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Smart Tax-Time Tactics

Use these nine tips to keep your biz accounting in order and ensure your tax records are always up to snuff.

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While April can strike fear in the heart of any taxpayer, smartbusiness owners know that tax season is really year-round, and goodaccounting practices can make the process less painful.

To help you get in control of your taxes, we asked WayneEdmunds, an advisor to the American Institute of Professional Bookkeepers (AIPB)and a member of the AIPB's Certification Advisory Board to giveus a few guidelines. Edmunds, who is also an associate professor ofaccounting at Virginia Commonwealth University as well as a CPA inprivate practice with Gregory and Associates in Petersburg,Virginia, provided the following commonsense tips:

  • Keep books. Maintaining accounting records is absolutelyessential for any business owner, large or small. Thoughentrepreneurs might overlook setting up an accounting system whenthey start their business, it's very important to note that theInternal Revenue Code section 6001 actually requires that everyperson liable for tax maintain accounting records. And recordsshould be maintained accurately in "forms and systems ofaccounting" so that the IRS can determine if tax is incurredand the correct amount. The burden of proof falls on the taxpayerand it's next to impossible to prove you don't owe tax ifyou have no substantiating records. If you've failed tomaintain accurate and complete accounting records, essentiallyyou're at the mercy of the IRS if you're audited. It'sthat simple.
  • Don't mix and mingle. Don't commingle personaland business expenses or records. Talk to an attorney, CPA or taxprofessional to determine what business structure works best foryou and your type of business. Make sure you have a thoroughunderstanding of what the tax as well as legal implications of thatbusiness structure is.
  • Store it away for a rainy day. Keep your accountingrecords for an appropriate period of time. It's important tounderstand the statue of limitations rules. The general statue oflimitations is three years, since the IRS can always do an auditexamination for three years back, although there are somesituations when it can become six years. If a tax payer hasn'tfiled a tax return or has committed fraud, there's actually nostatute of limitations.
  • Understand and use your accounting records. Don'tjust keep accounting records, learn to understand and use them.Accounting records serve a purpose, which is to give you datathat's useful in managing your business. It's more thanjust information to fill out a tax return. Understand and know whatthose records are telling you. Use them to prepare a budget and useit. Learn and understand the difference between accrual accountingand cash accounting, and don't rely on the balance of your bankaccount to tell you what the net income or loss for your businessis.
  • Hire a professional. Use a competent accounting and taxprofessional. Get referrals from friends, family and other businessowners to find the right professional. When engaging thatindividual, ask questions, find out about their background, whetherthey have any specialty areas, and don't just accept what theytell you. Review any information they give you and if anythingdoesn't look proper or correct, ask questions. The bottom lineis, it's your responsibility.
  • Be proactive. Read business publications including theWall Street Journal, Entrepreneur magazine [and] thebusiness section in your newspaper. Be constantly looking for taxchanges, new developments and strategies. Any new information youfind you can take back to your accounting and tax professional andthey can help you discuss it and find out if it's somethingthat applies to your business.
  • Understand your responsibilities. It's critical thatyou understand your responsibilities as a taxpayer. If you'veever looked at your tax return, the place where you sign the returnactually constitutes a declaration under penalty of perjury thatyou've examined the return along with all of the accompanyingschedules and statements, and that to the best of your knowledgeand belief, they're true, correct and complete. It's yourresponsibility when you sign your tax return to ensure that[declaration is] true. It's not just the responsibility of theindividual who prepares it.
  • Don't ignore the IRS. Always respond to IRS noticesand correspondence in a timely manner. If there's an issuethey're contacting you about, it's not going to go away ifyou ignore it. Very often there are time constraints and it ends upbeing a very expensive problem if it's not correctedimmediately.
  • Forward your withholdings. Be especially mindful of yourobligations regarding employee tax withholdings. When you have anemployee and you withhold federal income tax, state, local, incometax, social security, Medicare tax, etc., you're holdingsomebody else's money and those funds have to be remitted in atimely manner to the appropriate governmental body. The penaltiesfor delinquency or failure to do so are severe and the IRS will acton it quickly.

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