If you run or work at a small business, you know there are many perks. From the close relationships to the opportunities to take on new skills and roles, there’s a lot to appreciate. However, there are some nerve wracking parts too. For example, if you’re faced with the prospect of the dreaded IRS audit, can you quickly find the documents you need to defend your business? If you are still managing documents manually, the answer is “probably not.”
And don’t think you won’t get audited. While only one out of 100 individual taxpayers is audited, the IRS audits more than twice as many small businesses. If you aren’t sure what you need and where those documents are, you’re more likely to face fines.
According to the IRS, it’s important to keep the following documents for three to seven years, depending on the situation: receipts, bank and credit card statements, bills, canceled checks, invoices, proof of payments, financial statements, previous tax returns, W-2s, 1099s and any other documentary evidence that supports an item of income, deduction or credit shown on your tax return.
While the IRS doesn’t require receipts for items under $75, it can still question these expenses during an IRS audit. To be on the safe side, keep track of the expense amount, date, purpose and the place where the expense was made.
Effectively keeping track of documents means knowing exactly where everything is stored so it can be retrieved quickly. Manual record keeping is notoriously slow. According to an AIIM study, 85% of organizations say they spend extensive amounts of time trying to find content.
Automating documents is the first step toward orderly and effective storage. Receipts and other paper documents, for example, can be preserved by taking pictures or scans and then uploading them to a central repository.
Another option is outsourcing record storage. A small business could contract with a company to pick up cartons of paper documents, transport them to a secure facility and scan them. During an audit, the business owner would simply submit a retrieval request electronically to retrieve all the needed documents.
Once you survive an IRS audit, it’s tempting to keep every single document requested during the process, just in case. If at all possible, keep records for seven years or more. That’s because the amount of time the IRS has to start an investigation changes based on what they believe has happened. The time limit for auditing returns is three years from the date of filing. If income was misreported by at least 25%, they have six years to pursue an audit. And if they suspect fraud, there is no time limit.
However, if you are careful with your records, you won’t have to sweat the prospect of a tax audit. Audits happen, but with the right approach, you’ll survive just fine.
85% of organizations say they spend extensive amounts of time trying to find content.
Stat: 1.2% of C corporations with assets between $1 and $5 million, versus 1.9% for companies with assets between $5 and $10 million and 6.2% for companies with assets between $10 and $50 million.