Would Your Bookkeeping Hold Up Under an IRS Audit?

Oct 15, 2020 | Bookkeeping

If you’ve ever gone through an IRS audit, you know that it’s often a hand-wringing experience. The IRS’s goals are no mystery. The examiner wants to verify that your tax return is valid and to substantiate your deductions. He also wants to know that you’re properly documenting your profits and losses.

These things aren’t so difficult to accomplish when you keep meticulous records. If your bookkeeping is just one more task you tack on to your already busy schedule, your records might not hold up to an audit. If your financial data is questionable or inaccurate, your IRS audit might be more stressful than it has to be. Because the timing of an IRS audit is often unpredictable, your records must be audit-ready at any time.

Why would the IRS audit your business?

When the IRS chooses to audit you, it’s usually because their system flagged your return as unusual compared to “norms.” They establish these norms based on IRS tax research. There’s also somewhat of an audit wild card. They may also audit you simply because your business transactions connect you to another audited taxpayer.

The IRS wants all of your bookkeeping data

Organized information and consistent recordkeeping are critical to a successful IRS audit. They want to see your bookkeeping records because that’s where they expect to find the information they need. They request your financial data early in the audit process and they want it ASAP.

The IRS is tech-savvy

During your IRS audit, the examiner won’t anticipate a stack of paper documents. They expect you to produce electronic records because that’s the business-standard. They assume that you have an electronic data system so they’ve established a tech-compliant audit process.

  • First, they request your software backup files for the audit period.
  • Then, they avoid accessibility roadblocks by acquiring your administrator’s user name and password.
  • They’ll request the data on a flash drive, a CD, or a DVD.
  • The IRS can access and review the most commonly used types of accounting software.
  • They use your business data to produce financial reports based on their own parameters.
  • If they have questions they “drill down” into your data and documents.
  • Your digital data is usually all an examiner needs to test the “integrity and veracity” of your business records. Still, they might request supplemental documents.
  • Internal Revenue Code §7602 grants the IRS the authority to summon “…books, records, papers, or other data…”
  • They also have the authority to summon the person with care, custody, or control of your books. (That could be you or your bookkeeper.)

Will your bookkeeping hold up to an IRS audit?

We’re not trying to make you nervous, but the IRS is always ready for you. Also, we’re bookkeeping professionals and we just want to make sure you’re ready for them. We do that by organizing and tracking your financial data and keeping your records up-to-date.

We work remotely, virtually, and economically. Also, we take care of the financial details so you can spend your time growing your business. When tax time rolls around, you’ll have an accurate, timely record of your cash flow and that’s exactly what the IRS wants.

For more information about Goode Bookkeeping & Consulting Services, call us at 860-659-6543 or complete our consultation form.

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