Getting a letter from the IRS is enough to make you break out in a cold sweat. It's this anxiety that the U.S. House of Representatives Small Business Subcommittee on Economic Growth, Tax, and Capital Access is currently examining.

The Subcommittee is looking at how small businesses are treated during an IRS audit and, in particular, whether the tax agency is too aggressive when it deals with the nation's largest contributors to GDP and job generators.

Small businesses account for over half of all U.S. sales and 55% of all jobs. They pay significant amounts of income, employment, and excise taxes, and are the engine room of our economy. Helping these companies thrive boosts our entire nation.

Subcommittee Chairman Tim ​Huelskamp stated that several cases where the IRS has been too "aggressive" or acted in a way that has "harmed" small businesses have been reported.

He added that during the enforcement of tax regulation, small businesses have the right to be treated fairly and that the best outcomes will be the result of the IRS and taxpayers "working together to improve voluntary compliance and efficiently allocate resources".

Due to budget cuts, fewer small businesses are getting audited by the IRS. In 2015, the IRS conducted more than 950,000 correspondence audits and 291,000 field audits, down from 1.6 million in 2010.

But despite the falling number of people being audited, many report the headache of an IRS audit is more painful than ever.

Roger Harris, President and COO of Padgett Business Services, told the Subcommittee that IRS correspondence audits "can be frightening to small business taxpayers, as well as being time consuming and expensive," especially when "responses are lost or delayed in the system."

In his testimony, Pete Sepp, President of the National Taxpayers Union, stated that simplifying taxation laws would be advantageous for small business owners, eliminating a degree of uncertainty associated with the compliance process.

It can be a scary and time-consuming process for many small business owners, especially when they haven't kept clean records or worked closely with a financial advisor.

Mixing business and pleasure

Cloud accounting software platform,  Xero, recently asked a few hundred accountants what the most common mistake small business owners make that triggers an IRS audit. A whopping 39 percent said mixing business and personal expenses in deductions is what most commonly raises a red flag.

Harris told the Subcommittee that by working with an advisor throughout the year, not just at tax season, small business owners can establish good accounting and recordkeeping habits.

"Our strong belief is the best way to survive an audit is to do everything within your means to never have one," he said.  "Have a clear, traceable record of financial transactions and, of course, keep and organize receipts and invoices."

Moving to the cloud

Migrating to the cloud is a simple step all small business owners can take to help facilitate better recordkeeping and accounting practices. In the cloud, expenses can be sorted and reconciled on a real-time basis, meaning no more agonizing over whether that dinner receipt from three months ago was business-related or not. What's more? It also allows small business owners to access their data anytime and anywhere, in turn giving them the insight they need to make better business decisions.

When you use a platform like Xero, data should flow to the system with minimal intervention, limiting the risk of human error. Bank transaction data flows straight into the platform via secure, electronic connections. Small businesses and suppliers can transact directly with one another on the platform so the data stays clean. Cloud accounting platforms reconcile these transactions to keep clean books in real-time.

The amount of confidence you can have in the integrity of your books today, even as a small business owner, is quickly mitigating the cold sweats an IRS letter can bring on.

As the House of Representatives weighs IRS-related questions, the cloud is helping small business owners redefine best accounting practices to thrive today. With small businesses accounting for more than half of America's jobs, we can't afford to foster an environment where they aren't being nurtured and highly productive.

Published on: Jun 30, 2016