After I posted my August Tax hints, a PNC (potential new client) called us up with this query. (Please note I have changed certain facts in case you know the person or the issue. The substance is correct.)
Person: I have been thinking of starting a new business for years. Now, I am ready, and I was referred to you by BB&T (a bank with whom we have very good relations; the other ones include a few local DC banks- Virginia Commerce Bank and Burke & Herbert). Then, I saw your blog and decided to proceed.
I guess I should tell you that I haven’t filed my tax returns for a few years.
Me: Why not? Person: Well, I had every intention to do so, but the paperwork was overwhelming.
Me: And, you didn’t get help? Person: Well, I went to someone and he never finished the job.
Me: Was he a professional? Person: I think so…
In any event, the issue is as follows. Person no longer has his records. Now, he wants to recreate his business expenses for those prior years.
The problem- YOU CAN’T!!!!! The IRS requires all vehicle, entertainment, and travel expenses to be documented on a “timely” basis. You have to love the word “timely”- it says everything and says nothing at the same time. The point is that the IRS considers “timely” to be within a week or so of the expenditure.
The only out is if one has evidence to corroborate the expenditures. Now, if you presented a paper at a conference, that might work. But, who you took out for entertainment- that’s probably a lot tougher. And, your mileage over the course of a year, tougher still.
Oh, and let’s not forget that the IRS is probably looking for you by now. And, if there are plenty of expenses you plan to list on the return, you can expect that paper audit I mentioned, because the IRS knows when there’s blood in the water… they can smell the fact that you probably lack the documentation they want.
Trust me, I already have a client who thinks paying us on a monthly basis to keep his business expenses and records is too expensive. (I won’t even tell you how low a bid we gave him, just because we knew what would happen.) And, you guessed it- he was chosen for an audit (he also was late filing for the first two or so years, before he began having us do his tax preparations). And, basically threw out all his deductions because he lacked the timely documentation.
So please, file your tax returns on time. (Our rates really are very reasonable- and we really know what we are doing. We want to work with you to insure you pay the lowest amount required by law.) Especially, if you don’t owe money. And, if you wait long enough (3 years), you will never get credit for or refund of any overpayment(s). But, I am sure Congress will thank you for your donation against the debt. And, if you owe money- then there’s penalties and interest you will be contributing to lower our national debt.
Loved the ending! I lowered the debt twice this year alone.
Um, Marie:
I guess i should thank you.
Let’s hope you don’t fill the wishing well again this year!
Roy
Great blog, Roy! I’m always making sure my clients are up to date on everything by the end of each month…that way we aren’t having to go back to check things around tax time, but you always find those that wait or don’t want to deal with it. UGH! Makes it so hard on us and them for they have to remember this or that.
Keep up providing the great advice and work, Leona.
You are saving your clients mountains of grief!
Roy
Yikes! I’m so glad I’m not him! You give sound advice and I hope people will listen sooner rather than later! ~ Suerae
Suerae:
It’s folks like that who teach us valuable lessons. It reminds me of a saying I learned years ago when I lived in the “deeper” South….
“Better call your brother. He ain’t never seen a wreck like this one…”
Thanks for your comments.
Roy
And I was just complaining about the local IRS…
If I were to open a business in the US, I would surely ask for your help. Not very interesting in contributing to lower US national debt at the moment.
Gustavo:
With very few exceptions, everyone’s IRS is on the beholders “It list”.
Don’t feel left out!
Roy
Satisfying a tax department always requires sensible paper trails. Too bad most people still fail to understand this
Roberta-
Computer trails are also appropriate. (BTW, if one uses QuickBooks, they should start a NEW data file each year. The IRS has been requesting the data file- and if you have previous years, they are permitted to examine them, as well. Larger companies use proprietary programs which the IRS does not have, so it’s not an issue for them.)
Roy
Hi Roy,
Great post. Ok, so I admit, I hate filing taxes, expecially if I own the IRS but I do them faithfully each year. Those who procrastinate are not only hurting themselves but are hurting their future opportunities.
Thanks for sharing this Roy. It’s very helpful.
Cindy
Glad to help, Cindy.
My take on taxes is like playing Scrabble- it’s a game with limited options. The trick is to get the most points and finish the game early.
Of course, you may not want to play Scrabble with me, either…
Roy
Ah…if we could only put our head in the sand when it comes to this part of life…but as with all other areas, responsibility is key…and it is ours. Yes to hiring professionals. Yes to keeping good records. If it feels painful now…waiting is only going to turn a small headache (tracking expenses) into a migraine or worse! Good reminder, Roy and so good to know there are credible tax experts like you around who charge reasonably. The potential client was at least smart enough to see by your writing you know what you’re talking about!
Tambre:
To some degree the system is rigged. Like in Las Vegas, where the odds are always against you- even when you win, there’s a cut the house takes- the same applies to the IRS.
The definition of “timely” is a case in point. Who says that means within a day or two? (OK, i know the IRS does, but really!)
The trick is go keep your records in order, file your taxes, and be done with the burden. That way you get to keep more of your own money (no penalties, no interest).
Roy
Great real life example of how we hate to do the things we know we hate to have to do!
I took some comfort from the fact that yes I have indeed gone to an accountant for the past 4 years, even if its taken me months to prepare all the info at home. I’m sorry to say my receipts are in a drawer 🙁
I have learned a lot about resistance and am now freeing myself from its clutches and getting a bookeeper in soon.
Maureen:
There are devices and programs nowadays that can take your receipts, scan them in to an accounting program, and you just have to classify them. You should look into these to help your busienss sing!
Roy
Can’t imagine not doing my taxes or even not keeping copies. I have wicker baskets above a closet alcove that holds my 7 years worth. Every new year we pull the 8th year of taxes and shred it. Its not worth the pain and agony you would have to spend with the IRS.
We have a local CPA (for the last 10 yrs now) that we love. And when you hire a professional, they learn about you and your business and can actually be very helpful in letting you know the laws, especially since they are changing all the time. So thanks Roy for a wonderful reminder that it is better to pay your CPA than the IRS!!!
The second paragraph that Lynn provides is a critical piece of information! And, if your professional is more than an accountant, one who understands business and management, then you can be provided with warnings, advice, and recommendations to make the current and future years even more profitable.
Thanks for your comments, Lynn!
Roy
Hi Roy,
I also hate these kinds of obligations. Not that I don’t want to pay but its the process that disappoints me. Thankfully I’m the type who wants to get things done immediately. I think its fine to help the US lower its debt but I’d rather choose to donate to some charitable institutions instead. ^^
Vie:
I agree. We should all pay the MINIMUM tax required by law. Paying late is not a good option- it costs more and ups your chances for additional scrutiny. Not filing is really never the way to approach anything.
Thanks for your comments and, especially, for dropping in. Please visit again soon!
Roy