After Tax Day comes and goes, it is time to move onto the next big fear for the year. The anticipation and fear of an audit.
There are some business owners who will keep physical boxes of documents for years out of fear of a future audit. While maintaining thorough records is important both as a good business practice and in case of an audit, there is a middle ground when it comes to being prepared.
Here are a couple of tips to help you feel ready in case you get the dreaded notification of a tax audit.
How long do I need to keep my tax information?
The IRS can audit your return within three years of filing and can collect back taxes you owe for up to 10 years. That means that even though there was not an audit after you filed your 2013 taxes, the IRS can still initiate an audit on a more recent return and find discrepancies that result in taxes owed up to 10 years from the year of the audit.
The safest solution is to maintain your records for seven years but be sure to maintain them. Your records will not be helpful if you cannot find the right documents when there is an audit.
If you keep paper copies of your records, make sure they are in sorted files, by year so they are easy to navigate. If you have electronic records, try to store them in more than one place in case your primary location fails. Also, make sure that your file names include easily searchable terms, like the year of the return.
What are auditors looking for?
There are two main reasons for an audit. Either there is a flag that gives the IRS concern and they need more information, or the audit is random. In either case, many people get nervous about their business undergoing a tax audit because they do not know what to expect.
First and foremost, auditors are looking for honest records. Even if records were destroyed, the IRS wants to know what efforts you made to recreate those records.
Regardless of how you filed your tax return, you should seek help from a knowledgeable source to help you with your audit. They can help you understand the auditor’s requests and prepare your response.