Garbage In – Garbage Out, Bookkeeping!!!
You may have a great bookkeeper who is entering all business transactions to your QuickBooks file and even able to easily reconcile everything with your bank account transactions. Does it mean that your Profit and Loss and Balance Sheet statements are accurate for tax purposes? Is a great bookkeeper considered to be an accountant? Is your tax preparer check your bookkeeper’s work before he uses your financial statements to preparer your taxes?
A real-life example to further describe this situation is my experience from about 6 years ago. At that time, I have been witnessed to how property loans not been recorded, and the entire monthly mortgage payments been categorized as business expense for rental properties for years. This error resulted in overstating business expenses, understating liability and assets on balance sheet. If tax preparer will not catch this error and will end up filing tax return as stated by the bookkeeper, taxable amount will be understated, and a big red flag will be raised by the tax agencies. From this point, tax bill will be expected to increase by bunch of different penalties and interest after a tax examination have been conducted.
That was just one example of entering transaction in the wrong category. But there are many other examples that can overstate or understate your taxable income amount. Other examples may be related to credit card payments, or shareholders distributions and contributions, shareholders loans, transfer funds among different entities, and more. A bookkeeper that is not an accountant often categorize transactions that related to loans, or assets, or owner’s equity as expenses, because he/she are simply not familiar with GAAP (Generally Accepted Accounting Principles) related to other account types.
Additional example that I have seen in many businesses using progress invoicing is recording duplicate income without knowing. Duplicate income result in overstated taxable income and tax liability. This situation happens when a client pays one invoice with multiple payments. The duplication in income may occur in two different ways. One, when client’s payment recorded as a sales receipt instead of applying payment to the open invoice, and invoice then been adjusted at a later time to be closed. Second way, is when a deposit is not been recorded in within the bookkeeping software, but instead recorded from the bank as a new transaction for reconciliation purposes. In both cases, income gets to be duplicate and results in overstating tax liability.
To have a good accounting system for your company, you may want to choose one of these two options: 1. Company bookkeeper should be also an accountant and practice GAAP. In that case, you can assure that company financial statements are accurate for tax preparation. Or, 2. Your accountant is both your bookkeeper and your tax preparer.
If your business higher one party to be responsible on your bookkeeping, financial statements, and tax preparation, your business will probably have the lowest chance for tax audit and will be ultimately safe from the government in case of tax audit.
Moreover, even if your business been selected for a tax audit, your business, will have one accountable party responsible to resolve the audit issue efficiently, successfully, and this service might even be free, if accountant takes the responsibility to his work.
Certified tax preparer, who only prepare your tax returns, may have one of five different license options. However, none of them will not take responsibility to your bookkeeping or your financial statements if other party prepared them. In most cases, your tax preparer will file your taxes based on the financial statements that your bookkeeper provided him. But since he wasn’t the one to prepare your financial statements, he will not take any responsibility on the categorization accuracy and the numbers and will have you sign a disclosure releasing him/her from financial accuracy responsibility.
Based on the above, business owners, files both business and personal tax returns, may want to consider what would be the best efficient way for them to manage their accounting system. The cost for managing the accounting department correctly, might seem to be higher this way. However, for the long run they might be saving thousands of dollars, stress, and have peace of mind knowingly they are in good hands of one professional party, who responsible to all company accounting aspects from start to end.
It’s important to understand the differences among the five licensed professionals who authorized to prepare and file tax returns. This information may help you to choose the right professional to take full responsibility to your accounting department.
1. CTEC (California Tax Education Council): California law requires anyone who is physically in California and prepares (or assists with) tax returns for a fee, and is not an attorney, certified public accountant (CPA) or enrolled agent (EA), to register as a tax preparer with CTEC. This licensed person cannot represent taxpayers before the Internal Revenue Service, and may or may not have bookkeeping experience.
2. Accountant: An accountant (must also have CTEC certification) is typically a professional who has earned a bachelor's degree in accounting but obtained no governmental license. Accountant may or may not have bookkeeping experience.
3. Enrolled Agent (EA): EAs are federally-licensed tax professionals who specialize in tax preparation and have unlimited rights to represent taxpayers before the Internal Revenue Service and state agencies. EA familiar with federal tax rules, some of them specialized in resolving IRS tax issues, and efficient in filing federal tax returns. Some of them may be very helpful in tax planning.
4. Tax Lawyer: Any attorney, not just a tax attorney, can prepare your tax return; however, most attorneys only handle legal and criminal issues. A tax attorney has unlimited representation rights to assist clients in tax court or before the IRS. They will most likely not going to do your bookkeeping.
5. Certified Tax Accounting (CPA): A Certified Public Accountant, is a professional who has earned their CPA license by the state and through a combination of education, experience and examination. He would be specialized in state tax law, and most likely will not do your bookkeeping.