Phoenix Arizona CPA | Arizona Tax Accountant | Arizona Income Tax

A tax audit is usually not a welcoming experience for anyone in business.  Whether it is in part or total, the experience can be a minor problem if the audit is only about certain records, or a major dilemma in accounting for a complete audit of the business.

If your business is notified of an audit, you will be informed of which part or parts of your tax return will be examined so that you can assemble the required documents.  You must also make a decision as to who will represent you, yourself or hire a tax adviser.  Unless you are well versed in business tax law, it is advisable to hire someone with expert knowledge in the field.  However, if you decide to represent yourself and encounter a problem during the audit, the taxpayer “Bill of Rights” permits you to request a suspension of the audit until you consult with a certified public accountant, tax attorney or until you are properly represented.  Although a professional representation costs money, you will be assured that the audit is done efficiently and saves you time, stress and money.

All available documents must be available for examination to support several crucial areas of the business that you reported on your tax return.  Beginning with income, your bank statements and deposit records for the income you reported will be reviewed, along with sales records, receipts, general ledger and other official accounting records.  Proof of gifts you received, valuables, an inheritance or exchange of goods or services you received instead of cash, must be documented accordingly.  Otherwise, the IRS could classify these as taxable income.

Accounting for indebtedness regarding your business will be examined carefully.  Expense items such as canceled checks, bank and credit card statements, receipts, and other business records can be compared with amounts reported on your tax return.  Special attention will be given to debts or business losses, charitable contributions, travel, meal and entertainment expenses.  Accurate records to validate these expenses are essential to confirm that only valid business expenses were accounted for.

Because interest on business loans is a deductible business expense, the financial records will be compared with bank statements and other financial records to verify that the money on loan was actually used for business purposes.

Workers’ classifications will be examined to assure that all workers are classified properly.  When a worker is classified as an employee, the employer must make mandatory deductions and contributions to the proper taxing agencies and provide certain other employee benefits, including unemployment compensation.  Contract workers, as a rule, are classified as independent contractors or self-employed workers and are responsible for their own taxes, with no employee benefits.  For this reason, data such as time cards, job descriptions, benefit plans, contracts and other business records will be reviewed by auditors to ensure that independent contractors are categorized separately from regular employees.

Your business payroll records, such as canceled checks, tax returns, deposits and other business records are reviewed to see if the data is processed in a complete, accurate and timely manner.  Other information examined by auditors includes state, federal and social security withholdings.  Accounting practices for custody of Medicare taxes, unemployment compensation, along with salaries and bonuses paid to owners and officers of your business are also reviewed to be confident they are justified and within industry standards.

Inspection of other business records may include accounting for such records as bank, customers, suppliers and especially financial records regarding your tax reporting.  Aside from business records, your standard of living and personal finances may also be inspected to compare your current lifestyle with the income available on your tax return in order to determine if they are consistent.  A tax audit can be extended to anyone who is knowledgeable about you and your financial situation.

Michael Russell

Your Independent guide to [http://accounting-guided.com/]Accounting

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