As CPAs gather the information from an organization’s staff that’s needed to prepare the organization’s tax return, they often encounter issues that can make the process more challenging. When those issues create barriers for the CPA, it can potentially increase costs for the organization.
“It can be hours of additional work just to clean up an organization’s books,” says Emily Robb, Tax Supervisor at Corrigan Krause. “That can mean greater expense, greater risk of errors that could trigger compliance issues, and missed tax-planning opportunities.”
Smart Business spoke with Robb about common tax-time hang-ups and what companies can do throughout the year to avoid them.
What issues commonly give CPAs trouble at tax time?
The primary issue is incomplete documentation and poorly organized information. Often, CPAs receive documents piece by piece rather than all at once, and the reported transactions are unclear. It means a lot of back and forth with the organization trying to gain additional information. The CPA is chasing documents, clarifying the transactions and then cleaning up issues that could have been addressed systematically throughout the year. This increases the risk of delays or bottlenecks as well as the fees charged because of the additional time needed to complete the process. Extending the timeline could also require the organization to request a deadline extension.
Even organizations using accounting software such as QuickBooks can still have messy financials. That is usually because they don’t have a solid process that includes connecting their bank accounts and credit cards to QuickBooks Online and properly reconciling the accounts each month. Attaching statements or invoices can help clarify expenses or transactions if they aren’t ordinary transactions.
CPAs tend to make adjustments in the form of journal entries during tax preparation — essentially identifying accounts that need to be adjusted for tax purposes, such as recording depreciation. When journal entries haven’t been posted in the company’s bookkeeping system, it can be hard to reconcile one year to the next, which adds time to the process.
There is also the compliance risk. Incomplete or inconsistent records can increase the likelihood of notices, penalties or greater scrutiny from taxing authorities. Maintaining clean records improves accuracy and reduces the chance of tax notices after filing.
Unsophisticated bookkeeping can also lead to missed tax-planning opportunities, largely because expenses aren’t well tracked. That can mean losing out on deductions and credits you are eligible for, not being able to substantiate credits and deductions in the case of an audit, and more.
How can companies better prepare throughout the year for tax time?
A key first step is to keep the financial books current and accurate. That should include reconciling the bank accounts, loans and credit cards on a monthly basis. It’s also important to keep all business and personal financial activities separate. When organizations mix personal and business expenses, at the end of the year it’s the CPA who has to go through and determine which are actually business use expenses and which aren’t. That’s both messy and time consuming.
Another helpful step is for the business to track expenses or any major financial events that happen throughout the year, such as asset purchases or sales. Recording those when they occur is much easier than having a CPA record all of the additions and disposals at year-end.
Companies should monitor estimated taxes and cash flow throughout the year, and, ideally, have regular check-ins with their CPA. These check-ins could range from formal quarterly meetings to monthly emails to update their CPA on what notable financial activity has been going on. Keeping a CPA in the loop during the year translates to a smoother tax filing process.
Tax preparation does not have to be stressful. Being organized creates an opportunity for smarter planning through improved visibility into the company’s financials. Maintaining a regular process throughout the year means the CPA will need less time for tax prep and will be better able to help with tax planning and consulting that can alleviate tax liability. ●
INSIGHTS Accounting is brought to you by Corrigan Krause.
