Four Owner Operator Tips for Preparing for an Audit
There is a saying out there that we've heard, "You will get sued." It is a bit dark and depressing, but in a litigious industry like trucking, it can be more accurate than we would like to admit. The point behind the saying, of course, is that it is better to prepare for the worst in case the worse should happen.
For owner operators or owners of trucking fleets, we would like to add to that saying.
"And you might get audited."
An audit can be terrifying if you haven't maintained healthy bookkeeping habits. And unfortunately, if you're holding an audit notice from the IRS it is a little late to start good habits. There are, however, plenty of things you can do to proactively prepare for the possibility of an audit in case you are selected by the IRS.
Understanding an Audit
Before we go into our advice, we should revisit why audits exist and what they are. An IRS audit is when the US Internal Revenue Service reviews or examines an individual's accounts and/or tax filings and financial information in order to ensure that tax reporting has been completed correctly. If the individual is found to be falsifying their information they can be fined and/or face additional charges such as fraud or tax evasion.
Those who are chosen for audits are not in trouble and may have done nothing wrong on their taxes, they have just been flagged for further review. In some cases, the auditors may just have a few follow up questions to understand the numbers on your tax return. In other cases, they may do a full-blown audit of every part of your finances, although these are becoming more and more rare, especially for smaller businesses.
Because audits always start with auditors having questions and wanting to see more information to prove your numbers, it is wise to put the following tips into place so you are prepared.
1. Store 7 Years of Tax Information
Most experts recommend that you store the past three to seven years of tax returns. From experience, we think it is a best practice to store a full seven years. The IRS audit window is three years, however, if they have reason to believe that you falsified and underreported your gross income by 25 percent or more they have six years to begin an audit.
Holding onto records for 7 years gives you that extra protection. Make sure your files for each tax year include the following information:
- Canceled checks
- Bank statements
- Travel and Per Diem Logs
- Loan agreements
- Theft and loss documents
- Legal papers (divorce papers, death certificates, etc.)
- Employee documentation (if applicable)
Keep in mind, a large percentage of audits can be resolved quickly if you are able to get to the information the auditor is requesting. If you don't have accurate records, or if your records are missing or incomplete, then the audit becomes more extensive, and you risk hefty fines.
2. Bank Statements
While this was mentioned in the list above, we believe it important enough for its own category. Bank statements are so vital to most audits that if you refuse to produce them, IRS auditors will subpoena the bank to acquire the records.
Save yourself the hassle by making a habit of collecting your statements and grouping them chronologically.
If there are questions as to your income, per diem deductions, or business-related travel expenses, having a hard copy of your driver logbook is important.
Unfortunately, we've found that many drivers don't realize that e-log devices such as PeopleNet (which we use at K & J Trucking) only store up to six months of data at a time.
Make sure you are consistently downloading your logs and emailing them to yourself so you have the data you need when it is time to file your taxes and store your year-end data. It is a simple process that will save you a headache later.
Additionally, make sure you are logging off your e-log equipment at least once a week so it can update to the cloud. This will ensure that no data or notes are lost and your trips are securely stored.
4. Be Honest and Kind
When your mother said that honesty was always the best policy she wasn't kidding. Trying to cheat on taxes is a poor strategy for saving money. There is a high likelihood that your bad habits will eventually catch up with you, and they could cost you greatly.
If you are audited, treat the auditors kindly. They are people just like you and they know that their presence is a stressor. If you work hard to provide them with the honest answers, information, and paperwork they seek, the process can be as quick as sending them an email with your documentation. But even if the process takes longer, remember that your attitude can influence the outcome. Be forthcoming and professional and they may give you more leeway and finish the audit more quickly because they will know you are not hiding vital information.
If you have further questions about how to handle an audit in your independent contracting business, it is always wise to consult with your accountant, CPA or another financial advisor who is familiar with your situation.
At K & J Trucking we take a lot of pride in supporting and encouraging owner operators. If you're struggling with the business side of being an independent contractor, comment below with your questions or concerns and we will do our best to address them in a future blog.