IRS seeks to add many more examiners. Are you ready for an audit?

Possible new funding could result in a flood of additional examinations. Here’s how to prepare yourself and your business.

If President Biden gets his wish, the IRS will soon see a vast expansion of its budget and deploy thousands more examiners to audit businesses and individuals.

With this in mind, my advice to business owners is simple: Adopt the mentality that an audit is not a question of if, but when.

The truth is, there’s a lot of randomness when it comes to the firms and individuals that IRS examiners select for their audits. No business owner can truly think of themselves as immune from scrutiny, particularly with the signals the administration is sending about stronger enforcement.

So then the question becomes: how to win an audit?

It's impossible to overstate how much that question turns on documentation. Business owners need to commit to compiling detailed, contemporaneous documentation to justify any tax claim or strategy that could come under scrutiny.

IRS examiners, for instance, will not be content to see a credit card statement offered as proof of a business expense. They'll want to see the original receipt, and they'll expect every item on the sales slip to have a legitimate business purpose.

There are many apps out there today that can help business owners keep track of their expenses as purchases are made, but the best approach for many companies is to work with tax advisory firms that have developed customized solutions to facilitate documentation.

As I always tell clients, audits are uncertain, but the need for documentation is absolute.

No grey areas

It's an open secret that many – most? – business owners take the occasional liberty with their taxes. This can be as benign as counting every item on the Costco receipt as a business expense when there were in fact a few personal items on the ticket, as well. Still, this isn’t something business owners want to defend against an IRS audit. The advice here is blunt and simple: stop taking liberties. Operate with the mindset that you will have to justify any tax decision you make. When you do that, some minor fudges will seem a lot less tempting.

Penny wise, pound foolish

Finally, business owners could make better use of their network of professionals, but too often they are reluctant to pick up the phone or send an email. If you're thinking of making a significant move that could impact your company's tax situation, call your accountant. Run it by them. Too many business owners think of those billable hours that their CPA or attorney will charge them as a cost to be avoided whenever possible. Professional advice isn't free, of course, but when in the grip of a painful audit, that phone call that you didn't make will seem a lot more like an investment than an expense.

Bruce Willey, JD, CPA, is the founder of American Tax & Business Planning, LLC. He has been advising individuals and business owners in accounting, tax and wealth-building strategies for more than three decades. To speak with him or another ATBP expert, please reach out here or at https://www.americantbp.com/contact-american-tax-and-business-planning.