Preparing for an Audit

By: Akhil Shahani

According to the Merriam Webster online dictionary, "an audit is a formal examination of an organization's or individual's accounts or financial situation." It is an investigation conducted by the IRS to determine whether the information provided to the government on the tax return is correct and whether the proper amount of tax was paid. The burden of proof during the audit is on the taxpayer - you have to prove to the government that all of the information on your tax return like income, the exclusions, exemptions, deductions and credits are true and correct.

Typically, an audit is not a welcome event for any organization or individual. But remember, many audits result in no change if the detailed information on the return is accurate.

Is one coming your way? Never fear - we'll give you some tips on preparing for an audit which will help you sail through the process without having to face any repercussions.

Action to take before the audit takes place:
&bullThe first step while preparing for an audit is to thoroughly review your tax returns before meeting with the auditor. Be ready to explain how you came up with the figures.
&bullThe IRS has a right to look at any records used to prepare your tax return. So, organize your records for the auditor in a logical fashion.
&bullBack up your income sources or expense deductions.
&bullRehearse the answers to the questions that the auditor is likely to ask you. Preparing for an audit may also require that you research tax law beforehand.
List of items that the auditor would want to see:
At a minimum, the IRS will expect to scrutinize the following documents:
&bullBank statements, canceled checks and receipts: The auditor will want to see bank records from all of your accounts, both personal and business. Do not discard any business-related canceled checks, invoices or sales slips. If you paid for some expenses with cash, show them the appropriate paperwork. These could be handwritten notes, notebooks, receipts or petty cash vouchers.
&bullElectronic records: Bank and charge card statements are now accepted by the IRS as proof of payment. They must show the name, the date, the amount, and the address of the payee.
&bullBooks and records: The auditor will ask to see your records. These could be checkbooks and cash register tapes, ledgers and journals or a computer printout.
&bullAppointment books, logs and diaries: Businesses that offer services typically track activities and expenses using calendars, business diaries, appointment books and logs. An entry in a business diary helps justify an expense to an auditor as long as it appears to be reasonable.
&bullAutomobile records: You should keep a log of the business use of your vehicle if it is used for both personal and business purposes. You could also keep all gas and repair receipts in an orderly fashion.
&bullTravel and entertainment records: Out-of-town business travel and entertainment expenses require greater record keeping than most other expenses. You must have a written record of the specific business purpose of the travel or entertainment expense, as well as a receipt for it.
If you do not produce adequate records, the auditor is legally permitted to re-estimate your income and/or expenses and also impose a separate penalty for your failure to keep appropriate records. Remember, the key to get through an audit unscathed is to develop and maintain credibility with the auditor. So, be upfront and honest in your replies and co-operate as best possible. That is really the most important thing to remember while preparing for an audit!

Accounting
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