How to prepare your business for audit: A step-by-step guide

No one likes the idea of a tax audit, but they’re not as intimidating as they sound. If you prepare your business in advance, you can save yourself time and headaches, and minimize disruptions to your business.

But how exactly do you do that? In this guide, we’ll walk you through all the necessary steps, and highlight what you can to ensure a smooth — and successful — audit process. So let’s jump straight in.

Step 1: Understand why audits happen

Tax audits happen for a variety of reasons. They can be triggered by red flags in your financial reports, or discrepancies in your filings. In some cases, you may even be randomly selected by your country’s tax authorities.

Some common audit triggers include:

• Reporting inconsistent income across filings

• Unusually high deductions

• A history of filing late returns

• Operating in cash-heavy industries

Knowing why audits happen can help you take steps to minimize risk, and encourage you to keep clean, accurate records that don’t set off any alarms. Which leads into step two…

Step 2: Keep accurate and organized financial records

As a business, it’s crucial — and, in many countries, a legal requirement — to keep accurate financial records. On top of that, the more organized they are, the easier the audit process will be.

Whether you use an accounting tool or a professional service, make sure that:

• Your income and expenses are clearly recorded

• All business transactions have supporting documents (receipts, invoices, contracts)

• Payroll is accurately documented, including employee classifications and tax withholdings

For payroll, it’s highly recommended to use an automated, centralized platform, such as Remote Payroll. This minimizes the risk of manual errors and inaccurate reporting, mitigating the likelihood of an audit in the first place. And, if you are audited, all the payroll tax data and information you need is organized and easily accessible in one place, saving you and your auditors countless hours.

Step 3: Review your tax returns for accuracy

Double-checking your tax returns is essential. Make sure everything reported is accurate, from deductions to employee information. Some steps to follow include:

• Comparing reported income against financial statements and payroll records

• Verifying that any tax deductions and credits align with your business activities

• Ensuring that you have complied — and are complying — with all relevant payroll tax laws at local and national levels

An audit often involves going back several years, so ensure your past filings are also reviewed for consistency. Regular reviews and consultations with a tax professional are a great way to catch any discrepancies before they turn into audit triggers.

Step 4: Be ready to explain large deductions

If your business claims large or unusual deductions, you need to be able to explain them. Whether it's major equipment purchases, charitable contributions, or R&D tax credits, having detailed records can justify these expenses. Make sure you can provide:

• Documentation of the purpose of each deduction

• Proof that the deductions are business-related and within legal limits

• Receipts, bank statements, and any other supporting documents

Tax authorities tend to scrutinize big deductions, but if you have all your paperwork in order, you’ll be able to confidently justify them.

Step 5: Ensure proper employee classification

Misclassifying employees as independent contractors can raise red flags and trigger an audit. This usually occurs when you treat a contractor like you would an employee — but without any of the statutory benefits and protections that employees in most countries enjoy.

What is misclassification?

As a result, make sure you:

• Properly classify all your employees based on their role and relationship with the company

• Withhold and report payroll taxes accurately

• Maintain proper documentation for contractors to prove that they’re not full-time employees

If you are found to be misclassifying — even unintentionally — you may face legal action, penalties, and other negative consequences. 

To avoid this, carefully review (and frequently reassess) the terms of your working arrangements with contractors. If it more closely resembles an employer/employee relationship than a contractor/client one, you may need to convert the contractor into an employee. Remote can help you do this, and protect you against misclassification risk.

Step 6: Know your rights and responsibilities during an audit

If you’re selected for an audit, knowing what to expect can ease the stress. The exact process will likely differ between countries but, in general, you’ll receive an official notice outlining the scope of the audit, as well as which records will be reviewed

In most cases, you will have the right to be represented by a tax professional, and you’ll also be allowed to request more time to gather necessary documents.

However, it’s important to cooperate with auditors and provide any requested information promptly. Delays can raise suspicion and potentially increase penalties.

Step 7: Consult with a tax professional

As mentioned, it’s recommended to regularly consult with an external tax professional (if you don’t have one in-house). They can help you navigate complex tax regulations, identify potential audit risks, and prepare the necessary documentation. Professional guidance is especially valuable if your business operates in multiple jurisdictions or if you’ve never faced an audit before.

Remote’s local, in-house specialists can provide support and ensure that you are fully compliant with local payroll tax regulations, even when they change. We can also guide and help you with reporting, as well as advise you of any tax breaks or schemes you may be eligible for.

Simplify the audit process with Remote Payroll

Preparing for a tax audit might sound daunting, but it doesn’t have to be. By maintaining accurate records and staying compliant with local payroll and misclassification laws, you can sail through the process with confidence.

Remote Payroll makes both of these things quick and easy. Our automated platform minimizes the risk of manual errors and inaccurate reporting, while all your payroll tax data and information is securely organized in one place.

To learn more about how we can help, speak to one of our friendly experts today.

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