Below are ten things auditors commonly search for when auditing businesses.
1. Was all your business income reported, including cash, goods, property, or services received by the business?
2. Did you deduct personal expenses as business expenses? An auditor will pay close attention to auto deductions, entertainment expenses, meals, and travel.
3. Have you met your payroll tax obligations and made timely tax deposits for your employees?
4. Are you living larger than your income appears to warrant?
5. Does your business checking account activity match your business records? Beware, a business audit does not mean that your personal financial records will not be reviewed. The auditor is entitled to see both your business and personal records.
6. Are your financial records complete and well maintained?
7. If you are required to pay sales tax, does the amount you paid match the sales you show in your business records?
8. Did you deduct a business expense in the proper year? Tax rules cover when a business expense can be deducted. A “current” expense is deductible in the year it was incurred. A “capital” expense may have to be deducted over a longer period.
9. Do you have a business expense that appears too extravagant for the type of business you operate?
10. Do you deal with relatives or relatives’ businesses? Auditors look at “related party” transactions to see if your business is shifting taxable profits to family members and then using the shift as a business deduction.