One of the things I hear all the time from my clients is that they’re afraid of getting audited. They feel anxious that they’re messing up — and are worried that someone would go through their books and find mistakes that lead to fines or even jail time.
Are those real risks when you get audited? And is there anything you can do to avoid an audit?
You might not know this about me, but before I was a bookkeeper for online business owners, I was an auditor! I worked for a Top 10 accounting firm auditing senior living facilities.
While I love my current job so much more, there were lots of things that my auditing job taught me. Those lessons help me serve my clients better, and now I’m sharing them with you!
I hear this from business owners all the time — they’re terrified of being audited because it means they’ll go to jail.
But the only people who go to jail are those who are doing something illegal! Like, money-laundering-level illegal.
Minor mistakes like expensing something you’re not supposed to? You’re not heading to jail for that.
So, what will happen if an auditor finds out that you expensed something that didn’t meet the requirements? You’ll owe some money.
The IRS adds any incorrect deductions back to your taxable income and recalculates your taxes. You’ll have to pay the extra money you owe, and you might be charged an additional fee. That’s it!
Owing the government more money isn’t fun, of course — but it’s not jail.
The IRS has rules for what you can claim as a business expense. And they’re not as complicated as you might think. You can expense purchases that are ordinary and necessary for your business.
Yep, those are the IRS requirements: ordinary and necessary. Of course, it’s a good idea to check with your CPA if you aren’t sure about your expenses.
But honestly? If you have receipts and documentation for your purchases, you can make a strong argument for pretty much anything!
So what’s the lesson here? Save your receipts!
Documenting your expenses doesn’t have to be a super complicated process. I like to use Google Drive and create folders for each month and year. I just save all my receipts for one-off purchases in the correct folders.
This is especially important for purchases from Amazon or other non-specific retailers. Having the paperwork (and maybe a quick note about why you bought the item) makes it easier to prove to an auditor that the purchase really was ordinary and necessary for your business.
It’s not totally required to save receipts for normal, recurring purchases (like software subscriptions). That’s because if you ever got audited, it would be easy to pull up the cost for each of those subscriptions (like on the software’s website) and show that those services are clearly relevant to your business. But yes – it’s still best practice to save all receipts!
It might be hard to believe, but an auditor isn’t your enemy. The best clients I had when I was an auditor were those who were prepared, responsive, and organized.
Most auditors aren’t looking for “gotcha” moments — they’re just trying to make sure you have accurate and transparent financial records. And they’re checking that your deductions are tied to legitimate business expenses (and how it relates to your business revenue). So the more you can help them do their jobs, the easier the whole process is for everyone.
If you get audited, here’s what to do:
If you have all your receipts stored and organized, it’s easy to provide the documentation that your auditor needs. And that makes the whole process way less stressful.
Being audited isn’t necessarily fun, but it’s also not a trip straight to jail. And if you have all your receipts and documentation saved and organized, it’s far easier to show that everything you deducted was a legit business expense.
If updating your books and organizing your receipts isn’t your jam, I can help! I’ll get your books in order, help you understand the numbers, and give you the tools you need to grow your business. Get all the details about my bookkeeping services!