Tips to get through a state audit of your small business without having to shake out your piggy bank. Information for small businesses going through a state audit.
First audit? No need to hire an accountant or tax attorney just yet. There are some simple steps to getting through your first audit without having to hammer away at your piggy bank.
Many people panick at the thought of an auditor showing up to pick through their business records and data with a well sharpened pencil tucked behind their ear, but it is quite painless if one knows what to expect. The first tips actually starts the moment you open your small business.
- Learn the laws and regulations governing your specific type of business
- Know how to properly file your state taxes by taking free workshops and classes, hiring an accountant to help you through the first one or two filings or hiring an experienced bookkeeper to show you how to do it.
- Get a binding ruling from your taxing agency or if they do not offer a binding ruling ask them to provide written documentation that is dated, signed and incudes the taxing agency’s employee name clearly typed on all instructions or advise given to you. KEEP IT. This is your written proof that you are filing your taxes as instructed by the taxing agency should you be audited in the future and are told you have been doing it incorrectly.
- Operate your business within the laws and regulations and always keep your books on the up and up. Do not try to cheat the system. It is never worth it in the long run and if you are honest you won’t fear an audit.
- Keep all income and expense receipts in an orderly fashion in your files. All documents related to your business should be preserved. It is best to purge your office files yearly, or every other year, and file each year in an individual box, which makes finding records requested by the auditor easier.
The best approach to an audit is to be upfront and honest. Provide the necessary documents as quickly as possible so the auditor can perform his/her job and move on. You may have the auditor come directly to your office or consider having them meet at your accountant’s office if you choose. Using your office for the audit is not mandatory. There are several reasons you may want an auditor to work from your accountant’s office:
- Privacy – Small businesses often have home offices where personal and business space overlap.
- Your business hours are not appropriate for an auditor to be able to work 8 hours each day at your office.
- You are uncomfortable with someone sitting in the same room as you while you try to continue your business operations.
- The auditor can request documentation when or if they need it and you are normally given a few days or week to provide it. Having an auditor on location can sometimes heighten their expectations that you need to drop what you are doing to go dig out a record they have requested.
- Your accountant can answer many questions the auditor has or field the questions and then call you to speak privately before responding to the auditor.
- Your accountant knows what an auditor can and cannot request for documentation and how the audit process goes in general.
- You avoid idle chatter and lengthy conversations about your business operations.
It’s best not to get chatty with an auditor. Only answer the questions they ask and only provide the documentation they request. Be friendly and open, but remember the auditor may take something you say verbally out of context and make assumptions about your business that aren’t true. If you are ever unsure about how to answer a question it is perfectly fine to ask the auditor to put all his questions in writing so you can respond to them the next day. By doing so, you can avoid giving inaccurate information off the top of your head and answer the questions when your business schedule allows.
There’s been many people who say they try different tactics to try and get rid of the auditor as quickly as possible. They turn up the heat or turn it down to near freezing levels–hoping the auditor will not be comfortable and move on fast. They have also tried some of the following:
- Uncomfortable, hard wooden chairs and cramped desk.
- Dim lights or flickering lights
- Noisy office space. Play loud music, constant chattering and other background noise.
- Unorganized records tossed in a shoe box
- Sucking up to the auditor with coffee and comfortable surroundings
- Pets – Hoping the auditor hates cats, dogs, snakes, etc. A big muddy dog paws greeting.
- Small children running, yelling and screaming
You get the drift, but it is not advisable to try this as no doubt the auditor is on to your games. Trying to smooze an auditor isn’t a good idea either. Just keep a professional business relationship between you and the auditor and all will be fine.
An audit is much easier to go through when one feels confident their books have been kept properly and according to the laws and regulations as required. If an error is found, it will most likely be an honest mistake and you can then discuss it with the auditor to better understand how to correct it in the future.
Most importantly, review the final audit and check the laws regarding the assessment. Auditors can, and I find quite often, are mistaken in their interpretations of the laws. Read the laws yourself. Ask your accountant for more information and be sure to only pay what you truly owe. Some states are going after every penny they can due to the crippling economy and declining budgets. Don’t let them pick you as an easy target. If you owe pay, but if you don’t then fight it.
An accountant recently said to me, “It is criminal what the state auditors are doing.” They are knowingly trying to assess taxes, penalties and interest on taxpayers and hope they will just pay it because they don’t have the time, staff or perhaps the knowledge to know any better.
Speaking from personal experience I can say my audit was “criminal” as the tax accountant stated. The first assessment came in at nearly $8,000 and it was later discovered the business & occupation taxes were overpaid. One single invoice, sales tax on an equipment purchase was missed, was found and once it was all said and done–the total assessment was less than $300 dollars. It took a lot of my time, reams of paper and wasted ink, frustration and fight to prove I didn’t owe what they originally said, but it was worth it.
Most small business owners would have walked away and just paid the bill. I believe the states are banking on that to get more than their fair share–don’t let them away with it.