Tax attorneys routinely encounter the consequences of inadequate recordkeeping. This can look like audits prompted by disorganized financial data, excess tax payments due to overlooked deductions, and IRS complications that could have been avoided. January presents an ideal time for small business owners to initiate a comprehensive bookkeeping cleanup. View it as a financial reset; this process can help prevent costly issues and generate significant tax savings.
Why Start the Year With a Bookkeeping Cleanup?
Avoid Audit Red Flags
Messy or incomplete records are one of the most common triggers for IRS audits. A clean set of books reduces your chances of raising red flags, like inconsistent income reporting or excessive deductions in questionable categories.
Set the Stage for Accurate Tax Estimates
Accurate quarterly estimated taxes depend on reliable financial data. When your books are in order from the start, and you can compare to safe harbor tax payments, you’re less likely to underpay (and get penalized) or overpay (and lose cash flow).
Improve Business Analysis and Planning
Clean books provide a clear snapshot of how your business is performing. With better data, you can make smarter decisions about pricing, hiring, marketing, and more.
What Tax Attorneys Want You to Check Right Now:
1. Reconcile All Bank and Credit Card Accounts
Make sure all transactions for the previous year match your bank and credit card statements. This step alone catches a surprising number of errors.
2. Separate Personal and Business Expenses
Even if you’re a sole proprietor, it’s critical to keep personal and business finances distinct. Comingling funds can undermine deductions and complicate audits.
3. Double-Check Expense Categories
The IRS scrutinizes certain categories, including meal and travel deductions. Ensure these expenses are properly categorized and thoroughly documented.
4. Ensure Income is Fully Recorded
Your reported income should match any 1099s you receive and payment processor reports (like PayPal or Stripe). Any discrepancy can trigger IRS questions.
5. Verify Payroll and Year-End Filings
Check that W-2s and 1099-NECs were filed accurately and on time. Errors here can lead to penalties and upset employees or contractors.
6. Review Unpaid Invoices and Bad Debts
Now’s the time to write off uncollectible debts, but only if you have the proper documentation.
Bonus Attorney Tips:
- Save Your Receipts: Keep proof for every deduction. Digital copies are acceptable, but make sure they’re legible and organized.
- Set Up a 2025 Tax Folder: Create a secure digital space where you drop receipts, invoices, and key documents throughout the year. Future-you will thank you.
- Talk to Your Tax Pro Before Tax Day: If you had any major changes last year (buying equipment, hiring staff, moving states), don’t wait until tax day. A quick check-in can prevent costly surprises.
In short, the new year is your golden opportunity to start strong and stay compliant. Your books don’t have to be perfect, but they need to be accurate, consistent, and ready for whatever the IRS or your future business decisions may require. Having an experienced tax attorney, like G. Deffenbaugh, will make things much easier. If you are in the Centennial, CO area, contact him today to get started!