Now that we have covered the basics in Top Five Audit Facts Part 1, we can get to more advanced issues that most people don’t know about.
If you didn’t read Part 1, go back and read it now! This is important stuff!
1. Clearly Define Your Business and Business Activities as Ordinary and Necessary:
Half the time, the IRS has NO IDEA what you do in your business, and as a result, disallows a lot of expenses, which are not considered ordinary or necessary by them. A Blue Tax, Inc. Audit Specialist can easily solve this problem by writing a Professional Business Profile and Summary after interviewing the client.
2. Bank Records are not always a good enough source by themselves.
You have to support bank statements or credit card statements with a primary source, such as a log, ledger or receipts. If you don’t have one, you can retrace your steps and create one (see below). It is better to have a little SOMETHING than NOTHING– this goes towards your CREDIBILITY.
3. You are allowed to reconstruct mileage logs or cash transaction logs from memory.
It is sort of like retracing your steps. We can work with you to match it up with your bank statements or gas card- this will prove you actually went where you say you went, or you spent what you said you spent!
4. Attitude plays a HUGE Role.
Be consistent, courteous, prompt, and thorough. You wouldn’t like it if someone threw a stack of papers down on top of your desk all out of order, would you? However, tempting, don’t do the same thing to the IRS. Instead, do your best to cooperate, remember, document, and retrace your steps. Also, be polite to the IRS Agent, and don’t give more information than necessary. If they are rude, ask to speak to their supervisor. Our Audit Specialists are TRAINED to handle the WORST IRS Agents!
5. Discretion is KEY.
In certain cases, allowing expenses or disallowing expenses is discretionary- this means that if you have most of it, the IRS can make allowances in other areas, or be more “forgiving” in other areas.
6. “I Don’t Know” or “I Don’t Remember” often equals “Disallowed”
Do your best to remember, reconstruct, be helpful, and find answers, or you will find that a majority of your expenses are disallowed. Your Audit Specialist trained to ask the right questions that will jog your memory and help you find answers to any discrepancies.
7. IRS Agents will back down a bit once they find you have representation.
Most IRS Agents will tread much more carefully once they find out you have representation. They are less likely to ask probing questions out of scope of the audit (which could lead you to revealing too much information and opening up other years for audits!). They are also more likely to find your documents and assertions to be credible because all of your information will be consistently organized into an Audit Report, Exhibits, Substantiation, and Summary. We also have a way of handling “difficult” IRS Agents, and even their Supervisors!
8. Your CPA may be a great CPA, but may not be the best Representative for your Audit.
If they can do excellent accounting work, why aren’t they the best person to help in an Audit? Because successful Audit Representation has several components:
a) Accurate and Consistent Record Keeping (your CPA can help with this, and if they haven’t, we can help you with this)
b) Customer Service and Rapport- IRS Agents love us because we make the whole process easier, and the IRS Agents who hate us learn to get out of our way so that we can get you the best deal possible under your unique set of circumstances! We negotiate for you, we work for you!
c) Persuasion and Skill- Our Audit Specialists argue that your expenses are ordinary and necessary, and if all of the expenses are not allowed, we push for the maximum allowance.
d) Presentation is EVERYHTING: We put it ALL together, making it easy to read and understand, so that the IRS is much more likely to cooperate. You just can’t beat all of this.
9. Saying that you paid cash is not enough.
You either have to have a ledger or proof that you bought those items- take a picture! If you have visible documented proof, such as a picture (snap one with your camera and PDF it), that will help add CREDIBILITY to your case showing that you bought the item for your business. You will also have to EXPLAIN how you used it for your business. (Remember, we can do this for you).
A General Ledger, Cash Activity Report, or simple notes containing the following information is enough:
1. Date Purchased
2. What You Bought
3. How Much it Cost
4. Business Purpose for Purchase (Example- copy machine for Graphic Design business)
10. Put in the work up front, and get rewards later down the line.
This rule applies whether you handle your Audit yourself, or whether you hire Professionals like us to represent you for your Audit. Either put in a significant amount of work yourself, or let the Audit Specialist do the work for you. Although nobody knows your business and expenses like YOU, nobody fights an audit like US! Together, we can JOIN FORCES and FIGHT your Audit!
Once the IRS reviews the substantiation packet prepared by Blue Tax, it will be EASIER and much more LIKELY for the IRS to say YES!