What Should I Do if I Think My Small Business May Get Audited? (Podcast) | Ep. #070

Elizabeth Larkin, Michael Kelly, and Eric Dollinger

As a small business, the threat of an audit can strike heart into your heart. In episode #70, hosts Elizabeth Larkin and Gene Marks answer this question:

“I have a sneaking suspicion that I might be audited this year. We had a lot of unforeseen expenses, so how do I prepare for one just in case?”


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Elizabeth: Alright. So, here we go. Gene, you’re going to love the question we have in this episode.

Gene: I’m looking forward to it.

Elizabeth: Okay. So, instead of doing our little banter in the beginning …

Gene: Yes.

Elizabeth: … we’re just going to go right into hearing from our sponsor, and then we’re going to come back with the question.

Gene: Oh my God. I can’t wait.

Elizabeth: I know, it’s really exciting.

Gene: Let’s do it. Okay.

QUESTION: What Should I Do if I Think My Small Business May Get Audited?

Elizabeth: Okay, and we’re back. Okay, here’s our question. It’s from Mark H., in Leavenworth, Washington, and he owns a car wash. That’s kind of a cool business.

Gene: In Leavenworth. Isn’t there a big prison there in Leavenworth. Is that the same-

Elizabeth: That’s upstate New York, I think, I don’t know.

Gene: Is it? Okay. Alright, car wash.

Elizabeth: Okay. So, here’s his question.

“I have a sneaking suspicion that I might be audited this year. We had a lot of unforeseen expenses, so how do I prepare for one just in case?”


Gene: How do I prepare for an audit, just in case. So, Mark, listen. First of all, you want to go online and buy a place in Argentina. That’s your first step. Next, transfer all assets into a Swiss account. Next, hire a private detective in a firm to wipe out your identity online-

Elizabeth: Can you do that?

Gene: Probably. Then get a one-way ticket straight to your place in Argentina. That’s where you want to go and head. Then, Mark, we’ll talk to you again in like, another 20 years or so, okay, if at all. Okay. Hope that helps. Tune in next time to Small Biz Ahead.

Okay, what do you do if you think there’s an audit coming? First of all, I’d like to know, how do you know there’s an audit coming? Actually, maybe that’s not even a good question. You should always be thinking that there’s an audit coming, for starters, alright. That should go without saying. Like, “I guess I’ll just run a bunch of personal expenses through my business this year, because I don’t think I’m going to be audited, so that’s cool, but, oh, next year I think I might be audited, so I’m going to clean it up then.”

Elizabeth: If you do get audited, don’t they go back a little bit too?

Gene: Yeah, it’s like seven years they go back. First of all, you don’t just come up one day, wake up, saying, “You know, I might be audited this year, I better take some steps to make sure-”

Elizabeth: I’m sure there’s probably something that tipped… maybe he’s already gotten the letter.

Gene: Alright. Well, dude, first of all, I’d be panicking if you’d be doing anything that would give you a… you should be going to sleep every night saying to yourself, “If I was audited tomorrow, I’m still sleeping like a baby.” That’s number one. I’m not saying you have to be squeaky clean, because nobody is, but the biggest thing you just want to make, is that you’ve got your books and records in order. When you get audited by the state, by the IRS, by a federal agency, by the EEOC-

Elizabeth: What’s the EEOC?

Gene: The Equal Employment Opportunity… right?

Elizabeth: Oh, okay.

Gene: If there’s any labor issues going on or whatever. The first thing that these guys do is they ask for documents, documents, documents. It’s a discovery thing. As a CPA, when I talk to my clients that have been audited and gone through it, it’s not even any potential penalties that they get. Their biggest, biggest cost to them is the disruption that an audit occurs, and the disruption is often times caused because these agencies request information; you don’t have it or you’re delaying and you’re afraid that you’re such a mess, your books and records or whatever, that it raises their antennas and red flags and then suddenly they come down and they request more information and they come in more. It just makes everybody uncomfortable when you can’t answer.

Elizabeth: Wouldn’t your CPA have most of the information needed?

Gene: Not necessarily, no. First of all, your information is your responsibility-

Elizabeth: Oh, yeah, yeah.

Gene: I mean, your CPA theoretically does your tax returns, and he or she is basing it based on the information that you’re giving him or her, so therefore… but, it’s your data, your CPA is not a record keeper, they’re relying on you for the information. It really goes down to the… auditing or not, of keeping clean books and records in your company. That is the very, very first thing that you should be doing.

Elizabeth: If you’re using, let’s say, Quicken, or something like that.

Gene: QuickBooks, actually.

Elizabeth: QuickBooks, sorry.

Gene: Quicken is for personal financial statements.

Elizabeth: QuickBooks.

Gene: Right.

Elizabeth: If you’re using QuickBooks-

Gene: Right.

Elizabeth: What else do you have to do other than that?

Gene: That’s a great question, it’s a real good question. By the way, there’s many, we’ve talked about it on shows in the past, there’s QuickBooks, there’s QuickBooks Online, there’s Xero, there’s Sage, there’s lots of great, okay… so, number one… FreshBooks is a great system… you need to have an accounting system. In 2017, whenever I hear people who are like, “Oh, I got it in a shoebox.” Right? I mean, it’s like so-

Elizabeth: I only accept cash.

Gene: Yeah, I only accept cash. It’s one of those, like, “Please.” So, you’ve got to have an accounting system, but some of these things are free, so, that’s number one. Number two is, to get to your question Elizabeth, there’s still documentation. When you have transactions, there’s invoices that you’re getting from vendors, you’re sending out invoices, you’ve got bank transactions with bank reconciliations, there’s supporting orders that might support… so, you have to have those. Where now, a lot of companies still, it’s in paper. There really is still a lot of paper going around in companies, so you have to have a good filing system to back it. So, if an auditor does request, “We’re concerned about the amount that, what you’re paying your employees. This person should have been an employee, not a contractor.” They’re going to be asking for the documentation in support of, “Why are you treating this person as a contractor, instead of an employee?” You need to have a contractor agreement.

Elizabeth: I feel like that’s going to be a problem in the future, because-

Gene: It’s a problem now.

Elizabeth: More and more are going to be hired as contractors…

Gene: Right.

Elizabeth: And that’s going to be a sticky issue.

Gene: That’s a whole other topic of conversation, but the first thing they’re going to be asking about is evidence of what you paid, and then evidence of what agreement, that you have documentation, your books and records. I just can’t stress that enough. Even now, listen, if you’re listening to this and you’ve got kids of a certain age, or high school kids, God, for ten bucks an hour or whatever it is, have people come in on a regular basis and make sure your files are in order and everything is, whatever.

Elizabeth: You have a bookkeeper?

Gene: Yeah, I have a bookkeeper, and then she keeps all the files for me then I store them-

Elizabeth: So that would be your first call, right?

Gene: Absolutely.

Elizabeth: And she’d know where everything is.

Gene: Absolutely. Getting back to his question, is that, if he thinks he’s going to be audited, regardless of whether or not he thinks he’s going to be audited or not, the biggest thing that you can do to protect yourself in case of an audit is by having good books and records. If you’re trying to get away with nonsense, and therefore you don’t keep those records, that’s what the cash people do. They run a cash business, because they think they can’t get caught. It’s just, come on, auditors can easily catch and figure out what volume is, and then they’re always going to take the benefit of their doubt, not the benefit of your doubts and make assumptions against you, because you can’t provide evidence refuting otherwise.

By the way, the onus is on you as a tax payer. The IRS can make any claim they want, the onus is on you to respond to that with the documentation. Have I been clear about this? Have good books and records.

Elizabeth: Let’s say, to play devil’s advocate, let’s say that you’re using a composition notebook to keep your books?

Gene: Is there a reason why you’re saying that right now, because I have a composition notebook out here?

Elizabeth: Yeah, Gene, has a composition notebook.

Gene: Yes. Yes.

Elizabeth: Gene looks like he’s taking an exam in elementary school.

Gene: Yes. This notebook goes back… it is literally, it’s the composition, it’s the caliber and it goes back to September of 2016 of my notes, and that’s all manual.

Elizabeth: Let’s say your books are a mess, basically, and you want to get them into one of those systems, FreshBooks, Xero-

Gene: Yes. QuickBooks Online, Sage.

Elizabeth: Something like that. What would you do. Would you hire a part-time bookkeeper and pay them a lot of money to get that sorted out for you?

Gene: You know, it’s funny. This, again, goes back to topics that you cover as a business owner again and again and again. Dude, if you’re running a business, this guy’s running a…

Elizabeth: Car wash.

Gene: A car wash, okay. I mean, if I was him, I’d be focusing on making my car wash the best car wash ever. I would be spending my time… everybody running through with a car, I’d be out there shaking their hand, “What can I do? What can we do better?” I’d be looking for better deals on the detergents that I’m buying, or whatever. I would be hiring a bookkeeper to be immersed in getting my accounting records and files up to speed, because otherwise, that does nothing for his business. That’s not what he does. He’s not an accountant. You know what I mean. So, to answer your question, yes. Yes, you would take money and say, “I’m going to have a system and a regular bookkeeping service to make sure that my books and records are accurately kept.”

Elizabeth: Yeah, because, you need to be spending more time on sales and more time managing your employees.

Gene: Absolutely. You’re running a car wash. You’ve got competition all over the place. You’ve got to really watch your margins, and you want to be out there providing good customer service, so that’s what you should be doing, the face of the car wash, not in the back office going through invoices from two years ago, big mistake.

Elizabeth: I feel like we’ve really done a lot of work on this podcast to market bookkeepers, because we talk about them all the time.

Gene: It’s true. It’s so funny. Never really thought about that, but it’s true that books and records of a company are sort of the essence of what a company is, and so it really is an important service.

Elizabeth: Okay, great.

Gene: So, if you’re a bookkeeper, please, leave a comment or question on iTunes.

Elizabeth: Yeah, leave us a review. We’d love it.

Gene: That’s right, bookkeepers, we’re giving you a shout-out here.

Elizabeth: We’d love to hear from you. Alright, we’ll be right back with Gene’s Word of Brilliance.


Elizabeth: We’re back with Gene’s Word of Brilliance.

Gene: My Word of Brilliance today is Boomers.

Elizabeth: Boomers?

Gene: Yeah, the Baby Boomers that were born… these are people… I’m not officially a Boomer. I was born in 1965, which is-

Elizabeth: You’re a Gen X-er?

Gene: Yeah, I guess, Gen X-er, which, God, 1965 seems so, like … isn’t that crazy, but the Boomers were born a little bit before me, they were like-

Elizabeth: ’45 to ’65.

Gene: Yeah, it’s ’45 to say, whatever it is. They’re getting old. These people are now particularly at the beginning of generation. They’re in their ’60s, 70s, or whatever. There is, according to the National Association of Manufacturers, a huge demand for Boomers to do work in manufacturing.

Elizabeth: Really.

Gene: What manufactures, small and large and medium-size across the country are finding, is that they have a huge need for skilled labor and many job openings to get those skilled labor people, and they’re having a hard time finding those people that are skilled.

Elizabeth: So, they don’t want Millennials, because they’re not skilled yet?

Gene: Well, they do. They would love Millennials, but first of all, they’re having a problem actually interacting Millennials, because the Millennial generation, it’s not as meat and potatoes, you know, they don’t want to work on the shop floor as much, plus, like you just said, they’re having a hard time finding even Millennials that have skills.

Elizabeth: Okay.

Gene: They want to go to vocational schools or get technical training and all that kind of stuff.

Elizabeth: I always think that’s so sad, they always report unemployment numbers, and then the next story you’ll see is, “This, you know, business, cannot find people with the right skills.”

Gene: Isn’t that amazing?

Elizabeth: I feel like it’s such a… I don’t know where it’s a failing, but there’s people that want to work and then there’s businesses that need, but they’re not connecting.

Gene: And they can’t make the match.

Elizabeth: Yeah.

Gene: That’s a huge, huge… it’s another topic for another day, because some companies are making some investments in that area, in tech training and vocational schools. The government-

Elizabeth: Going to colleges, too, and saying, “We want to start a program with you, so-”

Gene: With more… suddenly, you get a more specific degree in manufacturing or skill set that the employers can grab you and hire you out of college. Then, of course, the government as well, both the Obama and the Trump administrations have announced they have plans to spend to try and get more manufacturing, skills, and jobs and all of that. So, it’s a big, big, big issue.

That’s fine, people are trying to do something about it-

Elizabeth: But for right now.

Gene: In the future, what about right now, what do you do?

Elizabeth: Yeah.

Gene: So, there’s this enormous trend across the country of companies, particularly manufacturers, that are looking at their older employees and they’re begging them, “Please keep working.” For a lot of cases, the older employees, they like it, because they want to keep… we’re healthier, we’re living longer, we get bored. They’re finding that a lot of these Boomers want to continue to work, however, a lot of the companies now have to change some of their working policies. They’re offering more flexible schedules, more days off so the Boomers can go down and visit their grandkids, wherever they are. They’re changing their factories around, so they’re putting hard-to-reach items in more accessible places, because you know-

Elizabeth: Great.

Gene: You’ll throw out your back, Elizabeth. Sometimes you move the wrong way. Or stuff elevated off the floor.

Elizabeth: They should bring in a masseuse or something.

Gene: That’s probably next as well. All of these different accommodations that you are making both for the physical aspects, but also for the flexibility that these guys want.

Elizabeth: So, Millennials and Boomers are a lot alike. They both want a lot of flexibility.

Gene: They do. So, who knew that the Boomers themselves would be demanding for that same flexibility that they’re seeing the younger kids get. Manufacturers are responding to that need, and the response is, if you are a Boomer, there a lot of opportunities for you out there, particularly if you’ve got some experience.

Elizabeth: That’s great.

Gene: Cool.

Elizabeth: Good news for the Baby Boomers.

Gene: It is.

Elizabeth: Alright, we’ll talk to you in a couple days with our next episode.

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