Proper Financial Record Keeping and Bookkeeping

Well organized records will make it easier to prepare your tax return and will help you answer questions if your return is selected for examination (the dreaded IRS audit), or if you are billed for additional tax.

Keeping Records

Records such as receipts, canceled checks, and other documents that support an item of income or a deduction appearing on your return should be kept until the statute of limitations expires for that return. Usually this is three years from the date the return was due or filed, or two years from the date the tax was paid, whichever is later. There is no statute of limitations when a return is fraudulent (you would never do that) or when no return is filed.

You should keep some records indefinitely, such as property records. You may need them to prove the amount of gain or loss if the property is sold. Generally, income tax returns should be kept for three years. They could help you prepare future tax returns or amend a return. For more information on record keeping requirements for individuals, see IRS Publication 552, Record Keeping for Individuals.

There is no specific method of bookkeeping you must use if you have a business. However, you must use a method that clearly reflects your income and expenses and the records should substantiate your expenses.

The documentation you should keep for each of these expenses can be found in IRS Publication 583, Starting a Business and Keeping Records, and IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Software for Bookkeeping

The most popular software packages for bookkeeping are Quicken, Quickbooks, Quickbooks Pro, and Microsoft Money. If your finances are relatively simple, Quicken or Microsoft Money will work for you. If you need to track cost of goods sold or have subcontractors, Quickbooks has more advanced features. If you have payroll, you'll need Quickbooks Pro. Most of these packages now offer online banking via the Internet.

Getting Help with Bookkeeping

If you would rather swim through nuclear waste than deal with keeping books, consider hiring a bookkeeper, accountant, enrolled agent, or CPA to help you. The differences between these professionals is generally one of education, not necessarily ability. Anyone can call himself or herself a bookkeeper and no education is required, just experience (you hope). An accountant generally has a bachelor's degree in accounting or finance. An enrolled agent is someone who has taken an IRS test and has the ability to prepare tax returns. No education beyond a high school diploma is required. A CPA has a college degree and has passed a pretty difficult test. A CPA also must meet a continuing education requirement each year to keep the license. The more education and qualifications the person has, the higher the fee.

Decide what your comfort level is and how much you are willing to pay someone. Then make sure to obtain references and get a clear understanding of what the person will do to help you. If you are in business for yourself, it is a good idea to get someone else to prepare your tax return. It is hard to edit your own work when you write. It is similarly hard to check your own bookkeeping. A fresh pair of eyes and an objective mind can be beneficial at tax time.

Read the next article in the series, How to Lower Your Income Tax If You Are Self-Employed.

Source: http://www.stcsig.org/cic/OnlineBook/c17intro.htm