How to Avoid a Tax Audit (Hint: Use FreshBooks!)
Of all the things on your to-do list, neat record-keeping probably doesn’t fall high on the list. But when your neighborhood tax auditor comes around, you may wish it had.
Many business owners don’t keep proper records, so they get burned during a tax audit, paying out hard-earned dollars in interest and penalties. Fortunately, with cloud accounting software like Freshbooks, you can “audit-proof” your books to stay in the clear—and reduce your stress during tax season.
Here’s how to avoid a tax audit using FreshBooks.
When starting a business, most people don’t bother with official accounting software. They send out invoices in Word or as a PDF, and loosely keep expenses on a spreadsheet with receipts scattered in a shoebox or George Costanza wallet .
While this may be fine early on in a business, it definitely gets harder to manage as things get busier. With no accounting system, you’re just inviting an in-depth audit. You see, before auditors decide to do an audit, they often ask questions like, “Do you have an accounting system?” or “Do you have your bank statements?” or “How do you calculate sales tax?” Based on your answers, they’ll decide to show up or not.
So showing auditors that you have an accounting system like FreshBooks may stop them from showing up at all. And if they do, it’ll make the audit go smoother.
Store receipts online
While keeping track of your income and expenses is one thing, auditors need to see the actual receipts. That gas receipt that you stuffed in your wallet and has since disappeared may cost you a few bucks in penalties if you can’t find it during an audit!
Keep in mind that audits can also go back several years—and you’re supposed to have receipts for all of them. Remember where you put the receipt for the tuna sandwich you had five-years-ago-last-Tuesday?
With Freshbooks, you can attach pictures of your receipts to specific transactions. Either snap a photo of the receipt with your smartphone or find the e-receipt in your email, then upload it to the expense entry. If you get audited, you’ll be able to pass with flying colors in just a few clicks.
To see this tip in action, watch the free video from my complete course FreshBooks Essential Training on lynda.com.
Connect your bank feed
Depending on the seriousness of the audit, some auditors will want to see your bank statements and match them up to your income and expenses. They’ll
be checking to see if you received more income than you invoiced, or if you overstated your expenses.
To keep the auditor off your back, Freshbooks’ bank feed feature allows your books to be easily traced to transactions in your bank. Connect your bank or credit card account to Freshbooks and you’ll be able to download all your expense transactions. If auditors check your books, they’ll be happy to see all your expenses neatly match your bank statements.
Watch this free video to see how to connect to your bank account.
Attach calculations to estimates
There are some tax deductions for business owners that are largely based on estimates. If you take a deduction for mileage or a home-office expense, you may be estimating the amount of business miles you drove in a year or the amount of space your home office takes up.
Auditors love to go after these types of expenses, as many business owners don’t remember how they came up with the calculations in the first place! If you’ve got your calculation in Excel, you can easily upload a copy of it to the claim in Freshbooks. When the auditor asks for backup, you won’t be frantically looking for a calculator.
Set up sales tax rates
If you work across provinces or states, you may have to deal with a number of different sales tax rates. When preparing invoices manually, it’s easy to mix up a rate and get burned in a sales-tax audit. Freshbooks allows you to set up different sales tax rates for the different areas that you do business in.
You can also attribute the rates to specific items to ensure the right tax rate appears for that item automatically, avoiding any costly sales-tax mistakes.
This free video shows you how to set up sales tax settings in FreshBooks.
Submit your taxes on time
An easy way to draw attention from auditors is to submit your taxes late. Late filers can be easy targets because auditors assume that many of them don’t have proper records. With Freshbooks, you can quickly run annual reports to file your taxes or collaborate with an accountant at tax time.
Since you’ll be able to do your books in real time, you should be a lot better off than those last-minute shoebox stuffers!
For more tax tips using FreshBooks, visit the FreshBooks resource center .
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