03/ 28/ 2006
by Charles R. McConnell
A recurring nightmare for accountants who do income taxes for individuals and small businesses is the client who practices "shoebox accounting." Shoebox accounting is the practice of throwing all receipts, vouchers and other indications of expenditures into a box, which is later –– most likely on April 13 or 14 –– turned over to the accountant with the expectation of receiving a finished tax return ready to sign and mail by midnight on April 15. This is no way to treat your accountant –– especially if you would like to retain his or her services in the future.
An exaggeration? Sure, but not by much when you see the way some people keep records and hear what they expect of an accountant or tax preparer when time has almost run out. Most professionals involved in income tax preparation will describe February, March and April as their "busy season." We might also include January in the tax preparers busy season; activity is gearing up during that month, but not everyone can do their taxes that early because organizations distributing W-2 statements and 1099 Forms don't have to get them all out until Jan. 31.
If you practice shoebox accounting, you might be hurting yourself, as well as driving your accountant to the edge. Most tax preparers don't need work so badly that they will accept a box full of unsorted documents late in the cycle. It might work with an accountant once, but he or she will likely tell you that it shouldn't happen again, or you will be shopping for another accountant. In fact, some accountants will take you on, only if you agree to supply information to them in a particular organized manner. Often, the process of dealing with accountants involves getting guidance on procedures for accumulating and categorizing documentation. If you are an individual or a one- or two-person business operation, you might be set up with a compartmentalized folder or series of files labeled with document categories such as "sales receipts," "postage and shipping," "utility bills" and so on. Most accountants will expect you to have done the clerical work of sorting, separating, categorizing and, in some instances, sub-totaling all pertinent elements of income and expense.
Another important point to remember when handing your accountant a box of unsorted paperwork: If the accountant takes on the job in that condition, you will likely pay more––perhaps much more –– for the job than if you presented your material in orderly form. Someone has to sort everything before tax preparation can start, and if tax preparers do that sorting, you can expect to pay an accounting firm rate for doing your tax-related clerical work.
Where and how do you begin to get organized before next tax season rolls around? And when do you begin? The "when" is easy: the best time to start is the beginning of the new business year, which is Jan. 1 in most instances. There’s a little more to the "where" and "how."
A good beginning is to get away from the shoebox concept and start putting documents away in some orderly fashion. Keep simple ledgers of business transactions and file the supporting paperwork in separate folders or envelopes by category. One individual, operating a one-person service business, maintains a ledger-like book divided into columns representing expense categories. At the end of the year, the columns are each totaled for submission to the tax preparer. What are the categories, and where do they come from? Simple: Since this business is reported for tax purposes via Form 1040 Schedule C, Profit or Loss From Business (as are many), the few categories used are taken directly from that tax form.
Avoid shoebox accounting by keeping a running record of all transactions and filing away all related receipts and other documents by category. Select the categories by referring Form 1040 Schedule C. And for simple but comprehensive guidance on proceeding through the year, consult the Tax Calendar for Small Business and Self-Employed (IRS Publication 1518).
Shoebox accounting isn't the only way. Be kind to your accountant –– and to yourself –– with some simple, commonsense organization. It will make April 15 far less stressful for both you and your accountant.
