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Tax

Preparing for the Unexpected with IRS Audits

What used to be a longshot of being chosen, now has business leaders working to be audit ready at any time.

By Lisa Schwarz.

Last year the IRS announced it increased the number of small businesses audits by 50%. What used to be a longshot of being chosen, now has business leaders working to be audit ready at any time.

Instead of waiting for the IRS letter to arrive in the mail, small businesses are wise to adopt an accounting system early on to effectively manage risk and ensure accuracy in all tax filings. This is especially critical if the company aspires to go public. The sooner a system is in place, the fewer headaches down the road.

With a mindset and approach shift, finance leaders can confidently embrace the unknown, knowing they’re prepared. Here are three ways to be prepared for the unexpected.

Stay on Top of Tax Changes

Regulations and requirements for filing federal, state, and local business taxes update periodically. Staying on top of tax changes means organizations can save money and time in the lead up to an audit.

For example, when the CARES Act and Consolidated Appropriations Act passed, it temporarily offered incentives and repealed limits on deductions keeping employees on payroll during the pandemic. Over time, deductions have changed. As changes are announced, it is important for small business owners to act quickly and thoroughly to remain in compliance. The practice of proactive monitoring for what’s next not only gives finance teams the visibility they need for bookkeeping, but also allows valuable buffer time to give employees, customers and other stakeholders notice of changes that will impact them.

Tax planning should never be a one-and-done exercise conducted annually. Because tax laws are constantly evolving, businesses who regularly maintain their reporting systems avoid the last-minute scramble to find deductions, credits, allowances, and exemptions to reduce their tax liability.

Improve Accuracy with Centralizing Data

The frequency of auditing is moving toward real time, as auditors adopt great automation and AI tools to sift through complete data sets faster. The scope of audits will also continue to expand, making the need for sound accounting and compliance systems mission critical to doing business.

The best way to ensure all tax filings are accurate, and delivered in a timely fashion, is to introduce accounting software early on into the business. This software will centralize your financial data in one place and serve as a vital role in running a business. It will help track expenditures and income, enable compliance, and provide investors and management with financial information to help make informed decisions. It’s about finding tools to grow with the business and keep pace as accounting processes grow increasingly complex. While it’s an investment upfront, small business owners and finance teams can better manage the company’s books and monitor financial health during tax season and beyond.

Move Beyond Bookkeeping with Technology

One essential way to save time and money in this process is to adopt and integrate technology early. The pain of preparing for an audit is minimal with software in place that is automatically updating the books while accounting for sales, accounts payable, accounts receivable, payroll, and more. 

As a business grows and operations become more complex, having the right tools in place is invaluable and extends beyond bookkeeping. At this conjecture, small businesses need to graduate from basic accounting software to a comprehensive business management platform. This platform will streamline operations and equip leaders to make informed decisions based on data spanning the entire company.

The software that was initially adopted for bookkeeping purposes will eventually become the company backbone and give business leaders the tools to spend less time running the business and more time innovating and growing. With access to these tools, filing taxes and preparing for an audit becomes a less arduous task, and something a small business can be ready for at any time.

What’s Next – How to be Prepared Year-Round

If a company is scrambling to prepare for an audit, it is probably already too late. It’s critical to prepare for the audit all year long, which means collecting and organizing documentation for the auditor throughout the year. It also means that organizations should maintain proper schedules and analyze, review, and reconcile balance sheet accounts regularly.

By staying on top of changes, adopting the proper technology, and staying prepared year-round, companies can enable an audit goes smoothly and remains within budget.

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Lisa Schwarz is senior director of global product marketing at NetSuite.