What Does Preparing a Trial Balance for an IRS Audit Entail?

A trial balance is more than a worksheet accountants use to spot arithmetic errors — during an IRS audit it becomes the map auditors use to understand your records quickly. In my 15 years as a CPA handling examinations, a clean, well-documented trial balance usually shortens the audit and lowers the chance of surprise adjustments. Below I explain how to prepare one audit-ready trial balance, what auditors look for, and how to present it so examiners can verify figures efficiently.

Why auditors ask for a trial balance

Auditors request a trial balance because it summarizes the general ledger and lets them:

  • Match account-level balances to tax return lines (revenue, COGS, depreciation, etc.).
  • Spot large or unusual balances and year-end adjustments that need backup.
  • Verify that the accounting system is internally consistent (debits = credits).
  • Identify accounts that require deeper testing (payroll, inventory, related-party transactions).

This single report helps examiners prioritize document requests and select sample items for verification.

Prepare before you create the trial balance

  1. Gather source documents: bank and credit-card statements, invoices, receipts, payroll reports, loan agreements, depreciation schedules, vendor contracts, and inventory counts. Keep the documents in chronological order.
  2. Lock the period: decide which date the trial balance will represent (e.g., fiscal year-end) and ensure no subsequent entries are mixed in.
  3. Reconcile major control accounts: cash, accounts receivable, accounts payable, payroll liabilities, and inventory. Reconciliations should include a clear tie to bank statements or supporting schedules.
  4. Export ledger detail: if you use accounting software (QuickBooks, Xero, etc.), export the general ledger and trial balance report. Save as PDF and CSV for transparency.

Step-by-step: building an audit-ready trial balance

  1. Produce an unadjusted trial balance from your general ledger for the selected date.
  2. Review for missing accounts or obvious data-entry errors (e.g., negative expense balances).
  3. Prepare adjusting journal entries for normal accruals and corrections: accrued expenses, prepaid amortization, depreciation, bad-debt allowances, and revenue cutoffs. Document the rationale and calculations for each adjusting entry.
  4. Post adjusting entries to create an adjusted trial balance.
  5. Identify any reclassifications (e.g., moving capitalized costs from expense to fixed assets) and show supporting calculations.
  6. Tie adjusted balances to schedules used on the tax return (depreciation schedule, cost of goods sold detail, shareholder distributions, etc.).
  7. Create a reconciliation table: Tax return line → Trial-balance account(s) → Supporting schedule/file name and page.

Include a one-page index that explains file organization and where to find supporting documents for each significant account balance.

What auditors focus on in the trial balance

Auditors are trained to spot these red flags in a trial balance:

  • Large adjusting entries near year-end or after closing.
  • Unusually high expense accounts relative to revenue or industry norms.
  • Repeated negative balances in typical debit accounts (assets, expenses).
  • Significant related-party balances or loans without formal agreements.
  • Inventory anomalies: missing counts, unexplained write-offs, or inconsistent COGS vs. purchases.
  • Payroll liabilities that do not match payroll reports or tax deposits.
  • Mismatches between book and tax depreciation or amortization methods.

When auditors find issues, they follow the trail: trial balance → general ledger detail → source documents.

Typical supporting documents auditors will request

  • Bank statements and reconciliations (3 months before/after year-end if requested).
  • Invoice detail and sales support (point-of-sale reports, customer receipts).
  • Vendor invoices and canceled checks for large expenses.
  • Payroll registers, Form W-2/W-3s, Form 941 filings, and payroll tax deposit evidence.
  • Fixed-asset listings and depreciation schedules (date of acquisition, cost, method).
  • Inventory count sheets and valuation methodology (FIFO, LIFO, weighted average).
  • Contracts or loan agreements for related-party transactions.

You should link each supporting document to the trial-balance line it supports (for example: Trial Balance Line 1200 – Accounts Receivable → File: A/R Aging.pdf, Page 2).

How to present the trial balance to the IRS

  • Use a clean, printed PDF with a descriptive cover page and an index. If the audit is remote, supply a well-organized folder on a secure file-share with the same index.
  • Provide both the adjusted and unadjusted trial balances, plus a short memo explaining each adjusting entry and who authorized it.
  • Where possible, include the source ledger export (CSV) so auditors can run their own tests.
  • Offer to walk the auditor through the reconciliation for major accounts. A short guided tour can prevent unnecessary follow-ups.

For a guide on organizing the full audit file, see Preparing a Professional Audit File: Organize Your Records Like a Pro (https://finhelp.io/glossary/preparing-a-professional-audit-file-organize-your-records-like-a-pro/).

Common mistakes that prolong audits (and how to avoid them)

  • Missing documentation: if an expense doesn’t have an invoice or receipt, auditors may disallow it. Keep contemporaneous backup.
  • Mixing personal and business transactions: co-mingled accounts raise related-party or constructive distribution concerns.
  • Over-reliance on spreadsheets without source links: every spreadsheet total should be traceable to source documents.
  • Incomplete reconciliations: a bank reconciliation that doesn’t tie to the year-end cash balance signals sloppy controls.
  • Not documenting accounting policies: auditors want to see written policies on capitalization, inventory valuation, and expense classification.

Practical examples from my practice

Example 1 — Inventory write-down: A restaurant client showed a high COGS percentage on the trial balance. Reconciliation revealed expired inventory recorded at cost. We prepared a dated inventory count, supporting waste tickets, and an adjusting entry. Presenting that documentation to the auditor eliminated a proposed adjustment and reduced tax exposure.

Example 2 — Misclassified contractor payments: A small business owner had recorded contractor payments as “consulting” but lacked Form 1099-NEC support. We generated payment reports, traced checks, and corrected classifications in the adjusted trial balance. The auditor accepted the corrected presentation once the 1099 reconciliation was provided.

Quick audit-ready trial balance checklist

  • Produce unadjusted and adjusted trial balances (PDF and CSV).
  • Include an adjusting-entry schedule with calculations and approvals.
  • Reconcile cash, A/R, A/P, payroll liabilities, and inventory.
  • Provide depreciation schedules tied to fixed-asset accounts.
  • Index and label supporting documents; include page references.
  • Separate personal and business transactions.
  • Keep a responsive point-person (CPA or controller) available to explain items.

If your audit is correspondence-based, review our document checklist and sample response letter for that format: Preparing for a Correspondence Audit: Document Checklist and Sample Response Letter (https://finhelp.io/glossary/preparing-for-a-correspondence-audit-document-checklist-and-sample-response-letter/).

When to hire a professional

If your business has complex transactions (related-party deals, significant inventory, R&D credits, or large nonrecurring items), engage a CPA or tax attorney early. In my experience, auditors give more weight to reconciliations and calculations prepared or reviewed by credentialed professionals.

Authoritative resources

These IRS resources explain examination procedures and taxpayer rights; use them to understand timelines and what to expect.

Final notes and professional disclaimer

A properly prepared trial balance is one of the single best ways to make an IRS audit efficient and less adversarial. In my practice, auditors respond positively when the taxpayer presents reconciled schedules, clear supporting documentation, and a logical trail from trial balance to source documents.

This article is educational and not a substitute for personalized tax advice. If you are under audit or expect one, consult a qualified CPA or tax attorney to review your records and represent you before the IRS.

Related guides on FinHelp.io: “Preparing a Professional Audit File: Organize Your Records Like a Pro” and “Preparing for a Correspondence Audit: Document Checklist and Sample Response Letter.”