REAL LIFE WITH TAXMAMA.
(A new series of real-life experiences.)by Eva Rosenberg
Moderator, HelpDesk, WebReview.
Time's Running Out... for Corporations.Very soon, it will be September 15th. That's the final due date for corporations with December 31st year ends. That applies to many of you. There are no more extensions, so the pressure on your tax professional - and you - is particularly intense.
Why haven't we finished your returns yet? Clients seem to be mystified about the delay in getting their returns done. Actually, responsible, ethical folks, like me <g> have been working feverishly to get everything done. (There are some tax pros that are slovenly and just leave everything to the last minute. I hear about them frequently. But most aren't like that.) Generally, though, we are often waiting for information from our clients. And waiting. And waiting. And waiting...
Do you want to look at specifics? Let's look at my current work load. See how these cases apply to your business habits.
In going over my checklists, I find that I have completed most of the corporate returns by July. I have only a few returns left to finish. (I will not use real names.)
Case 1: The Consulting CorporationAll the accounting and data input has been done for months. It shows a loss of over $30,000. The owner insists there was no income in that corporation in 1997. All he did was pay the outstanding bills in 1997 using money that was received at the end of 1996. He claims that he didn't remember lending the company any money.
This makes no sense - why?
a) The bank balance on the prior year tax return is nowhere near enough to cover the bills paid out in 1997. (It's over $25,000 short.)
b) If he had received a big chunk of money at the end of 1996, I would have instructed him to issue all those checks in December so we could deduct the expenses in the same year the money was received - why pay corporate taxes in one year only to show an non-deductible loss in the next year? So he must have received another check in 1997.
c) None of the checks bounced, so the money had to come from somewhere - either the 1996 balance was wrong or he would have evidence of a check from him or a credit card advance that was deposited into the corporation.
He has never given me the bank statements so I can reconcile them and see what the situation really was. If he had, I'd be done by now.
I can't complete the corporate return because I don't know if there was $25,000 or more worth of 1996 billings that he received in January of 1997 - and I can't do a return that is that far wrong as to profit. A $30,000 error is not ‘de minimis.'
Have you been disregarding your tax professional's entreaties for data?
Moral: When your tax pro calls - don't procrastinate.
Case 2: The Production CompanyAh, this is a tough one. But it's typical of small businesses.
The bookkeeper left mid-year, due to unavoidable circumstances. In the meantime, the company incorporated and the separation between the proprietorship and the corporate income and expenses was not very clear-cut. The old bookkeeper made some major errors on the payroll tax filings before she left, miscoding taxes and causing the IRS to issue some sizable invoices for taxes that weren't really due. (We just got a check from the IRS refunding nearly $3,000 of these penalties.)
Sometime before the end of the year, a payroll service came on board. When the year end numbers are all reconciled to payroll and sales tax returns, there was a $40,000 discrepancy. The client provided all the records in order to research the problem about a month ago. But, trying to identify an error in the payroll entries between two companies and hundreds of transactions is time and thought- consuming. It's the kind of thing you need to do on several days without interruptions - those are hard to come by. We've found over $26,000. Now, we need to identify the last $14,000 worth. Once again, the difference is too large to just make a journal entry and ignore it.
Moral: Don't hire friends or people to whom you have emotional attachments to do your books. Make sure you have someone who is trained and competent. Errors can be very costly!
Case 3: The Marketing CompanyThis is a terrific business. The company creates advertising pieces for certain professionals and handles their sales, billings and collections. All the pros have to do is work. My client's earnings are a percentage of the professionals' income. Clever!
Well, we got the records and bank statements - at least most of them. It took months to get all the missing bank statements. But we got them. So, what's holding us up? All the expenses are already entered - and all the bank accounts are reconciled. But, I don't know how much income they received.
Why can't I just take all the bank statements and add up the deposits and say that's the income? Well, I could, if we weren't ethical. But we are, so...we also have to report the cash.
Dealing with cash is often a serious problem for business owners. Why?
First, it's very tempting not to report it - any many don't.
Second, since it often gets spent before the owner gets back to the office, it's often difficult to reconstruct how much was received.
Third - For some, it's not cash income, but cash from deposits that creates a problem..
When they make deposits in person, they take "less cash" from the deposit coupon. If they use the method of adding up all the deposits on the bank statement to determine their income, they often report substantially less than they actually earned. (I had one client whose wife was in the habit of making the deposits less cash - and the IRS caught him shorting his income to the tune of $100,000! We didn't know she was doing that at the time. We learned it when the IRS showed us their microfilm copies of the deposit receipts, but I'm careful to never let that happen to anyone again)
In this case, the owner likes to use his own method for recording income. He enters everything into a word processing template that lists all the money he's received. Sort of. Some of the time, when he receives cash, he pays it directly to the professional. Sometimes, the professional receives it himself and my client has to record it in the accounts receivable records, but it doesn't belong in his books. Other times, the cash is used to pay printing or advertising bills and doesn't get into the bank. There are no totals, just lists of names and dollar amounts, some with notes next to them. So, I need some serious, uninterrupted time to figure out how much cash was actually received.
Moral: Try to use a conventional accounting method, instead of jury-rigging a personal system. It will make everyone's life so much easier.
But, TaxMama's clients are always right. So, she just sighs and does what she must to get things to work out for them. And then cheerfully sends them the bill :-)Conclusion: You can save yourself lots of time, stress and accounting fees by simply following your tax professional's instructions. Or you can just pay us lots of money to fix it for you!
