With tax time drawing nearer, small-business owners may be in for an unpleasant surprise.
"There really are not a lot of small business audits, but that will be changing," said CPA Joel Maller, head of the Maryland accounting firm The Maller Group. "The IRS is going through yet another reorganization, getting leaner and meaner, and it will be attempting to increase the auditing function."
Fortunately, technology can help. Good accounting software, payroll outsourcing and other such tools may not help to avoid an audit, but they may help one to get through the mill with minimal grinding. The best thing to feed a hungry auditor is a well-organized set of documents, and the careful use of digitized accounting can carry that ball a long way down the field.
"The major advantage to technology is that it gives the client the ability to have a much better set of records than we saw before," said Maller. "If you are audited, you have a real full general ledger at the touch of a button. It makes bank reconciliations easier, it makes it easier to keep good vendor records, and it makes it easier to create 1099s. It makes creating all the documentation so much easier, so much more cost-effective and time-effective."
But it isn't a panacea, warns John Santora, director of systems support and development for Fiducial Support Systems, an international provider of professional business and financial services.
"A tool is only as good as the person using it and the training that they have," Santora warned. This is especially true of accounting software, where it is possible to configure things wrong at the start, thus generating wads of useless data down the line. Even if one is not going to outsource the entire accounting function, Santora suggested, it may be worth turning to an outsider provider to do the initial system configuration.
If outsourcing is an option, there are certain choices that may bear fruit in the unlikely eventuality of an audit. The payroll function in particular is laden with rules and regulations that can be both time-consuming and confusing. Outsourcing this function could offer a degree of protection in case of an audit.
Santora offers a number of other ideas that can help in an audit situation:
- Organize documents into four categories: Corporate records, staff records, accounting and tax records; and employee benefit plan records.
- Store corporate records off-site. This includes articles of incorporation, board meeting minutes, stock certificates and the like.
- Maintain staff records for at least four years. There are several regulations that require records be maintained, including The Fair Labor Standards Act (FLSA), the Equal Pay Act, The Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA) and ... well, just keep the records.
- Still got room in the file cabinet? Santora says to keep accounting and tax records for seven years, including invoices, purchase orders and cancelled checks. Also, keep employee benefit plan information for at least six years, as required by the Employee Retirement Income Security Act (ERISA).
That's a mountain of paperwork to keep on hand for an audit you will probably never experience. As Maller noted, the IRS only audits about one percent of all tax returns, business or otherwise. That's the good news.
The bad new is, technology sometimes can work against you in the cat-and-mouse gave of avoiding and surviving audits.
"Technology may make returns more auditable, especially because of the growing popularity of e-filing," Maller warned.
Consider a paper return filed in tax season. Come April, the IRS is relying on temporary keypunchers to manually enter the vital data. "When someone manually keypunches a return, they only put in certain information, whereas if I e-file a tax return with the service, they basically have my whole tax return in electronic form," Maller said. "They therefore have a much greater ability to take that information and use it to determine whether they even want to do an audit."
Maller therefore advises his clients to file by paper, and he says he'll continue offering that advice until e-filing becomes the law of the land.
Adam Stone writes extensively on business and technology issues. He makes his virtual residence at email@example.com and his physical home in Annapolis, Md.
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