The allure of software for completely in-house bookkeeping and tax return preparation is a constant temptation to small-business owners.
Unfortunately, the odds are against a mere software purchase achieving financial paradise.
Bookkeeping software is only as reliable as the input. A substantial number of business owners don’t understand double-entry bookkeeping.
Likewise, tax preparation software helps prepare accurate tax returns only when the input correctly follows tax rules.
Tax software doesn’t know what expenses a business incurred. It cannot judge whether eligible expenses are entered in the correct categories. Tax specialists are valued because of their knowledge, especially regarding complex matters for businesses.
Working with accounting professionals is almost always the right strategy for business owners. But tax accountants and bookkeeping services may not automatically convey all details about the nature of your relationship with them. So, you have to inquire about these issues.
Following are four things to ask your accountant:
1. Ask your accountant what substantiation you need for certain tax deductions. Some items require distinctive supporting documents. For example, reimbursements for business use of a personal vehicle necessitate a mileage log with specific details. Also, large payments to contract labor demand that the business issue a Form 1099 to each worker. You also need to know how much of your documentation you need to provide for preparation of tax returns or financial statements.
2. Ask if your accountant will notify you of any questionable matters on a tax return. For example, an expense category for utilities without any office rent is a likely error. Utilities for a home office are a separate matter from ordinary business expenses. Make sure that your accountant identifies situations where the basis for a deduction seems unsound.
3. Find out what privileged disclosure is available with your accountant. A limited privilege is available with certified professional accountants and other tax practitioners authorized by the Internal Revenue Service (IRS). This is not the same as privileged disclosures with attorneys, which are a fully protected right of common law. Privileged disclosure is important because it affects the facts you are willing to present in order to obtain advice. Accountants can assert privilege only in civil matters brought before the IRS or federal courts. It does not apply to criminal proceedings, state taxes, preparation of tax returns or civil proceedings that involve tax shelters. Be sure to identify the professional credentials possessed by the individuals with whom you communicate about your taxes.
4. Ask your accountant about who is actually preparing your tax return. At firms with large staffs, your tax return is likely delegated to young associates or even a temporary employee. This is not necessarily bad, but you should find out. As long as your accountant is signing the tax return, you can rest assured that the signer is at least reviewing any preparation work by someone else. Make sure that your accountant is responsible for any mistakes in reporting figures you accurately present.