“You’re being audited.”
Those three words can strike fear in the hearts of even the most organized property manager. But if you take measures today to ensure that your business is audit-proof, you’ll be a lot more comfortable if your property management business is chosen for an audit.
While an IRS audit is always possible, it’s more likely that your state’s Department of Real Estate would be the pursuer of any audit request received. No less terrifying than an IRS audit, negative findings can directly impact your business, with repercussions ranging from fines, to suspension of even revocation of your license, depending on the violations that are found during the audit.
In order to audit-proof your property management business, here are a few steps you can take starting today:
Clean up your general ledger accounts. That means refraining from dumping unclassified transactions into a miscellaneous account, to using vague account descriptions such as Utilities. If you track several utility types, like most properties, try to be specific in your account wording. And be sure to change these at the beginning of your fiscal year, since most accountants and CPAs frown on changing account numbers mid-year.
Always begin year-end work early. January is not the time to begin to processing year-end tax reports and 1099s. Even though 1099 forms are not due to recipients until February 1, you don’t want to wait until the last week of January to process them, particularly since there are always missing social security numbers to track down or addresses to change. Going forward, make it a habit to collect social security numbers and addresses when you’re adding a new vendor or property owner, eliminating that year-end scramble all-together.
Properly manage your trust accounts. Since abuse or inappropriate use of trust accounts is the number one reason why property management businesses are audited, you’ll want to make sure that you’re using trust accounts, and that you’re using them properly. Research the laws pertaining to your state, and make sure that those rules are followed at all times, by all staff members. Ignorance of the law is not a good defense if you’re audited.
Establish and maintain internal procedures for all money handling and other funds-related transactions. That can be anything from assigning roles to each employee, and making sure that those roles are being undertaken properly.
While being audited in never fun, following these procedures will help to ensure that your property management business (and you) are given a clean bill of financial health.