As an accounting professional, one of the most common concerns we hear from clients is the fear of a tax audit. While audits are relatively rare, they can be time-consuming and stressful, so ensuring your business is audit-proof can save you time, money, and stress. 

Here are ten essential ways to keep your records clean and compliant:

Accurate and Honest Reporting. The foundation of audit prevention is accurate and honest reporting. Maintain detailed and organized financial records, including receipts, invoices, and bank statements. Monitor your cash flow. And perform regular bank reconciliations to ensure your records match your bank statements. This helps catch errors early and keeps your books accurate.

Document Everything. Maintain detailed records of your income, business expenses, and deductions. This includes receipts, invoices, bank statements, and any other relevant documentation. It also includes contracts, agreements, and any relevant correspondence. Having thorough records not only helps you in case of an audit but also ensures you’re claiming all legitimate deductions.

Automate and Organize. Once upon a time, professionals kept all their business receipts in a manila envelope. This is still a good practice, but nowadays there are many apps and software options that can augment or even replace that envelope. Sync all your accounts, upload photos of receipts, write and deposit checks remotely, and enroll in autopay for recurring bills and invoices. The future is awesome.

Keep in mind, though, that technology is not infallible; it’s wise to review your transactions regularly to make sure your money is being moved where and how it should. An unwatched account is at a greater risk of fraud.

Also: store all your financial information in one place. This includes past tax records, as businesses are required by law to keep at least three years of tax documentation on hand in case of an audit. Prefer physical copies? Assign one drawer or folder to the task of storing your expenses. Hate all the paper? Keep two sets of digital records instead, one stored locally and one within the cloud. Because #techhappens.

Avoid Red Flags. Certain red flags can increase your chances of being audited. For example, large charitable donations, excessive business expenses, or claiming a home office deduction can draw scrutiny. While these deductions are perfectly legal, ensure they are well-documented and within reasonable limits.

Separate. They say you should never mix business with pleasure, and the IRS agrees: Keep your business and personal accounts separate. And by “separate,” we mean “as separate as possible.” Separate credit cards. Separate bank accounts. Maybe even separate banks, if you are especially prone to this habit. The more your expenses overlap—say your personal vehicle doubles as a work vehicle, or you bring your family along on a business trip and put it all on the company card—the more your expense reports will raise an auditor’s eyebrows. Co-mingling funds is one of the most common mistakes we see, and one of the biggest disasters. 

Be Careful with Deductions. This is one of the key areas that triggers disputes, so it’s critical to understand what does and does not qualify as a deductible. According to the IRS, business deductions should be both ordinary and necessary. In other words, any expense that is common for businesses in your industry and is necessary for keeping your business running can be a deductible. Pretty straightforward.

Except not really. The danger is in the expenses that seem deductible, but come with caveats (e.g., home office space, work lunches, capital expenses) or aren’t deductible at all (e.g., commuting costs, insurance, legal fees, business attire). When in doubt, ask your accountant. Aren’t you glad you have one?

Beware Employee Expenses. However much your personal finances can complicate your expense reports, your employees’ finances can complicate them even more. Remember: Only businesses can make business deductions. Employees cannot make business deductions on their personal taxes.

This is a relatively new change, within the past few years, so some people may find the consequences confusing. But the long and short of it is, if an employee incurs a personal expense on behalf of your business, they can only be reimbursed through your business. If your employees are frequently making business purchases, consider giving them a company credit card. It’s less hassle for everyone and makes those purchases more trackable to boot.

Record Charity with Clarity. Even if they are given in your business’s name, charitable contributions are not a business expense if you are a sole proprietor reporting your business income on a Schedule C. But they could potentially be an itemized deduction on your personal return. If the contribution is in exchange for a sponsorship, it can be categorized as advertising or marketing rather than charity.

Stay Compliant. Keep up with industry-specific regulations and ensure your business complies with all local, state, and federal laws. This includes labor laws, environmental regulations, and licensing requirements.

By following these tips, you can reduce your chances of being audited and have peace of mind during tax season. Remember, the key to avoiding an audit is accurate, honest, and well-documented reporting. If you’re ever in doubt, don’t hesitate to seek professional advice.