A lot of people ask me what happens during an audit?
How does it go?
So my goal in this video is to teach you how to be prepared for an audit.
And I'm not talking about when you actually get the audit,
I want you to be prepared in advance, because most of the time these audits
aren't happening during the current year or right after the year ends.
They may be two years down the road, and by then it's going to be
a lot more work to try and get prepared for an audit.
So you want to be doing it all the time in your business.
Now I will point out that audit rates are fairly low right now.
However, they are still happening.
And just because
you think you may not be the one, well, you may just be the lucky one.
So I advise you to stay prepared with these five easy tips.
It's important to know that there are two main types of audits.
One would be a correspondence on it.
And what this means is that the IRS is sending you something in the mail
and they're requesting a list of specific items for you to send back in.
They will review.
Hopefully it goes well and that may close it depending on
what they're looking for or what you've sent them.
They may send out more, but those are typically an easier audit.
The bad news is, if there's anything complicated going on
or anything is disorganized,
you don't really have the opportunity to explain it in person to someone.
So you really have to make sure when you send it back that there's a good road map
for them to follow
so that they can easily identify everything and hopefully close it out.
The other type of audit would be an in-person audit,
and this is where the IRS agent is actually coming
to your business site potentially, or you're going to our IRS office.
And they're asking you typically they're interviewing you in advance
and requesting information and it's a bit more detailed.
So the downside of that is it's more involved than I audit by mail.
The upside is you get to actually work with someone and hopefully
explain and answer any questions better.
Now let's get into the five tips
that are most important to be prepared for an audit.
And I don't do this all the time.
Not when you're pulled for audit.
The first one is keep a separate bank account for your business.
Okay.
I see this one all the time with people you use.
Maybe a business accountant, but you run some personal expenses through it,
or maybe you run some business expenses through a personal account.
It's a mess.
It creates a lot of room for air, and it shows the IRS that you're
not really treating the business as a business.
So you're already starting off on a bad foot.
Plus, it's much easier to organize your records and prove to the IRS
your deductions because you have it all in one place.
Now you will need more support is will go over
but that's the baseline
is you start with having your bank statements, credit card statements
available outlining all the activity through the year in one place.
It's easy. It's organized.
So that is tip number one.
Tip number two is support.
Keep support for all of your deposits.
The default from the IRS perspective is any deposit in a bank
account is income unless it's proven otherwise.
There are many other types of deposits that may not actually be income.
For example, if you have to put money into the business,
if you're taking money from your personal account,
putting it into the business to fund the business expenses.
If you don't have support and show the IRS that that deposit came
from your personal account and not from, say, a customer
or something else, then the IRS won't treat it as income.
So make sure you have that support available.
Another type of deposit that would not be considered
income would be deposits from debt.
So if you take out a loan and you use it in the business,
or if it's real estate and you refine hands and cash out
and deposit it in the bank account for the real estate,
then you need to be able to show where that deposit came from.
So it's not treated as income.
So always make sure you have that support for every deposit
and you should really keep support for the deposits of income too.
But the real concern here is the IRS
saying you had more income than you actually did.
The third tip is the other side.
You need to support every deduction because if there's not
support, the IRS may disallow them.
Now, a good baseline at a minimum, like I said,
is having bank statements showing these expenses.
But really what you want is receipts for every transaction.
And because that's what the IRS is going to look at, they want to know
not just that the money went out the door,
but this is actually a business expense.
So having an invoice with the detail.
So if it's a rental property and say you had the AC repaired,
well, you would have an invoice with the property address.
And what happened that way, if the IRS questions
that expense, like, for example, they may ask, well,
how do we know that that wasn't just a repair on your personal residence?
How do we know that was for this actual rental property?
Well, you'd have an invoice with that rental address supporting it,
and so it's much easier to claim those deductions.
Now, you should also recognize that there are some expenses
that the IRS requires even more support for than the typical expense.
One of these expenses is auto deductions.
The IRS wants to know, one, how much that expenses.
Two, you have to keep track of the business mileage
and total mileage of the vehicle throughout the year.
Three, you have to have the date of the business you for
you have to have the business purpose of the business use.
So, for example, did you go visit a client's office?
Did you go pick up materials for something?
You know, what was the reason you had that
mileage and you're calling it a business expense?
Also, and this is very important.
They should be contemporaneous.
What does this mean?
Basically, you don't wait until the IRS comes in and questions
the deduction to come up with the log and where you went.
You keep this as the year goes on.
So it's already there. You already have a log.
That way it's much harder to question,
well, hey, you're just doing this off of memory.
Well, now this I did
every time I had a business use, I wrote down all these things.
I kept track of all the expenses, the dates, and it's detailed.
It's much easier to support.
Plus, the IRS requires you to do that in order to allow the deduction
a second expense that the IRS requires more support for its travel expenses.
They want to know the date of the departure and how many days.
They want to know the destination.
And of course, they want to know the business purpose
and what the benefit that you expect to derive from that travel.
What keep that in mind whenever you have those types of expenses
that you need more support and then you shouldn't be trying to come up with it
after the fact when you actually get pulled for audit.
My fourth point is have a good CPA and I know I'm a CPA.
Of course I'm going to say that.
But this is like anything else in your life.
If you actually get pulled for audit one by having a good CPA in advance,
they're going to tell you all of this and they'll be able
to provide more information so that you're already prepared
and then if you are actually pull for audit,
it's much better to have the CPA handle it because the CPA is going to have
a better idea of what the IRS is looking for on requests or interviews.
And so they will be able to target it better not under share or overshare.
It will be a little more.
Hopefully they won't overshare or under share.
Not that there's anything to hide,
but you want to make it a seamless, as simple as possible.
You don't want to open a bunch of can of worms to go through.
You want to close it as quick as possible with the least amount of expense.
And a CPA can help you do this.
So you want to check if they've got experience with this,
because that can be really important when the time comes.
Lastly, the fifth bullet point and really
this one is just a recap of everything because it's so important.
It's keep good records all the time.
So many times I end up with potential clients
or clients and things are just all over the place
and it's hard to pull together if you can't find it easily.
The IRS can't find it easily.
And you know what?
The IRS is going to spend time trying to help
you get that deduction or clarify that something is an income.
They're just going to say you don't get the deduction or that it's income.
So you have the responsibility of making sure that you have the right records
and everything is in place.
So hopefully this helps and I'll see you guys on the next video.