There are few more terrifying words for the business owner. Here’s how you can prepare for the worst and make your day with the auditor a breeze
A few years ago Judy McCoy received the phone call that business owners never want to get: It was time for a random audit from the Washington State Department of Revenue.
“They told us that we would need to show them records from the last four years and we needed to provide them with a desk for four days so they could go through it all,” said McCoy, who co-owns Camtec Precision with her husband, Chuck. “I felt we were doing a good job keeping records of everything, but I was still nervous.”
The auditor showed up at the appointed time and McCoy was ready with all the records they needed and an extra desk for the person to work.
“After one day, the woman walked up to me and was actually smiling,” McCoy said. “Can you picture someone who audits businesses actually smiling? I was surprised.”
The auditor had gone through every receipt and record on that first day, and not only found everything in order, but discovered that the McCoys were entitled to a refund.
“I learned that I was doing it the right way, which made me feel much better, because there were times where I would be awake in the middle of the night wondering if I was doing it correctly,” McCoy said.
Becky Eastwood, co-owner of Puget Safety Equipment, also went through a random audit, in June, with the Washington State Employment and Securities Division.
“She asked a lot of questions about how we handle our employment taxes, went through our records and said we were in good shape,” Eastwood said. “That was a relief.”
Two years ago Puget Safety went through an audit with the Department of Revenue, and that wasn’t so easy. It turned out they used a different style of keeping records, and the Eastwoods had to spend a lot more time proving they were doing things correctly.
“We were pulling records for two weeks and had a lot of late nights recreating a typical day to show what we were doing,” Eastwood said. “It was quite a challenge to do that and run a business.”
Good bookkeeping = less pain
Both McCoy and Eastwood said when they found out they were being audited, they were thankful they had complete records to show.
“When it comes to running a business, I learned to become much more detail oriented,” Eastwood said. “I learned that we would never have a paperless society, and would make copies of copies of receipts and kept the copies in a separate file that was easy to access.”
McCoy said she also keeps back-ups, and has run the numbers in a separate computer program to make sure she is accurate.
“I use QuickBooks, but then I use an Excel spreadsheet to double-check,” McCoy said. “It helped me confirm I wasn’t missing anything.”
McCoy also learned it was important to make sure that she stayed on top of the filing system, trying not to fall behind even by a day.
“I learned not to put files in stacks, but to file them away as soon as I was done with them,” McCoy said. “You don’t want to fall behind and then get a call from an auditor. If you do not keep good records and have accurate filing systems, it is impossible to catch up when you get the call.”
You may get the call
Thousands of small businesses are selected for random audits each year, whether it’s by the Internal Revenue Service or state agencies. Local business people have noticed there has been an increase in random audits from state agencies on Whatcom County companies.
“It does seem like agencies like the Department of Revenue have been stepping it up in the past few years,” said Bob Sytsma, a partner at Varner, Sytsma & Herndon. “At this office, we have definitely seen a significant increase in DOR audits in the last six months.”
Sytsma said based on what they’ve seen, certain industries get more audits than others.
“It is difficult to determine what triggers an audit, but we see a lot of companies from the construction industry get selected,” Sytsma said. “It could be because contractors must apply complex rules depending on whether they are a general contractor, custom homebuilder or speculative homebuilder.”
The most important thing is to keep good, detailed records. Most auditors will request to see a three- or four-year period. Sytsma said an audit will either be a smooth or very painful experience based on the record-keeping systems in place.
When keeping records, Sytsma said it is very important to keep copies of equipment and asset purchase invoices in a separate file.
“Auditors will always ask for these invoices as they search for untaxed purchases,” Sytsma said.
Sytsma suggested other things small business owners should keep in mind when keeping tax records:
Keep sales tax in mind when selling or purchasing products on the Internet.
Tax rates for each city and county differ, so it is important for contractors to identify locations of jobs.
Keep resale certificates on file and updated.
Educate yourselves on the tax rules. “Ignorance will not relieve the pain of paying additional taxes, penalties and interest,” Sytsma said.
When a business owner discovers they are being audited, after they have gathered together the records requested, it is recommended they get a pre-audit review, either with a tax advisor or accountant. This will give the business owner a chance to identify any trouble areas and address them if the auditor has questions. It may also help save money in the long run.
“A revenue auditor recently audited a new client and proposed additional taxes of $18,000. As a result of identifying errors by the auditor and assisting the client with gathering documentation, we were able to reduce the assessment by $12,000,” Sytsma said.
When the auditor arrives, it is usually best to have one person be the contact for the auditor, to avoid confusion and to make sure the right information is being provided. That person should be in daily contact with the auditor, so questions can be dealt with right away, before they become big issues.
By keeping good records and being cooperative in handling requests from the auditor, both Eastwood and McCoy feel they saved themselves a lot of pain and time away from their business.
“Staying on top of record-keeping can feel like a waste of time, but getting audited happens to a lot of businesses. I never figured we would be lucky enough to avoid a random audit, so I made sure we were prepared,” Eastwood said. “I’m just glad we were able to get it over with.”