“We don’t see things as they are, we see things as we are” – a Talmudic saying attributed to Rabbi Shemuel ben Nachmani who lived 1600 years ago.
I read an online discussion thread last night among accountants describing a series of talks they are having this week with some of their small business clients. Some describe these as “come to Jesus moments”. By the way, that “come to Jesus moment” reference was picked by Forbes as the most annoying phrase in the business world in a 2013 article. Annoying or not, it gets the point across. In this context, accountants are discussing the problems, stress and increased financial risks of small businesses that are not up-to-speed on their accounting and compliance. The problem typically reaches crisis level leading up to the September 15 extended tax filing deadline and now is the time to put an end to the madness. Some small business owners live in a sense of altered mentality that they can avoid problems and dodge tax problems indefinitely. This errant thinking is almost always corrected when they receive an audit notice; something that happens with increasing frequency in this age of tax compliance automation.
Small business accounting in 2016 should be an easy and painless task. A wide range of fantastic, easy-to-use and inexpensive automated accounting tools is available to anyone. Yet some businesses choose to avoid them. Several of my own clients still rely on piles of bank and credit cards statements to compile tax filings. Now that the September 15 business tax filing deadline has passed, some clients need to hear from their accountants that the unnecessary level of risk should not be tolerated next year.
Prices have dropped. I recently wrote a blog post that flawless, reliable, automated small business payroll systems are available starting at $15 per week from some of the nation’s best service providers. The best small business accounting programs are offered at around $20 per month. These prices are significantly lower than what was offered in the past and the services are quite a bit better due to ever-evolving technology.
“There is no law that says that I have to use QuickBooks”. True. There are 300 other great small business accounting platforms. Pick one. It just so happens that 3 out of 4, or about 30 million small businesses, choose QuickBooks. The wholesale cost is only $5 per month so it is less expensive than other options even with accountant’s oversight, I’m not singling out this software for the purpose of endorsing them, rather just reflecting on the trend. There is certainly strength in numbers and this market share draws the largest share of add-on software integration and professional level support services. To draw the contrast, however, I can say that every one of my small businesses that does not use some type of automated accounting system has tax problems. It simply is not realistic to believe that you can avoid compliance problems in today’s climate without strong software support.
The cost of poor accounting is more than the cost of good professional accounting. I hear some small businesses balk at the minimal cost of good professional bookkeeping; something typically in the range of $250 per month for small firms. Yet these same small businesses almost invariably spend more in the long-term to resolve tax compliance issues. One self-employed client declined to subscribe to a simple $250 per month accounting service and recently wrote checks totaling more than $10,000 for accounting and tax attorney to resolve what should have been a routine accounting issue but not involves almost $50,000 of taxes and penalties.
Manual account reconciliation is absurd. I am now working with a handful of nonprofit organizations with cash management problems. It’s not that anyone is absconding with the money but rather that they simply don’t choose to reconcile their accounts regularly; at least not within one comprehensive accounting system. At a minimum, this raises risks for the board members relying on periodic reports. At its worst, it can lead to an embarrassment, like the Trump Foundation’s story that is currently drawing unwanted attention. This is an easily automated task that significantly cuts the risk of errors or misstatements.
Audit risk is higher. Despite what we read about the IRS being understaffed, the risk of audit is high in some types of small business mess-ups. More importantly, the cost and risk level associated with defending those audits is higher than ever. We are dealing with leaner, meaner tax auditors in a process that is not meant to assist taxpayers without automated accounting. It may not be fair or legal, but that’s what I see in real-life tax examinations. Those without electronic files are getting screwed by the process.
Tax audit procedures are changing. It’s no longer adequate to simply be “honest” in your tax reporting. It’s no longer effective to have “proof” of your transaction. The reporting and the evidence must be in the format that matches the tax authority’s systems or else you are simply asking for trouble. I have one case where the IRS auditor says that he won’t take the time to look at a small firm’s 1,700 pages of printed transactional information that is not available in a QuickBooks file linked to bank transactions. It is completely unfair to the taxpayer, but IRS is denying the correct tax treatment on these transactions.
So the sermon here should be clear: if your accounting isn’t up to par, there is no excuse. Now is the time to correct the problem before it really hurts you and your family and undermines the small business that you worked so hard to build. Salvation is available for the asking.