From the June 1999 issue of Startups

Are you prepared for an IRS audit? Well, get ready, because you're a prime candidate, says Arthur D. Levy. The New York City CPA, who caters to small and midsized businesses, contends, "[Small]-business owners and their businesses have a much higher incidence of being examined by the IRS than wage earners or corporations."

Why? "Business owners can't necessarily separate their personal from their business finances. They end up deducting expenses that have nothing to do with their businesses. That's exactly what the IRS looks for," Levy says.

What else does the taxing agency focus on that might trigger an audit?

*Large deductions for travel and entertainment

*Unreasonable compensation

*Excessively high bonuses

*Company perks (such as cars, apartments or club memberships)

What to do? First, says Levy, "Keep impeccable, meticulous records, and carefully separate your personal finances from your business finances. One client with huge American Express entertainment bills was audited by the IRS and harshly told he couldn't deduct any of them. My client produced a second American Express account reflecting personal entertainment expenses, thereby differentiating his personal from his business expenses. That blew the IRS case out of the water."

"If you do nothing else," Levy advises, "at least get separate credit cards and separate checking accounts for your business and your personal expenses, and painstakingly use each accordingly."

If notified that you will be audited:

  • Contact the IRS. Ask for a list of items in question.
  • Get organized. Compile all records relevant to contested items.
  • Contact your accountant. Don't hide anything.
  • Don't attend the audit--let your accountant deal with it. If you're compelled to go, keep your answers brief and to the point. Be honest and cooperative, but don't volunteer information other than what's asked of you.

Put On A Happy Face

Whether you have financial backing from an angel, an investment group, or a syndicate comprised of your parents, a sibling and Uncle Leo, a policy for dealing with investors on a professional level could help increase support for your business. A proactive policy aimed at establishing and maintaining understanding, trust and credibility also helps keep lenders at arms' length from your operations, yet near enough to tap should you need future funding.

"Keep angels or start-up investors informed about what you're doing, what successes you've had and what your plans are," advises Maxine Bingham of Agora Marketing International Inc. "Make them feel part of the team."

For one high-tech start-up Agora Marketing helped launch, "We established constant communications," says Bingham. "We put [investors] on the distribution list for news releases, sent them all published articles about the company and designed a special newsletter for them." Bingham says a regular newsletter is a good idea because "investors get nervous if they don't hear from you. So tell them about a new product, a change of service, any significant hires. Better yet, use e-mail; it's quicker and cheaper than printing and snail-mailing a newsletter, and people like the convenience of being able to forward it to others."

Bingham, whose 11-year-old Cupertino, California, company helped launch such start-ups as Yahoo!, Ship Express, Plus Logic and Pilot Network Services, has noticed a perceptible change in investor expectations over the years. "Investors want to receive information immediately," she observes. "[That's why] many businesses are setting up Web sites with special investor pages that are password protected. It's a way to promote your business while keeping investors informed."

It's a good idea, too, to stay a step ahead of investors on industry news, competitor developments and even what press your company gets. "Don't be in a position where board members or investors are telling you what's going on," cautions Bingham. Instead, contract with an information services company such as DataTimes (http://www.datatimes.com) or Profound Market Research (http://www.profound.co.uk). They'll track news by industry, by company, etcetera, for a fee and deliver timely items to your e-mail box. Or use Point Cast (http://www.pointcast.com)--it's not as tailored, but it's free.

As you receive relevant information, pass it on to investors via your Web site or in a newsletter, perhaps adding your own spin rather than permitting investors to draw erroneous conclusions.

For additional information on how to keep your investors happy, contact the National Investor Relations Institute (http://www.niri.org), which has 30 chapters nationwide and offers seminars, workshops, luncheons and free publications sure to help you learn the basics of good relations.

Getting Trashed

This isn't another sermon on the importance of financial record-keeping. Just the opposite: It's about discarding unnecessary records to free space in your overstuffed file cabinets. But which records should you keep and which can you trash?

Tax returns and supporting data should be kept for at least seven years. Beyond that term, CPAs suggest keeping returns forever (particularly if you have tax-deferred retirement accounts); you may toss the backup materials.

Things like audit reports, financial statements, general ledgers and journals should be stored through eternity, along with legal correspondence, contracts, documents related to real estate transactions (including capital improvements) and all corporate records (from articles of incorporation to any paperwork relating to shareholders).

Six years is about the limit for keeping bank statements, deposit slips, sales records, journals and any materials relating to employee income or expenses.

Items that can be discarded after three years include canceled checks, paid invoices, payroll records, depreciation schedules, paperwork relating to expenses, donation receipts, real estate tax bills and inventory records.

You can trash the rest--if you dare.

Contact Sources

Agora Marketing International Inc., (408) 777-8436, MaxineB@aol.com

Arthur D. Levy, c/o Arthur D. Levy & Co. PC, (212) 684-7999

Paul DeCeglie (MrWritePDC@aol.com) is a former staff reporter for Journal of Commerce and American Banker