Record Keeping & 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.
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.