What is the IRS? They are a collection department for the Treasury Department. As collections agents, they only have one goal, get your dollars. When a tax return is selected to be audited, the IRS sends a scary letter. I have a copy of one in my office which a client received. It’s one of the guides we use to keep our client’s books in an audit ready state.
If you’re in Seattle, or Washington State at all, you’re familiar with the myriad of taxing departments. The average business owner doesn’t know how to properly track their sales for the purposes of correctly reporting sales tax. The average business owner also doesn’t understand the IRS and how they think. Fortunately, I have over 2 decades of experience in taxes, so I’m going to tell you what I think will be most helpful. Rely on your source documents, because that’s what the IRS, the DOR, ESD, L & I, and every other agency is going to request.
What is a source document? Anything that can be obtained from an original un-edited source. Bank statements, credit card statements, reports from Square, Clover, Paypal, Amazon, Paychex, ADP, Google, Home Depot, etc are source documents. Equally, your mortgage statement, utility bills, medical bills, copies of checks that have cleared your account, copies of checks you’ve received, and copies of invoices are also source documents. An IRS auditor who is trying to verify the income and expense figures you used on your tax return will be looking to see how closely the source documents match your tax return. If your business bank statement shows $100,000 in total deposits for 2018 but you reported $56,000 in gross receipts on line 1 of your Schedule C, you’re going to have to prove that $44,000 of your deposits was not income. From here, they go down the line. For each item you deducted, they want to see a source document.
This is one reason our year end bookkeeping guide is being made available for free. Click here to download it now.
If you’re using Quickbooks, and using it correctly, provided you keep your receipts and other source documents in an orderly manner, you will not need to fear an audit. Auditors are actually happy when they find nothing wrong because they are short staffed, overburdened, and they are judged as all employees are, based on performance, so the more files they get through properly, the better. You may come out unscathed, but most people don’t, so they’ll be glad to move on from your file to someone else who is not bulletproof. Good Luck in 2019 and remember to call Sound Bookkeepers with any of your bookkeeping questions. We serve all of Puget Sound including Seattle, Ballard, Greenwood, Bellevue, Kirkland, Redmond, Kent, Everett, Bothell, and Woodinville,