5 tips on tax audits for small businesses in California

No one likes the idea of being audited by the IRS, but the reality is that many taxpayers will face this uncomfortable and sometimes tricky process. Audits may be as simple as a review, or as complicated as delving into previous tax years, item by item. While audits can be arduous, there are a few tips that small business owners in California can use to help themselves in advance just in case they find themselves facing an audit.

Tip number one is to keep stable financial records, preferably on a computer software program where files can be backed up and accounts reconciled. Tip number two is to record any bartering transactions appropriately, at fair market value. If you've filed a 1099-B, you will want to ensure that the proper documentation is in place because this is still considered income by the IRS. Tip number three is to not play games with money and keep businesses separate. When income and expenses from more than one business become entangled, your tax return -- and potential audit -- quickly gets complicated.

Tip number four is to have an audit trail established for all funds that are nontaxable. Keeping copies of cancelled checks and other transactions can dramatically ease the process of an audit. Tip number five reiterates not playing games with money, only this time with regard to reporting. It may go without saying, but transactions on your income and expense sheets should have a purpose and be legitimate, not solely for the purpose of the tax code working on your behalf.

Tax audits can be expensive and time-consuming. Many California small businesses can avoid being audited simply by following tips such as these, as well as maintaining a solid relationship with any outside financial sources. It is important that small business owners understand their rights and responsibilities, and know that help may be available to them should their tax audit situation move beyond their own control.

Source: Fox Business, "Audit Tips for Small Business Owners," Bonnie Lee, May 25, 2012

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