Utilize & Prepare For Audit, Don’t Fear It
Headlines everywhere, “IRS hiring an army of auditors,” “IRS is hiring 87,000 agents to perform 710,000 new audits” and “Senate approves nearly $80 billion in IRS funding.”
Why is hearing the term audit so scary? Why is hearing the letters IRS frightening? Wait, what is an audit? A simple definition is an official inspection of an individual’s or organization’s accounts. What does that mean?
There are three types of financial audits: IRS audit, internal audit (someone inside your company) and independent audit (third party, typically a CPA firm).
An internal audit can be very helpful. It is a way to review whether your company has calculated and reported taxable income, losses, deductions, and expenses correctly. The benefits of an internal audit can help protect assets and reduce the possibility of fraud. It can improve efficiency in operations. It will increase financial reliability and integrity. There is also the benefit of ensuring compliance with laws and statutory regulations. Obviously, a valuable financial tool.
An independent audit is an opportunity for a neutral party to give the same insights. The intent being an opinion that is unbiased, in all material respects, financial position, results of operations, and cash flow using generally accepted accounting principles. It can expose any deficiencies in the accounting systems or controls. Recommendations can be made that are completely objective and less prone to fraud or error.
In both cases, there are numerous benefits to the business. Additional benefits can also exist if looking for funding from financial institutions. Audits provide validity of financials, help discover errors, limit legal or tax issues and most importantly, educate the business owner.
If periodic internal audits are done during the year, and your tax professional does spot audits annually, there are no surprises if a letter from the IRS is received for an audit. Being proactive versus reactive creates confidence in all phases of accounting.
Now with all the new auditors and more funding for the IRS, what does that mean? Statistics show audit rates have dropped over the past 10 years by almost 76% from 2010 to 2020. The IRS reviews 1 in 333 returns. Only 1 out of every 166 business returns are audited. If there is an audit, 74% of all audits are done in writing, via a letter from the IRS with a question. Sometimes, as simple as a question regarding one line item.
Business owners need to educate themselves on how their operation is running. If proper controls are in place, the word audit is not something to fear. It should be looked at as a positive way to review the company’s financial health.
So, gather your financial reports and supporting documents and examine, look over, go through them — in other words AUDIT!
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