Keeping Accurate Tax Records in California
It may sound simple, but one of the best and most effective things you can do to protect your company from an IRS audit is to keep accurate business records. I’ve heard from so many San Francisco business owners who could have avoided complicated audits or inquiries if their records and receipts were organized from the beginning. Let’s look at tips to help you maintain accurate and complete tax records in order to avoid IRS and CDTFA scrutiny in California.
Keep up with your expenses. Always record your expenses at the time you incur and pay for them. It’s so easy to think that you’ll organize receipts and expenses later. Make it a habit to record them at the time of purchase, or block time on your calendar each week to record expenses.
Use accounting software to help organize records. There are so many great software programs such as QuickBooks and TurboTax that can help you track financial transactions. Using these programs regularly will save you so much time and trouble when you need to access the information quickly.
Track deductions and credits. Using accounting software will also help you track your expenses to make sure they are properly deducted. This includes home office expenses, mileage, charitable donations, and more.
Maintain business records to protect from the CDTFA. As important as it is to keep accurate tax records for the IRS, you also need to do this to comply with the CDTFA. At any point, a CDTFA representative may ask to verify the accuracy of sales and use tax returns, or determine if tax is due if a return has not been filed. Failure to maintain accurate records may be considered negligence and you may incur penalties.
Make sure you are keeping the following records: your general books of account; documents of original entry (e.g., bills, receipts, invoices, job orders, contracts) supporting the entries in the books of account; and all schedules or working papers used to prepare your tax returns.
Report all income. Make sure you report all sources of income, including cash payments and side businesses, to avoid discrepancies with IRS records. If you are self-employed, make sure you keep a record of the self-employment tax that you are paying.
Keep business and personal finances separate. This is especially true if you are self-employed or own a small business or side hustle. The best way to keep accurate business records is to have separate bank accounts, credit cards and files. Doing this assures you do not commingle your accounts and accidentally report inaccurate information.
Retain resale or exemption certificates. For business owners who sell products, make sure you are keeping any certificates that document claimed nontaxable sales. If you do not keep these records, you may be liable for the tax, including penalty and interest, if you cannot otherwise prove a sale was not subject to tax.
Keep a paper file of all your IRS tax documents. This may sound like a no-brainer, but keep a paper file of all tax-related documents. This includes W-2s, 1099s and past tax returns. Keep these documents up to seven years in case the IRS decides to ask for them. organized and accessible for at least three to seven years, as required by the IRS.
Work with an experienced tax professional. As a business owner, you have so many tasks and critical things to organize. Let an experienced tax attorney or professional handle your tax issues and records. These individuals have experience working with the IRS and CDTFA. Let them work for you in those matters.
Take a few extra hours each month to organize your records and follow these tips. Doing so will help reduce the risk of IRS scrutiny and maintain compliance with tax regulations in California. Always consult with an experienced San Francisco tax attorney or professional. We can always tell you to make sure accuracy is always front and center of your business.
Allison Soares is a partner and tax attorney at Vanst Law LLP. It doesn’t matter the issue: audits, collections, appeals, international disclosures, grumpy people— Allison enjoys fixing problems. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits from San Francisco to San Diego.
