representative regardless of the audit outcome, and it might amount to thousands if not more in professional fees. Hopefully you didn’t allow this expense to sneak up on you and you’ve already budgeted for it. This is a judgment call on your part as the frustration and time spent away from the business might be well worth any amount of money you can pay a professional to handle it for you.
In the end, the words audit and enjoyable don’t go together, until of course it has ended. Using the information above you’ll be better prepared for what you face and make the process as smooth as it can possibly be.
Chris Benjamin founded Rogue CFO Management Consulting in 2007 after spending 12 years in the corporate world as a CFO to both public and private companies. Leveraging his experience & education, Chris currently partners with growth stage companies who are in need of CFO management talent on a part time basis to help them grow and eventually become publicly traded. In his efforts to help the small business community, Chris has also created video courses, webinars and articles to help educate entrepreneurs & CEO’s, and guide them to success.