Do you find tax season stressful? If so, you're not alone. A simple Google search for “tax season stress” reveals well over a million results, so the anxiety associated with taxes is obviously a common problem.
Tax season stress occurs for a number of reasons. For example, we have a client who started a small service-based business a couple of years ago. Since his business is small and he was just starting out, like many small business owners, due to limited cash flow, he didn't want to spend the money on accounting software or hiring a bookkeeper.
He was Worried About How Much He Would Have to Pay in Taxes
Since he didn't use an accounting system and worked directly from his bank account, he had no idea what his income and expenses were, and was very worried because he was clueless when it came to how much he would have to pay in taxes.
In addition to that, since he hadn't really kept track of things, when he decided to hire our company, he dreaded pulling together the information we needed to prepare his tax return.
Close to April 15th, he provided us with a folder with copies of his bank statements, receipts, and deposit slips, and from that, as his accountant, we had to compile the information, and put it into a form to prepare his tax return. He essentially paid us a premium to put everything into an accounting system, which he could have quite easily done himself, if he had a system in place to do so.
Even worse, since we don't know his business in the same way he does, we had no way of knowing if we had missed some things, such as whether he had mileage he needed to write off, or had perhaps purchased anything using cash or his personal funds that we didn't have a record of.
When everything was said and done, he ended up with a tax refund of several thousand dollars, so not only had he needlessly been worried about how much he owed, he also gave the IRS thousands of tax free dollars.
In addition to that, by the time we finished preparing his taxes, due to not having an accounting system in place, he was several months behind in his accounting for the current year.
He Kept Track of Everything in His Head
Another business owner used Quickbooks in a hit and miss manner, but for the most part, kept track of everything in his head, along with notes on scraps of paper. He gave his totals to the accountant he was using at the time, who did the best she could with what she had to work with.
A few years down the road, he was audited by the IRS due to an innocent mistake that he made in his taxes. One of his clients hadn't issued him a 1099, and due to his poor recording keeping, he failed to report the income.
He learned that the IRS doesn't care about what you put down on paper, they care about what you can prove through documentation. It's our strong belief that he tried to do all the right things, and in fact, he thought he had done so, but as a result of not having a good accounting system in place, and therefore not being able to prove what he had put down on paper, with penalty and interest, he ended up owing the IRS $150,000.
He didn't even know where to start to argue those findings, because he didn't have the documentation he needed all in one place.
At that point he came to us, and asked for help. We did the best we could with what he gave us to work with, and through our knowledge of what the IRS is looking for, we were able to save him $80,000 on his bill.
The Importance of Having a Good System in Place
The anxiety and expenses in both of the above scenarios could have been avoided with a rock-solid accounting system in place to capture every transaction, including cash receipts.
For example, in the second scenario, the thing that triggered the audit was that the business owner failed to report income from a client that didn't send him a 1099. Even though the company should have sent him a 1099 and didn't, that didn't absolve him of his responsibility to report the income.
In contrast, if you document everything in a good accounting system, you'll always know where you stand financially, not to mention be able to back up what is on your tax return, if you're ever faced with an audit.
You'll also have a ballpark figure of what you'll owe in taxes, and can do things before the end of the year to minimize your tax bill. For example, you may put money into equipment or other things your business needs so that you'll get what you need for your business, and at the same time, reduce your tax bill.
The Bottom Line
Using a solid accounting system, and seeking help from tax professionals eliminates unnecessary tax season stress, and can save your business a lot of money.
