You're getting audited.
Those words are often enough to deeply scare any small businessperson. Nightmares of hours and hours of digging through receipts and invoices, meetings in which you feel like you're being judged for not exactly understanding giant mountains of tax code, and often a painful bill in the end for something you weren't even aware of? Who needs to watch horror movies when such things lurk in the shadows?
Luckily, there's a secret truth, a silver bullet that kills that werewolf in the closet. It's simple. Document everything.
It's simple... but it's harder than those two words can ever reveal. Here are six tactics I use for audit-proofing my own small business.
I make a note of every dollar that goes into the business - and every dollar that goes out. I keep these in Excel. For each entry, I list the amount coming in or going out along with exactly what the purpose for that money was. If it's a payment, I note the invoice number. If it's something I bought, I note exactly what it was and why I bought it.
I call this my "audit trail" and it's served me for more than just audits. It's the first place I look for almost any question I have about my small business, as it points me to everything from customers to supplies.
I don't mix personal and business expenses. If it doesn't have a strictly business purpose, it's a personal expense and it's not included in any records of the business. I don't make purchases that combine personal and business items on the same receipt, for example - I separate them and check out twice.
Eliminate those grey areas up front so that they don't come back to confuse you later - or bite you if you get audited.
I don't deduct everything under the sun. For many people, tax time means time to invent every deduction under the sun, even if it means squeezing a camel through the eye of a needle. This is usually a bad idea, especially if it gets you into situations where you have a lot of revenue but no taxes are due. You'll be scrutinized - and when you're claiming deductions that are perhaps not black and white, you don't want that kind of scrutiny. You're far better off sticking to the cut-and-dried deductions. Of course, that also means making choices throughout the year that produce very clear deductions for you.
If a year is unusual, I proceed with extra caution. This is particularly true if you're going through a year with a big spike in revenue, which will almost always attract attention. Good years are the ones that make a small business worthwhile - but a good year can also be a temptation to get greedy at the very time when our good fortune will be attracting attention.
I audit myself. Having a set of trusted eyes on the books on occasion can help you discover problems that you didn't even see. Instead of waiting for Uncle Sam to put the crunch on you, invite a trusted third party to audit your books for you and identify problems before they become disastrous. It might cost a little bit, but that's far better than getting hit with an enormous bill later on.
I'm honest with myself. Not too long ago, things reached a point where I was having difficulty keeping up with the records and paperwork. Rather than being stubborn and trying to stick with my previous system, I recognized that I needed help - and I asked for it. You can't do everything. Recognizing when you're stretched to your limit - or beyond - and seeking help is absolutely vital in keeping your records straight and keeping your business on the right path.