Good bookkeeping is the key to neutralizing an IRS audit

If you are a small business owner, the best way to protect yourself against an IRS audit is to keep good records in a systematic way. Most of us don’t like the bookkeeping task and would much rather be doing something else, rather than reconciling the business checking account. We know how much money we spent, we know how much money we made, yet we are often told that bookkeeping has to be done anyway!

Well “they” are correct.

Without good bookkeeping, two things can happen. 1) You can lose track of the minor transactions which can add up to be a large transaction, which can immediately overdraw your account and make you believe you have more money than you actually have. Plus, often times clients forget about certain deductions when tax time comes because they didn’t keep good records.

The second reason for good bookkeeping is to put into place a protection in case the IRS has questions. If you pay cash for certain services or items on constant bases, there would be no way to prove this deduction unless you keep good records and can produce these records if the IRS questions your deductions.

Example:

Kenneth is a contractor and each morning he buys each of his workers coffee and a food item at the local Starbucks. On the average there are 6 workers, who work 5 days a week. Kenneth spends $5.00 on each worker. 50 weeks a year, 5 days a week, $5.00 on 6 workers (average) 50 x 5 = 250 days x $5 = $1,250 a year for one employee x 6 =$7,500 a year for food and beverages for his workers.

Kenneth always pays cash at Starbucks, sure he could use a credit card or buy a gift care, but he doesn’t think of that until the IRS sends a CP-2000 (paper audit) asking about another item on the tax return.

Kenneth’s tax professional wants to be able to substantiate each deduction because he doesn’t agree with what the IRS is proposing and ask for a meeting with the IRS.

Kenneth can’t prove his $7,500 write off for food and beverages for his workers. $7500 on Schedule C Line 24b = $3750 (50% of the food and beverage) Kenneth didn’t add the $5 a day he spent on himself, but he should have!

IF, Kenneth had put the $35 a day cost into his QuickBooks entries, he would have had a running proof. The Starbucks owner surely would have written a letter confirming that, 5 days a week, Kenneth and his six guys purchase coffee and one food item each morning. (if he couldn't find his receipts)

There is a reason we recommend QuickBooks for tax clients. Quickbooks Online - Choose the plan that's Best for your Business Today! Try Now FREE for 30 Days! Clients can use Quickbooks Online and always have access to their accounting records without having to do any paper work. If clients have a problem with keeping receipts then we encourage them to Manage your receipts and business cards online.

Regardless of which plan you select it is much easier, then dealing with paper work, which will never organize itself.