Tax season is a stressful time for any business—get it wrong, and you might find yourself in the middle of an audit. The best time to prepare for an audit is long before the IRS even sees your tax return, and the best way to prepare is to keep impeccable records. And since the consumer packaged goods industry has notoriously complex operations, this is especially true for CPG brands.
Here, we take a closer look at how to prepare for audit season.
The IRS uses software called the Discriminant Function System (DIF) to look for red flags on tax returns. If you have a return that’s outside of the norm, an IRS agent will review your return by hand to see if it warrants an audit.
Here are a few triggers that will increase your chances of getting flagged:
Most tax audits are conducted by mail. The IRS notices something off about your tax returns and requests specific information to clarify the situation. Once you send the information back, the auditor will determine whether you’ve offered sufficient information to close your case. If so, your audit is complete. If the auditor still finds problems, you can accept the findings and pay penalties or unresolved bills—or appeal the findings.
In rare situations, the IRS will schedule an in-person audit at your business location. A tax auditor will arrive and manually compare your accounting information to your tax records. During an audit, the IRS may review up to six years of your financial records. After the audit is complete, the IRS will present its findings to you. If a penalty or additional taxes are due, you can accept and pay—or file an appeal.
Whether you’re a small or large business, preparing for an audit involves gathering a large amount of information. Although anticipating and navigating a tax audit can be stressful, here are five things you can do to make the process smoother and easier.
Although an auditor may not go through every single transaction, you’ll likely have to account for some of them by providing proof that a deduction or other entry is valid. If you’ve kept accurate, organized records, you’ll be able to quickly find the information the auditor asks for.
The number-one way to protect yourself during a tax audit is to maintain accurate records year-round. Keep track of every financial transaction related to your business, no matter how small or seemingly insignificant.
If you’re a CPG brand, many of your expenses will be from trade promotions. The deal you work out with retail establishments will include marketing and other activities. Many of these expenses are deductible, and since large deductions are a red flag for the IRS, they may trigger an audit.
Look at your current process of tracking trade promotions to make sure you’re accurately tracking every expense. Check how your employees classify the expenses, and use a trade promotion software that helps you keep things organized and easy to find. The harder it is for you to find certain records and tie them to specific activities, the harder it is to prove to the IRS that your deductions are valid.
Having expert support around you is vital for getting through your audit preparation—and the audit itself—with ease. The tax code is very complex, and even if you have financial experience, you may miss small details that a fresh set of eyes will see.
Get in touch with the person who handled your tax preparation. They will be familiar with the details of your return and in the best position to help. If you have legal concerns, contact a tax attorney, who can be present during the audit.
It’s essential to be polite to your auditor, but it’s also important to keep in mind that auditors are trained to look for red flags. Stay friendly, but keep all conversation focused on concisely answering the questions your auditor asks—avoid divulging extra or unnecessary information.
It’s important to know your rights as a taxpayer when you’re going through an audit. Here are a few of the most important ones to keep in mind during the audit process:
In addition, know when and how to push back if you believe your rights are being violated.
In the demanding world of Consumer Packaged Goods, each season presents its challenges. Audit season, in particular, is a period that requires keen attention to detail, especially concerning financial matters. At the heart of this complexity, the deduction management process emerges as a crucial factor in ensuring a company's financial health. The challenge amplifies when dealing with components such as distributor chargebacks, invalid deductions, and accounts receivable, which can impact your bottom line.
An efficient Enterprise Resource Planning (ERP) system can help address many of these issues. However, ERP systems may fall short in managing specific types of deductions that can affect cash flow. This is where the need for robust trade promotion management (TPM) software becomes clear.
Deductions can be a headache. Invalid deductions and distributor chargebacks can chip away at your bottom line, affecting your working capital. Moreover, types of deductions vary from chargebacks, shortages in supply chain, slotting fees, to Marketing Co-op Budgets (MCBs), each bringing its set of challenges. Dealing with this complex environment can be time-consuming, but effective deduction management can ensure that these elements don't hamper your business performance.
While ERP systems provide a comprehensive view of business operations, they may not offer the detailed focus required for managing trade spend. This is where a dedicated TPM solution comes in. Best-in-class TPM solutions offer functionalities that streamline workflows, manage backup documentation, and provide a thorough breakdown of deduction data. This significantly reduces deduction disputes and accelerates deduction resolution.
Effective deduction management plays a pivotal role in trade promotion management. To do this, automation is key. Automated workflows save valuable time and reduce human errors that can lead to deduction disputes. Moreover, having an 'all in one' solution that integrates with your existing ERP can provide an efficient method for handling all your deduction-related tasks.
An effective deductions software not only aids in managing disputes and resolution but also provides the insights needed for informed decision-making. These tools analyze deduction data and generate reports that can help identify trends, pinpoint recurring issues, and highlight areas for improvement.
Deduction management is more than just a financial process; it's a strategic element that directly impacts a CPG brand's cash flow and bottom line. By automating tedious tasks and providing valuable insights, a best-in-class deductions software can play a critical role in maintaining your company's financial health during audit season.
Remember, successful deduction management is not just about resolving disputes and managing chargebacks. It's about improving efficiencies, optimizing cash flow, and ultimately contributing to a healthier bottom line. So, as audit season approaches, ensure that your CPG brand is armed with an effective deduction management system. It's an investment that will pay dividends for years to come.
Vividly can be a CPG brand's best ally, especially when it comes to deduction management ahead of an audit. It's no secret that handling deductions, including chargebacks, shortages, invalid deductions, and more, can be a massive headache. But Vividly's all-in-one platform makes it a breeze. Vividly streamlines your accounts receivable and deduction management processes, making it easy to keep track of various types of deductions.
Plus, it automates workflows, helping save valuable time during this busy period. Vividly also ensures you have backup documentation at your fingertips, crucial for swiftly resolving any deduction disputes that might come up during an audit. By helping CPG brands keep their financials in check, Vividly doesn't just protect the bottom line, but also gives you peace of mind during audit season.
Vividly can make all the difference between a successful tax season and one that doesn’t quite meet the mark. Request a demo today to see how Vividly fits in your business.
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