Good documentation helps small business customers prepare for audits

By Jim Conroy.

The 2022 Anti-Inflation Act, with its provision to add $80 billion in federal spending and potentially up to 87,000 additional IRS employees over the next 10 years, is of concern to many who wonder where these resources might be concentrated. Although the Treasury Department has stated that these resources would not be used to reinforce audit testing for small businesses and low-income individuals, it is always good business practice to ensure your clients are prepared for any scenario.

Karen Kerrigan, President and CEO of the Small Business and Entrepreneurship Council, said small businesses will be hit hardest because “tax data shows that these are small businesses with moderate means, not ‘the rich.’ are the ones most commonly attacked.” As great as the risk of being caught up in error or fraud, Kerrigan determined that the real burden would be on companies not being able to provide the necessary lawyers and accountants to hire what would be a direct drain on their business, a loss of productivity and anxiety.

In addition, the Tax Cuts and Jobs Act of 2017 treats small businesses and large businesses differently. “Pass-through” companies such as limited liability companies (LLCs), partnerships, S-corporations and sole proprietorships have the advantage of being taxed only once. However, some critics, such as Jim Blasingame of The Small Business Advocate radio showhave determined that the IRS has been given autonomy to determine which small businesses can receive the qualifying business deduction defined by this law.

If Kerrigan and other concerned parties are correct, accountants will be dragged into the coming decade as they will need to document their clients’ expenses as both the number and intensity of audits increase. As unfortunate as it is, you know that all too often small business customers neglect their bookkeeping, expense documentation, and other tax-related responsibilities.

The burden of an audit rests with the CPA, and it may not matter whether or not the CPA prepared the tax return in question. If so, you can be fairly certain that the required documentation is in place. They will continue to be tapped to help with audit preparation and participation. However, you could be overwhelmed by 16 tons of misrecorded documents, missing bills and receipts, and best estimates when a new client comes to you invited for an IRS audit. So now, before the next tax year starts and the IRS staff interviews roll in, now is the time to find the right tools to achieve the best possible outcome should your clients be caught in audits.

For existing clients, reinforce any previous advice you gave them about what to pursue and when. Remind them that the future of their business depends on accuracy. Explain how an audit robs them of time that they could spend working on their business and that the more sloppy or incomplete their records are, the longer the process takes. Remind them that there are financial and sometimes criminal penalties for inaccurate tax returns, which can also put their business at risk. Also, remind them that accurate financial records offer other benefits that allow them to better grow their business through smart decisions based on real data and even improve their ability to secure funding from a lender.

At least make everyone’s life easier by making sure the customer knows what to record. This checklist can help the client cover the basics. Customers should avoid a shoe box or desk drawer. A system for recording their expenses as they arise is essential. Carefully organized businesses can use a spreadsheet for the same purpose. However, you and they should be skeptical about their reliability. Too many have learned over the years that items can be forgotten, typed in the wrong cell, added incorrectly, or accidentally overwritten.

Suggest customers have a simple tool that makes it easy to capture and organize financial documents in any format – scan paper, snap a photo with your phone, or capture email receipts directly into a financial management system as they become available. These platforms can even use artificial intelligence to allocate expenses to the right account once secured, making the task even easier. Your job as a CPA is to remind your customer to enter their invoices and receipts into the system consistently.

Only time will tell if the spine of small business in America will be broken by the government’s intention to arm the IRS. But even if the customers of competing accounting practices are harmed, your customers can be protected from harm if you insist they use the technology to capture the information you need to file an accurate tax return. Your exam will be uncomplicated when it happens and your work for them will be easier for you and your office.


Jim Conroy is CEO of The nice company.


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