If you asked me to isolate a single compelling reason for business startups to keep good records from the beginning, I would offer the following.
A recent survey by the National Small Business Association confirmed that the IRS is not looking the other way when it comes to small businesses. In fact, the opposite is the case.
One-third of the respondents to the survey indicated that their business had been audited at least once in the past ten years. A similar number reported requests from the IRS for additional documentation to support figures shown on business returns.
The moral? Just because your startup is small, don't presume that it will fly under the IRS radar. There is a conventional wisdom in Washington that small businesses — especially sole proprietorships and single-member LLCs — frequently under-report income and overstate expenses.
So long as this wisdom prevails, and so long as Washington is squeezed for money, you can expect small businesses to be the subject of careful IRS scrutiny.
With the endless distractions and urgent priorities involved in starting a business, it's easy to be lackadaisical about keeping good records. We've all heard the proverbial comment about the small business owner who keeps his or her financial records in a shoe box.
Unfortunately, I know small business owners who've never even bothered to find a shoe box. They jot down notes here and there about expenses and track their income primarily by reviewing deposits to their bank account.
The Tax Man Cometh
Come audit time, IRS does not find this a laughing matter. An auditor will be looking for consistent record-keeping that is well documented with detailed income records and organized receipts for expenses.
And finally, don't be so naive as to believe that if you are ever notified of an audit, you can quickly put together the documentation you need. I can tell you from personal experience, audits tend to occur at times when your schedule is loaded to the hilt with other time-consuming obligations. And auditors are fairly skilled at recognizing records that were hastily put together to pass an audit.
Plus, if the auditor becomes suspicious that you have cobbled together records just for the audit, there's a distinct likelihood that you will find the audit suddenly expanded to the returns for prior years.
So save yourself the headache. Keep your records in good order from the first day of business. It's a habit you will never regret.