Keeping books for your business may inspire the same feelings as creating a budget for your expenses. As annoying as it is to record every transaction, careful bookkeeping is integral to running a business. Your accountant can help you with your bookkeeping and can also help you prepare your financial statements.
What is an IRS Audit?
An IRS audit is an inspection or review of your information. They do the calculations to ensure you’re reporting things correctly, that you’re following tax laws, and that the amount of tax you’re reporting is correct. In other words, the IRS checks your number to ensure no discrepancies on your return.
Sometimes state tax authorities also conduct audits. If you are telling the truth, and the whole truth, then you have nothing to worry about. There’s nothing inherently bad about an IRS audit or a state audit. However, people who deliberately cheat the system deserve attention.
The audit conducted by IRS
The IRS conducts audits by mail or in person to audit your records. The auditor in UAE may be at an IRS office, the taxpayer’s home, office, or workplace, or an accountant’s office (on-site audit). Remember, we will contact you by mail. The IRS will write all contact information and instructions in the letter you receive.
If we audit you by mail, our letter will ask you to provide additional information about items shown on your tax return, such as income, expenses, and itemized deductions. You can request an in-person audit, and the IRS will provide contact information and instructions in the letter you receive.
The benefits of accurate bookkeeping
Bookkeeping is the accurate recording of a company’s business transactions. Before deciding whether to invest in bookkeeping services Dubai or try bookkeeping yourself, you should understand the many advantages of prudent bookkeeping.
Revenue analysis
Bookkeeping involves keeping track of every transaction. Knowing how much you earn and spend is important to understanding your income and expenses. If you have yet to record the details, you might be surprised how much your business spends on various things. It’s common for business owners to underestimate some expenses and overestimate others. With bookkeeping, you don’t have to guess. When you keep your books year after year, you can better estimate future income and expenses, even if your sales fluctuate seasonally.
Hybrid accounting
Consolidated bookkeeping usually involves blending the two accounting systems to obtain a consolidated financial picture of an organization. For example, cash accounting records transactions when the company receives funds, while accrual accounting enters transactions when funds are earned but have yet to be received. Both are effective bookkeeping methods, but combining the two will give a company a complete picture of its financial health. Meticulous bookkeeping is essential for maintaining a hybrid-style record system, enabling business owners to economize and precisely allocate funds for upcoming ventures.
Track Money
One of the benefits of careful bookkeeping is tracking the path money takes in and out of your business. For example, a company using a double-entry bookkeeping system can see where and where its money comes from. When a company buys an item, it shows up as an expense on one side of the book and an asset on the other. Creating this detailed funding funnel allows business owners to know exactly how money is being spent and the value their purchases bring.
Maintain your inventory
Whether you sell tools, productivity tools, or provide booking services in Dubai – many companies have raw materials, finished goods, and other items in inventory that they must keep track of. With bookkeeping, your inventory is kept up to date with new purchases and sales. While you’ll need to perform regular physical inventory counts, you can estimate the damage and other inventory losses by looking at records from previous years. If you spot an unusual inventory loss through bookkeeping, you can take steps to prevent it from happening again.
In addition to tracking income and expenses, bookkeepers maintain your general ledger. The general ledger shows balances for asset and expense accounts. A general ledger can be a snapshot of a company’s financial health, but tracking accounts over time is also important.
Administrative
Accurate bookkeeping provides updated data that a business owner or manager can access at any time to decide whether to invest or plan to purchase capital. It also helps provide the IRS with a complete package when filing taxes, reduces the chance of errors that could lead to an audit, and waives the fees and penalties associated with having to file an amended corporate tax return.
Understanding Financial Decisions
Proper bookkeeping is essential to understanding and making better financial decisions. It can only be easy to assess growth and investment opportunities by knowing the financial details of your company. You can only take advantage of sales and warehousing opportunities when raw materials or merchandise are discounted if you’re sure how much your business will make each month after all the expenses are paid.
Record keeping
Collecting expense receipts, gathering payroll data, obtaining payments to suppliers, and tracking outstanding invoices are all part of careful bookkeeping. With accurate recordkeeping, much of this information could be recovered and accurate. Detailed bookkeeping facilitates the firm’s operating processes and reduces the cost of doing trade by centralizing the vital functions of the finance department. It also makes it practical to create financial reports as a central repository of crucial financial information for a company.
Payroll submission
Another important part of bookkeeping is calculating payroll. While you don’t have to withhold state taxes for your employees, Florida corporations must still withhold federal income taxes and Social Security and Medicare payments. Employers must file these deductions quarterly with the employer’s portion. The IRS is open when filing payroll taxes on time.
Invoice Tracking
Your business must be diligent about invoicing and collecting customer payments to stay competitive. Your accountant can handle both processes for you, but some businesses may require additional staff to handle accounts receivable. The other side of the coin involves the bills your company must pay to stay in business. From utility companies to suppliers and contractors, paying bills on time is essential. Doing this will save you late fees and ensure a good relationship with your supplier.
Processing
Your financial records are necessary to generate accurate financial statements. By recording each transaction and making necessary adjustments at the end of the fiscal year, your accountant creates an income statement, balance sheet, and cash flow statement. These financial statements can give you a lot of information about your company and help you identify areas for improvement.
The income statement plays an important role when filing an income tax return. Your balance sheet may be of more interest to bankers when you apply for a loan or to investors if you decide to expand your business. Finally, a cash flow statement can help you determine the life cycle of your company’s funds.
Tips for Avoiding an IRS Audit
Many small businesses face many challenges, including the risk of an IRS audit. Audits can be costly, time-consuming, and stressful for business owners. However, small businesses can take several steps to reduce their chances of being audited.
No cash transactions
Small businesses should avoid cash transactions whenever possible and instead use checks, credit cards, or electronic payments. Cash transactions can be challenging to trace and may attract the attention of the IRS.
Accurate records
Keeping detailed and organized records of all business transactions, including income and expenses, will help ensure the company complies with tax laws. The IRS may choose to audit a business if there appear to be inconsistencies or errors in the records, so maintaining accurate records is critical. This is why a bookkeeper is essential. Having a professionally certified accountant makes all the difference.
An experienced accountant can help ensure business knowledge of taxation and regulations, reducing the risk of an IRS audit.
Avoid discounts.
Deductions that are excessive or seem unreasonable can attract the attention of the IRS. Recording all deductions and ensuring they are legitimate business expenses is important. This can help evade scrutiny by showing the company is operating with integrity and in compliance with tax laws.
File taxes on time
Filing tax returns on time is critical for small businesses. Filing taxes on time shows that the business is organized and responsible, which helps avoid the possibility of being audited by the IRS.
Final Thoughts
Proper bookkeeping is important to every aspect of your business. Accurate records allow you to make better business and financial decisions, plan your business effectively, manage your budget, and avoid tax audits. Naturally, you will enjoy smoother business operations locally or globally as all your business records are organized and accurate.
Despite taking all necessary precautions, the IRS may still audit small businesses. In this case, you must consult any professional help. A tax attorney or accountant can help represent the company during the audit and ensure it is done fairly and legally. Seeking professional help can also help ensure that the company can defend against any charges or penalties that may arise during the audit.