If bookkeeping for your business has fallen by the wayside, there’s never a better time to catch up on it than right now – especially if it’s tax season. If your records aren’t in order, you risk running up against errors or other common audit triggers for the IRS. When you actually undergo the auditing process, your lack of proper bookkeeping could open your finances up to further scrutiny, penalties, and fees.
Don’t worry – we’re not trying to frighten you. The chances of actually getting audited by the IRS are actually fairly low, but that won’t be much consolation should it happen to you. So, why risk it?
If the IRS isn’t your concern, making sure your business is running efficiently should be. Having good financial records in place can help you assess and adapt your business strategy to capture more income. Think it’s too late to play catchup bookkeeping? It’s not, and it may only take a day of your dedication to get everything sorted out.
Gather Receipts & Invoices
Before you do anything, find out how far behind you are in your bookkeeping. You may be just a couple or even several months behind, but either way it’s important to know (and be honest with yourself about) how far back into the past you’re going to have to begin.
Once you’ve identified the period of time that you need to construct your records, start by gathering all of your receipts and invoices. Sounds simple, right? It might be if you know where all of these things are.
To clarify, you’re looking for:
- Invoices to Customers – If you sent your customers invoices, you probably have them saved somewhere on your computer or have physical copies in a dedicated folder.
- Records of Bad Debt – Someone might owe you money and you haven’t been able to collect on their debt to you. This is known as bad debt and keeping accurate records of it can allow you to factor it into your tax return.
- Business Expenses – It takes money to make money, which is why businesses can deduct their expenses from their taxes. Make sure you account for all receipts related to expenses you intend to deduct so you can get an accurate read of your income tax liability.
Reconcile Your Bank Statements
Review your bank records to make sure the income and expenses you identified agree with what’s gone into and out of your accounts. If your records don’t match what’s showing up on your bank statements, it’s likely an indicator that there’s a mission invoice or receipt somewhere.
Being able to identify when and possibly to whom payment was sent or received can help you track down and fill in gaps during your catchup bookkeeping endeavor.
Make Sure Business & Personal Expenses Aren’t Mingling
It’s more than likely that you have a separate bank account you use for your business, but sometimes independent contractors find it easier to have their assets flowing in and out of one account. If this is the case for you, at least make sure you can accurately identify business and personal expenses in your bank statements.
Claiming personal expenses as business expenses is a common trigger for IRS audits that can lead to harsh penalties or worse if egregious enough. Consider opening a small business bank account to avoid these two very different types of expenses for being confused with one another as you play catchup bookkeeping.
Digitize & Organize All of Your Records
If not all of your records are already in digital form, scanning them is an important step to preserving them for future reference. The IRS has its own guidelines for how long you should hold on to your records, but by digitizing everything you can hold on to them all indefinitely.
You shouldn’t rely on digital copies, however. It may be a good practice to just hold on to your tax returns and receipts for the maximum recommended amount of time (seven years). After that, you can shred your oldest files every year with the assurance that they still exist in a digital form.
File Your W-9s, 1099s, & W2s
Unless you’re a sole proprietor or independent contract with no employees or subcontractors, you’ll need to file important tax documents.
Here’s what you need to know:
- Independent Contractors: If you paid someone more than $600 for work during the last tax year, you’ll need to file a Form W-9 and a Form 1099-MISC. The former will request the worker’s taxpayer information, which you’ll use to fill out a 1099-MISC for the IRS. The 1099-MISC is used by the tax agency to account for payments to independent contractions.
- Employees: If someone is employed to you, you’ll need to file a W-2. This wage and tax statement outlines the employee’s gross income and deductions for local, state, and federal taxes.
Have a Tax Attorney Review Your Work
If you’re undergoing a catchup bookkeeping process, having an experienced tax attorney walk you through the process or review your work can help you protect yourself from an audit. At Damiens Law Firm, PLLC, we’re dedicated to supporting people through their tax-related problems and can help you prevent them by reconstructing your business’ financial records.
If you’re behind on your bookkeeping or haven’t made an effort to get organized, Damiens Law Firm, PLLC can advise you of best practices that can help you work through the details of your situation. We’re committed to helping people like you file with confidence by knowing you have a legal tax representative on your side.
For more information about how Damiens Law Firm, PLLC can help you, contact us online or call (601) 871-6322 and ask about schedule a free initial consultation.