The month of December is a month of holiday celebrations, but it is also the month for year-end tax planning. Even though everything around you is chaotic, you need to stop and take stock of your finances before it is January 1.
As I have always recommended, you must be keeping good records. The burden of proof is on you if the IRS has questions, so if you can consult your computer program or your hard copy, you will be in good shape. If your CPA has set up your chart of accounts and you have appropriately filed each expense and all income in the correct categories, you are on firm ground if audited. There are a number of good computer programs which can make this task very easy for you during the year. Granted, they need to be set up properly from the beginning, but once the program is configured for you and/or your business, all you have to do is fill in the blanks. Otherwise, without the computer software, you will need to keep copious hard copy and all receipts for future reference.
Review for Your Year-End Tax Planning
In December, review your various accounts and ascertain these things:
1. Have you recorded ALL of your income?
2. Have you recorded all of your expenses?
3. Are you current on your tax payments?
If not, correct your files immediately and take any necessary actions. The IRS does not approve of unreported income, and will cause great problems for you if you don’t report all of your income, especially if you do this deliberately.
This is also the time to review your actions for the year and maybe even past years. If you have not been filing tax returns, I can guarantee that the IRS will eventually find you and make your life miserable. If you have been hiding income, declare it immediately on the correct IRS forms. Now is the time to correct past bad habits and prepare to file your tax return properly.
If you have not been keeping up on your tax payments, you need to get current immediately. If these tax payments are for your employees, the IRS views your non-payment in a very negative light. You collect these taxes from your employees for the government—it is a type of escrow for which you are responsible. If you fail to pay the government those taxes you have collected, you have, in effect, stolen from both your employees and the US Government. Serious stuff, indeed.
Inflating your expenses can be another red flag for the IRS. Record only those true expenses for your business and be able to document them. If your expenses are excessive, you are reducing your net income, thus hiding income from the government. Be accurate and be able to prove any expense you declare as a valid business expense.
Ignorance is No Excuse!
So much of this is simply common sense based on being truthful. Granted, some people are simply ignorant of the tax laws, but if you are in business (or even file as an individual), you need to get familiar with the tax laws which affect you. In this day and age, there is no excuse for ignorance. You have access to trained individuals—your tax lawyer or your CPA—and at worst, you can go on the internet and glean information. If the internet is your ‘go-to’ source, go cautiously here, however, for not everything on the internet is accurate and you can get into a great deal of trouble by following some of these ‘advisors’.
If you find, upon doing your year-end planning, that mistakes have been made, consult Jeff Fouts, Tax Attorney, for advice on how to correct your problems right now. Problems only grow when ignored, so you will benefit from aggressively correcting any misdeed that might be in your tax records.