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
*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.