How Audit-Proof Are You? Take the Ultimate Audit Readiness Quiz!

Well, let's move into how audit proof are you? Let's score ourselves right now. Let's take an how audit proof are you? Assessment or quiz. So bust out a pen paper if you want to record your answers as you go along. I believe there's 12 questions, so we can blast through this fairly quickly. We're going to go through the questions and I'm going to ask the question. And then on the next slide, I'll tell you what. You know, how many points to give yourself for that answer. So the first question is, what is the frequency of your bookkeeping? Are you A, monthly, B quarterly, C, annually, or D, what is bookkeeping? And the reason we're asking that question is that's critical. And what gets inspected gets respected. Your bookkeeping is the same. How frequently are you doing the scores for those? If you answered A monthly or more frequent, that gives you three points. Quarterly, two points annually, one point or what is bookkeeping? Zero. Most of these answers we want higher points. Monthly bookkeeping or frequent bookkeeping is going to keep you audit proof. How important is receipt retention to you? If answer is A, super important. I have a system to capture receipts. Awesome. B, you keep about 75% of them. Okay. If it's C, it's important, but it's in a shoebox. I just kind of throw them in there as is. Or if you say D, receipts are for suckers, no one needs them. Well, then give yourself these scores based on how you answer. Hopefully nobody said D that receives are for suckers. So, you know, obviously for something to be audit proof, you need to have proof of the expense, which is your receipt. You need to have method of payment. If you pay cash, cash for something, write a receipt or a bill of sale and indicate paid cash. And have the other person sign that bill of sale saying that you paid them 10,000 cash for XYZ piece of equipment. That happens all the time. So just, you know, have the other party sign and date that. That's what makes a deduction Loctite audit proof. So receipt people think, oh, I've got my credit card statement, I got my bank statement that shows your method of payment. That doesn't show the actual receipt or bill of sale. That shows here's what you purchased and purpose of that. So give yourself a 3, 2, 1 or 0 based on how you answered that question. So LLC or C Corp. If you have an LLC or corporation, s Corp. C Corp. How often are you doing corporate governance? Is it A, monthly, B, quarterly, C, annually or D, what the heck is Corporate governance. Give yourself 3, 2, 1 or 0 points. The more points you're getting on this, the stronger you are. So corporate governance is super important because that's more of a legal requirement, but that is documenting the decisions you make in your business. So example of a corporate compliance is that we help our clients with is we help you adopt an accountable plan, which is a reimbursement policy. So we actually help you lock in a reimbursement policy for what is going to be reimbursed by the company to your employees, yourself included. You could also do corporate resolutions for hey, we need to purchase a large piece of equipment. So where you're going to authorize as a shareholder or owner of the company company. The acquisition of a large piece of equipment. That may seem trivial, but this is an area where not a lot of people act like. Like you say, hey, I'm a corporation, but you don't act like it. You don't walk like it, you don't talk like it. Or maybe you talk like it and you don't do the thing. So if you get audited and they say, well, are you a duck? Do you look like a duck, do you walk like a duck and you talk like a duck, they want to know, are you acting like a corporation does? Is your business and personal are you separating your business and personal life from an expense category? So if the answer is Y, give yourself a three. If it's yes, but there's some personal crossover, give a two. If you say I separate, but I do try to separate, but it's mostly mix, give yourself a one. And if you're like, nope, it's a complete mess, give yourself a zero. The more separate you are, the better and the cleaner you're going to be. Do you follow the rules of deductibility? So that means is the expense directly related to your business? Is the expense 100% business use with no personal element? And is the expense an ordinary and necessary expense? If it's not any of those things, if not directly related to your business, or it's not 100% business use, there's some personal element. Maybe it is an ordinary necessary expense. That's where through the corporate governance conversation, the business can make you whole by reimbursing you for the business portion of that thing. Maybe it's your vehicle, your home that you're allowing the corporation to use. If the answers are A, B, C, D based on the how you answered that. So here's a question I would like to ask. Is a Burberry or Gucci bag, deductible as a work briefcase. True story. Client came to me and he's like, well, my wife works for me, she helps me in the office and she wants a Gucci bag or a Louis Vuitton bag every six months and happy wife, happy life. Right? You know, so I buy her a briefcase. He was buying them through the company. There are lifestyle shifting things you can do. You can absolutely say, hey, the company's going to pay for X, Y or Z. But is that an ordinary and necessary expense? By all means, you can use a Burberry or Gucci or Louis Vuitton bag as a work briefcase. Absolutely. But is that an ordinary and necessary expense? The answer would be no. So next question, vehicle usage. So do you track your miles? And this is where people don't realize. They're like, oh, it's 100% business use, so I don't need to track my miles. You actually do. That's the requirement. You should be tracking your miles and saying, okay, what is business? What is personal? I would say 95% business, 5% personal. That could be an area where they say, hey, that's high business usage. And they're going to say, you know, how did you come up with the personal usage? Show us your mileage log. Well, if you don't have a mileage log, if you're not tracking at all, you're going to get nailed in that audit. They're going to say, yeah, we're not going to allow a full vehicle. So give yourself the score. 3, 2, 1 or 0 based on, you know, do you track your miles? Moving on to tax strategies. So what's your approach to tax strategy? So do you seek to understand the basics of the strategy? Like if somebody like me is sitting here spouting out Augusta rule or hey, accountable plan, do you inquiring minds usually want to know? They're like, okay, so help me understand the basics of what this strategy means and the impact to you? Or do you just ask a few questions and then just say, okay, I'll roll with it and trust what you're being told? Or do you ask a few questions but you're not really interested in the details at all? Or is the answer people say the details are my CPA's job. The reason why, if you get a 3, 2, 1 or 0 on this is if you're engaged. Tax mitigation and tax reduction is a collaborative effort. Your cpa, your accountant can say, hey, I need you to X, Y and Z. But if you don't understand the basics. Like, you don't need to do the nuts and bolts. So if you, as a tax strategy in your business, are seeking to understand the basics, that means you're engaged in the process and that means you understand, here's what I need to do next to actually make those tax savings a reality. The other thing is, how do you find tax saving strategies? Right? How do you tackle that? Are you talking to friends or looking to social media? Are you talking to your licensed professional? Are you reading on your own or is it a combination of those? So I would say this would be a combination of reading on your own. The strongest answer where you're going to get the most points in this assessment is if you're listening to a tax professional and making sure that you understand and doing a little bit of reading, investing of your time on your own, that's going to give you the strongest score from a tax perspective, right? And then regarding audits, how you are either super paranoid and OCD about your records, you're mildly concerned, not concerned at all. That's what my CPA is for. Or audits are like the tooth fairy. They're mythical. And I'll never see one right self the, you know, three, two, one. Sorry if I blew up the tooth fairy for anybody. Do you include all of your income on your taxes? Either true or false, yes or no. 3, if you do, zero if you don't. And then what is your mindset around audit flags, right? Are you aware of your niches or your business red flags and you're zealous about your documentation? Give yourself three points if you know your red flags and you're decent at documentation but you could improve. You know, let's be real. Two points. If you're not aware of any red flags and you're terrible documentation at one point. Or red flags and audits are like dragons, purely mythical and I'll never see one, right? So if you're like, whatever, don't care. Zero points. So if you go through these questions and you tally them all up, if you got anywhere between a 30 and a 39, you're strong, you're doing the reps, you're doing the daily things, you're doing the monthly things that you need to do to identify. Like, my chances of surviving an audit would be good if you're fully engaged in the process, right? If you're scoring between 21 and 29, that means you're good or fair. It's like you could probably strengthen some things and if you're in that 0 to 20 range, then you really have some work to do.