03/ 17/ 2008
by Charles R. McConnell
When faced with multiple demands on our time we often give the most attention to whatever task is represented by the next deadline. Taxes aren't due until the middle of April, so why not wait until early April to take care of them? Many people work from deadline to deadline, always addressing the highest priority of the moment, and the mid-April tax deadline simply takes its place on the list of priorities. But if we insist on sticking to priorities, we need to put the annual tax chore in its proper place in the priority order.
When taxes are done at the last minute and submitted just under the wire there are too many opportunities for errors and omissions. Tax preparation isn't a simple task; there's much information to assemble and every year there are tax-code changes to consider.
Your accountant or tax preparer is likely to be swamped with work during the first quarter of the year. If you haven't engaged such a person by March or early April, you may not be able to find an accountant or tax service with time available for another client.
Allowing taxes to go past due usually isn't the answer. When cash is short at tax time it's usually possible to make an installment arrangement with the IRS, but in practice it's less costly to pay on time by liquidating assets or borrowing. There are just a few some circumstances under which the IRS will sanction late filing without penalties, and these mostly involve severe casualty, disaster or theft losses.
The soundest approach to tax preparation is to start early to ensure that all necessary records are available. Maintaining a tax calendar is recommended for staying on track throughout the year. Information about tax calendars is available in IRS publication 1518, Tax Calendar for Small Business and Self-Employed. The calendar lists everything you need to know to stay on top of the year's tax preparation.
If you didn't plan throughout 2007 for this April's taxes, it's all the more important to begin now rather than waiting until the deadline is imminent. Mistakes are inevitable when taxes are prepared in an eleventh-hour crunch, and dealing with the IRS concerning errors is steadily becoming more difficult.
Tax preparation represents one of the most important reporting requirements placed on business. To minimize errors and avoid the hassle of late submission, it's always wise to start early. And starting early with an organized approach can avoid what must certainly be a recurring nightmare for tax preparers: "shoebox accounting."
Shoebox accounting is the practice of throwing all receipts and vouchers and such into a box which is later—most likely in early April—turned over to the tax preparer with the expectation of having a finished tax return ready to sign and mail by Midnight April 15.
Most tax preparers don't need work so badly that they will accept a box of unsorted documents late in the cycle. This might work once with a particular accountant, but you'll likely hear that it shouldn't happen again or you'll be shopping for another accountant. Some tax preparers will take you on only if you agree to supply information in a particular organized manner. Often the accountant will supply you with procedures for accumulating and categorizing documentation. Most accountants will expect you to have done the clerical work of accumulating and compiling all pertinent elements of income and expense. Someone has to sort everything before real tax preparation can start, and if the sorting is done by the tax preparers you can expect to pay an accounting-firm rate for doing your tax-related clerical work.
Anyone who hasn't yet done so—and this goes for individuals as well as businesses—should get away from the shoebox concept and start putting documents away in an orderly fashion. Keep simple ledgers of business transactions and file the supporting paperwork separately by category. For example, the operator of a particular two-person service business maintains a ledger divided into columns representing expense categories. At the end of the year the columns are totaled for submission to the tax preparer. And since this business reports for tax purposes via Form 1040 Schedule C, Profit or Loss from Business, the few categories used are taken directly from that tax form.
Shoebox accounting need not be a continuing mode of operation. Be kind to your tax preparer and to yourself with some simple, commonsense organization. It won't take a great deal of effort to make April 15 far less stressful for both you and your accountant. And tax time can be considerably less stressful for all concerned if serious preparation begins two or three months before April 15 and planning starts in January—of the prior year.
