Always Be Prepared for an Audit. Here are the Key Steps:
Although technology has created an increasingly paperless environment, an audit, whether initiated by the Internal Revenue Service, state, or local governmental agency, still requires a clear paper trail.
For a typical IRS examination, 14 monthly bank statements must be furnished (January through December of the audited year, December of the prior year and January of the following year). Cancelled checks and deposit tickets are still required, so please obtain an optical scan of each “paper” transaction with your monthly bank statements. (Note: most banks provide this monthly service free of charge).
Vendor bills and invoices must be made available too. Routine monthly bills, such as utilities, telephone, and rent are not considered critical. Unusual or business facilitation bills are important e.g. long-lived asset purchases, most cost of goods sold transactions, and travel expenditures. You can save all invoices and statements as pdfs so that no paper output is needed; just make certain you maintain and back up your data folder frequently.
Mileage logs must support vehicle deductions whether your return uses the actual expense method or mileage deduction. Print out all electronic calendars, ideally monthly, in order to provide support for business miles. Also obtain an oil change or annual checkup either one-week before or after December 31. This action provides a third-party marker date for beginning and ending odometer reading.
Paper documentation will remain necessary even as our technology evolves. Consequently it’s wise to plan on unforeseen difficulties and expenses in retrieving documentation requested by auditors. Be diligent and plan ahead to avoid the pain of sourcing documents from old computers and cell phones.
