In this age, it is strange to come across a business that does not accept electronic payments. People are moving away from using cash and using credit cards more and more. Long gone are the days where businesses kept cash inventories. Most of the sales and payments are now done electronically. Companies need to be extra cautious when using credit card systems for purchases and payments. It is easy to relax and forget to keep their statements. Don’t rely on the idea that everything is recorded in the system. Keep your credit card statements. You never know who might come looking.
It’s difficult to know how long you should hold on to your credit card statements. Don’t hold on to them forever but do try to keep them as long as you can. The recommended time ranges from forty-five days to seven years. To figure out the right time range for you, consider the type of business transactions you provide and tax applied to purchases.
The significance of credit card statement auditing cannot be underestimated. However, it is common to come across articles all over the internet that have blown the entire issue out of proportion. These articles contain misleading information that makes business owners worry without providing any rational evidence. Here are some common misconceptions you might hear about credit card statement auditing:
1. You Need to Hold on to Your Statements Forever
Everyone has heard horror stories about auditors on the hunt for a piece of paper from five years earlier. To soothe your worried mind, here are some things to remember when it comes to statements.
When you want to know how long you should keep your records, first look at the type of purchases. If you are making small and regular purchases, you should keep the statements for about forty-five days. These purchases might include small supplies, meals and one-time expenses. You need to hold on to these statements and add them up so that they match the monthly bill. Check for any accidental double swipes.
The next category of items are the ones that can be returned, especially those with warranties. The statements for such items should be kept for about ninety days. Most stores selling these types of goods have robust records. Even if you lose your copy, they could easily retrieve it from their system. However, don’t rely on this. Keep your statements in a safe place. If the seller is not able to recover it; you will be the one in trouble.
When you use your credit card to make any tax-deductible purchase, store the statement and other documents that support it for about seven years. Mark that entry in your records so that it is easy to retrieve it when the auditors come. Try and define such transactions clearly so that the authorities do not become too curious about them.
2. You Do Not Need to Do an Internal Audit
If you buy things from other businesses electronically, you need to protect yourself. Electronic payment processes are handy, but they’re not perfect. It is better if you catch the mistakes yourself than wait for the auditors to discover them.
A functional internal auditing team can solve this problem for you. Appoint people to regularly go through your credit card statements and make sure everything checks out. You know that you’re honest, but can you say the same thing about the people you are buying from and selling to? An internal audit helps resolve any issues with your statements before the auditors come calling.
3. Credit Card Statements are Enough for Tax Deductions
In the United States, businesses are eligible for tax deductions. Every year, a lot of money goes to waste in the form of unclaimed deductions. However, not every business expense is eligible for deduction. Tax-deductible expenses can be defined as the ordinary and reasonable expenses that help a business to generate income. The IRS says ordinary deductible costs are any that fall under general and administrative expenses, business-related travel and employee benefits among others.
Credit card statements are not enough to claim these deductions. You could use the statements as proof, but they don’t tell the whole story. The IRS wants more information and may ask for additional documents. In this case, receipts are your friends. They include much more information that will allow the IRS to determine whether or not it is a legitimate deduction.
4. Having Several Credit Cards Hurts Your Score
Lots of people will tell you that owning more than one credit card can hurt your score. This is simply not true. A credit score is determined by: current balances, how you pay your credit, and your credit limits. It about how you use the credit cards, not how many you have.
Don’t be worried about owning multiple cards. As long as you pay regularly, it won’t affect your score. However, as you take on more cards, you want to be sure to have an internal audit to keep track of everything.
5. Small Businesses Can Mix Up Personal and Business Expenses Safely
This is one of the most common and most costly mistakes for small business owners. Do not mix personal and business expenses. We assure you that you will come to regret it. Follow GAAP guidelines when it comes to any purchase, big or small. Make sure that you can justify every single statement. Make sure your employees understand this rule as well and implement any preventative controls you may need to stop it from happening.
6. You Can Fully Protect Your Firm from an Audit
Many authors on the internet guarantee that, with their special tips, you will be able to avoid an audit from the IRS. Life doesn’t work that way. The IRS has the mandate to audit every business within the United States. You can’t completely protect yourself from an audit, but you can learn what catches the IRS’s attention.
The main thing that will trigger an audit is if you have more expenses than income. Other factors that can draw the attention of the IRS include having losses from year to year, unusual deductions and third-party referrals.
Even if you do everything perfectly, an audit could still happen. Make sure that you always have your statements and supporting documents at the ready.
7. It Is Cheaper to Audit Your Statements In-House
Many business owners have the money to spend on an in-house auditing team, but not everyone does. Outsourcing an auditing team could be cheaper in the long run and yield better, less-biased results. Never forgo an audit, either internal or external, because you think you can’t afford to. You can’t afford notto.