The run-up to tax season can be one of the most stressful times of the year for a small- or medium-sized business. Receipts can be thrown together willy-nilly (with only a reasonably high level of confidence as to relevance).
It seems a checking or credit card statement is always missing. Too often, everything gets entered into a spreadsheet and the original documents wind up in a file drawer or banker's box, never to be looked at again. Too many business owners will follow up by not thinking about taxes again until their next quarterly estimated payment is due, or maybe even until tax season returns the following year.
Be prepared
Unless you're truly brave (and maybe a little reckless), reading this should give you a slightly uneasy feeling.
If your clients' approach to tax time is this haphazard, can you be sure that the business year underway will be buttoned-down when April rolls around again?
Worse, if the Internal Revenue Service pulls their number out of its audit computer, would you be ready to defend the tax filing from two years ago?
One good way to prevent spikes in stress is to take time for organization when there's no deadline. Next time you've got free time, you should consider organizing your old tax documents for any possible audit. Or, if you've got plans to grow, to make it easier to pass data along to someone else who will handle your taxes, whether it's a temp bookkeeper, a new-hire bookkeeper, their existing tax accountant, or a new tax accountant.
Preparing all of this can alleviate stress while ensuring you're in compliance with tax laws. And if you find an error before the IRS does in an audit, you can file an amended return. While fees and penalties are likely to apply,
Taking time to reorganize
Find your old files and attack them with the most recent year first. These are likely to be the most important and most relevant. Make sure you've got your income statements, balance sheets and expense records. Compare what you have in your files (or box) to what you reported on the actual tax form. You want the income statements because that's what was the basis for your taxes due.
You want proof of your expenses in the form of receipts, credit card statements and checking account statements so that the deductions you took can be validated. Your checking statements and invoices can be used to support your income. Some businesses may need additional documents, such as depreciation schedules or records of inventory.
If anything is missing that might be needed in an audit, now is the time to find it. It may just be misfiled (in the 2020 file instead of the 2021 file, for instance). A document management system makes it easy to search for a document that may have been misfiled, too. If you're missing a bank statement, you can probably secure it from your bank.
Store it better
Knowing where all your paperwork is located is certainly helpful. Digitizing documents and storing them in the cloud makes storage, access and manipulation easy. A DMS ensures that all relevant documents are in one place. It's less likely that a document will go missing or be misplaced. Not only will you reduce clutter, but you'll be able to access the data from anywhere.
Once you've confirmed that you've got all of a particular year's data, set aside time to capture it with the DMS you've chosen. By extracting the data on your paperwork through optical character reading, the DMS will free you of the task of manual entry. A good DMS will enable you to categorize your paperwork by type also and may do it automatically. In addition, a DMS should be able to produce reports that can confirm that your income statement and other financial records are correct.
The future
While you're moving backwards, remember how relevant this is to your future. If you don't want to revisit this exercise, be better organized with your present documentation. Entering your receipts, invoices and bank transactions into your DMS on a regular basis will make your next tax season simpler. Your tax accountant will be happier too, even if they bill you less. You'll save time and reduce errors as well. And a cloud-based DMS means you can stick to any schedule you establish by making access possible from anywhere. Your bookkeepers and tax accountants can be enabled to work with the DMS, too.
Choosing the right DMS will provide you with a way to integrate with other commonly used business tools, such as accounting packages and spreadsheets, which can streamline workflows and increase efficiency.
Reviewing and organizing your past financial documents is an insurance policy against potential disaster. Being ready for an audit that never comes is way better than being unprepared for one that does. Having those records digitized and available for manipulation can even provide you with a chance to glean insight into the path you've taken. New awareness can lead to new inspiration and bigger success. All by getting your old documents in order.
