I received an email from the Internal Revenue Service giving their tax tips. The top of the list was “start a filing system” to keep and organize your receipts and records. Rarely do I find myself in such complete agreement with the IRS. One of the best things that most tax payers can do is start a record keeping system. One of the things that absolutely amazes me when I sit down to do taxes with my clients is the dreadful state of some of their record keeping. It should not be the tax preparer’s job to tell taxpayers what they have spent money on in the course of the year. Business people should know what they have spent on their business. Landlords should know what they have spent on their rental property. Everyone should know what charitable contributions they have made. Yet I find, with some consistency, that my clients do not really know. I need to sit down with them and go step by step to find what they have spent money on. The good news is that most people know their big ticket items. For example, what homeowners spend on their mortgage or what businesses spend on rent and payroll are items that are well known to my clients. Let me give a very simple example of a problem that I encounter. Last year, we prepared tax forms for a couple hundred landlords. Not one of them – not a single one – advised me that they spent money on batteries for the smoke detectors. However, I know that every single one of those landlords changed the batteries in the smoke detectors. It is a small thing, but small things add up. Some things seem small, but are not. For example, it snowed recently and my wife instructed the maintenance man to buy some bags of salt and give them to the tenants. My wife was shocked when the maintenance man handed her a receipt for roughly a hundred dollars for six bags of salt.
My staff sometimes gets irritated with me because I am such a stickler about how we use stationary in my office. We actually have “good letterhead” which we use when writing to courts, other lawyers, IRS, DOR, clients, Trustees and insurance companies, and “cheap letterhead” which we use when requesting medical bills, medical records, wage statements, when writing to debt collectors, vendors or to other people who I am not trying to impress. My staff thinks that I am being petty and small. However, when reviewing my records several years ago, I realized that I was spending ten-thousand dollars a year on stationary, most of it unnecessary. That is a very easy expense to reduce, so I reduced it. But I would not have even realized it if I were not so scrupulous, some might say anal, about keeping financial records. That raises a very basic point. I am aware that payroll is by far my largest expenditure, but it is not my only expenditure. In fact, many people could live quite comfortably on what I spend on miscellaneous office expenses, for what I spend on “supplies”, and especially for the miscellaneous expenses associated with individual cases such as filing fees, medical record fees, deposition transcripts and the like. In fact, before we started emailing our correspondence with the insurance companies and other lawyers and started e-filing documents with various federal agencies and Courts, postage expenses were a significant line item, and still account for a few thousand dollars a year. My point being, there are a lot of expenses that are not major items, but do add up. It is useful, as a person managing a business or managing a rental property, to have a handle on these expenses and do what can be done to reduce and manage them. At tax time, it is absolutely essential that you know what these expenses are. Between federal income tax, state income tax, self-employment tax, tax surcharges and some of the tricky little things that the government does now to take away personal exemptions and itemized deductions and whatnot, a successful self-employed person could find themselves paying a 50% marginal rate of tax or more if they are not careful. On top of that, if they are paying that tax on money they have spent, then it is not long before a lot of little things add up not only to major expenses, but large tax payments on income that never existed. This is why I do not mind spending time with my clients trying to help them to reconstruct what they spent money on in their businesses or on their properties or through their charitable contributions throughout the course of the year. However, there is only so much that I can do after the fact. This is why I offer my services and my firm as a vehicle for helping people to organize their financial records better so that they can have a better tax season going forward. Also, in the process of getting organized, it becomes possible to manage a business better.
In my next installment of this blog discussion, I will write about a client of mine whose record keeping, was such a mess, he wound up hiring me to do his bankruptcy, as well as to do several years of back tax filings, personal and corporate. We have changed all of his financial practices and my office is handling his book keeping. Now, not only will his tax filing be easier and more accurate, but because he understands his costs, he is actually making money!
In the third installment of this blog, I will write about my record keeping practices. Because my personal finances are complicated, some of the things I do, such as keep separate bank accounts and credit cards for every entity my wife and I control or invest in may seem a little “over the top” to many people, but may make sense to some. That I keep a shoe box in my office in which I throw small receipts, is a simple solution to a problem most tax payers have.