Taxes, taxes, taxes. It seems like that’s all we talk about these days, but that’s because we have seen and felt the pain of companies unprepared. A new survey from TaxSlayer discovered that 28 percent of Americans think it would be easier to go without a cellphone for a week than file their taxes… And that’s only for their personal taxes. For business taxes, I’m guessing business owners would do two weeks of no cell phone. So, we are doing everything in our power to get you prepared come tax time.
First, it’s important to understand what are the biggest causes of stress during tax time. Then, we'll provide a case study of how one company we worked with changed their ways, and finally, we’ll talk through four strategies to help you alleviate tax time stress.
The tax time crazies: Top 2 things that cause frustration
1. Financials not up-to-date
One of the biggest frustrations during tax time is having to play catch-up and clean-up to even be able to file taxes. There is often an expectation that a tax preparer can fix months of messy financial data and whip up a return in a matter of hours. Guess what… it doesn’t work that way. First off, your tax preparer shouldn’t be fixing anything; it’s the responsibility of your bookkeeper and/or accountant to get the tax preparer everything they need to file your taxes. This is made monumentally easier when your business’s financials are consistently updated monthly.
The tax preparer then takes that information and files your taxes. Putting the tax return together is only 20-25% of the entire tax process. 75-80% of the process is on the shoulders of the bookkeepers and accountants reconciling accounts, gathering info from 1099 contractors, making sure the W-3 ties out to the financials, making sure fixed assets are captured accordingly as capital assets and not direct expenses, compiling end of the year statements on any loans, etc.
Lastly, any outstanding issues/questions need to be answered by the company/client. This is not the time for you to disappear expecting your accountants and tax preparers to handle everything; they will need information from you and the quicker you turn that information around, the more painless the process will be.
2. Previous years’ tax returns haven’t been filed
That’s right, some of the businesses I’ve worked with (businesses as big as $80 million in annual revenue) have years of unfiled, unpaid taxes. When you don’t file or pay taxes for a few years, the problems add up because there is information on the prior-year tax return that carries forward to the next year. This leaves the tax preparer to try to back-track on what happened during that time, adding significantly to the hours required to prepare the tax returns (at a much higher rate than what you would have paid a bookkeeper to remedy the mess).
Case study: ABC Media – a $10 million events company
How I helped a company clean up a multi-year mess and be prepared for 2017 taxes
When I started working with ABC Media in late 2017, none of their accounts had been reconciled since July 2012. There was no audit trail. The prior accountant put together their tax returns without any reconciliations or back-up so the controller did not have good information to work with. Once the tax preparer got involved and began to review the history, it was clear there was a lot of double entering, information missing etc.
Through several conversations with the owner, I was able to gain an understanding of the business, types of expenses, vendors, etc. I next went back and did a thorough review of the past few years. Upon review, I noticed many items were booked twice, regular ordinary expenses were never taken, no balance sheet accounts had been reconciled, balances carrying forward from year to year did not match the tax returns that were being filed etc. By digging in, I was able to construct a plan of attack.
My plan included reconciling balance sheet accounts through 12/31/16, which alerted me to the fact that they were overpaying on their tax returns… by a lot.
In 2016 alone—after amending their S-Corp return and then amending their personal returns for both Federal and State—I was able to recoup over $15,000 in overpaid taxes from their original returns.
The time commitment needed from the client
One reason why so many companies put off dealing with their finances is because they can’t stand taking time out of running their business—and they know that cleaning up the mess will take a good chunk of time.
But… if you hire the right talent, it really doesn’t need to be that time consuming.
For ABC—even with multiple years of financial data needing reconciliation—the time commitment for ABC was not extensive. It was heaviest in the first week and through the first month and most of the time they had to spend was on the phone with me, answering my questions so I could gain a better understanding of how their business operates and familiarize myself to better tailor services to meet their needs.
Now we talk, e-mail and/or text a few times a month and it’s mostly just to review what happened the previous month.
How tax time changed for ABCMedia
We are coming up on ABCMedia’s first tax season where all their financials are in order and we have an ongoing process established to finalize financials the middle of the month following (ie: November’s financials are completed by mid-December). This proactive approach to financial management makes tax season a breeze and also allows for tax planning along the way. Stress is low and the handoff to the tax preparer will be smooth and uneventful, just the way we like it.
Had they waited to deep dive into their financials in March, weeks before their taxes were due, they would have paid double or triple due to rush charges and paying a tax preparer (who charges a higher rate) what a bookkeeper should have been doing all along. Additionally, ABCMedia was drastically overpaying on their tax bills because no one took the time to explain how the financials and tax returns integrate with each other and the steps to be taken to minimize tax liability. Too many times, the client and the previous accountant were being reactive instead of proactive.
The cost of the clean-up was quickly recouped
Not only did ABCMedia realize $15,000 in tax savings, but they saved money on rush charges they would have incurred had they waited until the last minute, and reduced tax-season-related stress and anxiety by an unmeasurable amount.
How can you prepare so you don't end up in a situation like ABCMedia?
4 strategies to ease the crazies
1. Admit you have a problem and stop putting off solving it
If you have the sense today that you’re going to be scrambling to get your taxes in order, reach out to a bookkeeper or accountant now.
2. Understand the role each member of your finance team plays
Bookkeepers and Accountants track expenses and reconciliations, administer payroll, ensure all 1099 contractor info has bene gathered, manage invoices, classify financial data.
Accountants quality check bookkeeper’s word, prepare monthly or quarterly financial reports, ensure quarterly tax payments are made, manage best accounting practices for your business.
Tax preparers/tax accountants take the info provided by the bookkeeper and accountant and make necessary tax adjustments, file returns, prepare quarterly tax estimates of liability in order to make payments, provide strategic guidance on ways to reduce tax liabilities or deal with losses.
3. Communicate early and often
A clean, open line of communication among members of your finance team is essential. If there is no communication, all hell can break loose:
- expenses are more likely to be miscategorized
- fixed assets might be booked as direct expenses, which leads to a misleading financial statement
- contributions from owners may be booked as income, as opposed to a loan/contribution from the owner
- there may be credit cards or loans that exist that we are unaware of, thus leading to companies missing out on deductions
The list can go on and on but these are some of the most common that can lead to bad financials, incorrect tax returns, and so much more time and money (2-3 times the original cost!) spent to get it fixed.
4. Involve your tax preparer earlier than you think
Companies need to understand the importance of involving their tax preparer during the year, at the very least on a quarterly basis. This way, they’re not starting from scratch during tax time each year. This also keeps all members of your finance team communicating and connected throughout the year so everyone is up to speed on what’s happening in your business, which makes for a smoother, easier tax season.The old adage that an ounce of prevention is worth a pound of cure clearly applies here. Having up-to-date financials and tax returns, two-way communication between companies/clients and their tax preparers, and involvement of the tax preparer through the year will go a long way toward reducing stress on an accounting staff at year end and help to keep a lid on the cost of tax return preparation.
Chris Kliczinski has an extensive tax and accounting background spanning nearly 20 years with the majority of those years (16) being in public tax and also 4 years in the private sector internally for a multi-location, multi entity organization as their Controller/CFO. I specialize in being able to take care of all of a client’s needs from the bookkeeping aspect to the accounting, to tax planning and ultimately leading to the tax returns and along with that, help educate the client so they understand their financials and how to use them to effectively run their business daily.