Plan Ahead for a Tax Audit: Organize Those Records

Most entrepreneurs are big-picture thinkers rather than dedicated to detail. But these traits needn’t be mutually exclusive: You don’t need to obsess over details to have well-maintained and well-organized business records. And as you know, these are crucial to the health of your business-especially in the event of a tax audit.

A sound recordkeeping system needn’t be intractably complex. It just requires basic rules. If the auditor should knock, you’ll be glad you followed these basic rules to the letter. Of course, you need to keep company tax returns for the past seven years; your tax accountant may have implemented shortcut accounting entries that are revealed in detail on the tax returns.

Also maintain evidence of all asset purchases-equipment, vehicles, and real estate. Include details such as first date of use, cost, and financing. Financial records should always include a depreciation schedule, which lists all capital assets along with depreciation methods and past amounts.

Your records should also include seven years of bank statements, business credit card statements, receipts separated by expense category, and company financial statements. You must keep employment records, such as W-4s, reports of hours worked, wages paid, and taxes withheld and remitted, for each employee for the previous four years.

Despite your focus on the big picture, don’t forget that an organized business not only manages well, but performs well. As well as preparing you for an audit, the process of storing financial and tax records helps you identify fraud and waste and monitor financial progress.