It’s late March and the stresses of tax season are pelting you like hail. Return after return after return, 16-hour days, coffee in quantities that make your heart pound like electronic dance music. For CPAs, tax season is torture on levels that would impress a James Bond villain. You’re likely here for a mental recharge, so let’s take a few minutes to discuss mistakes that could make tax season even worse.
I’m under no illusion – if you’re an AccountingWEB reader, you know the fundamentals. I don’t pretend to know of cardinal tax mistakes that you’ve never heard of. However, it’s those simple errors that doom accountants to unpleasant conversations with tax regulators, much like those silly mistakes that seemed to plague every high-school math exam. In the worst case, errors can trigger malpractice suits. Whether you’re a CPA or a PGA golfer, it pays to go back to basics.
With Tax Day on April 18 this year, perhaps you have a plane booked to Hawaii or another tropical paradise on April 19. If you want to come home without a surprise snafu, beware of these three mistakes.
1. Do not mix up your accrual rules. Tax 101 always distinguishes between tax avoidance (OK) and tax evasion (illegal). In the eyes of a tax agency, inconsistent accrual rules can land you in that gray zone between the two.
Businesses use one of a few different accounting methods for recognizing revenue. Some will list income as soon as they generate an invoice. Some will recognize revenue once a credit card is authorized. Others will wait until an order ships.
While the differences seem academic, remember that inconsistent accrual rules can shift the numbers on a tax return. If a customer places an order on March 31, the credit card is authorized on April 15, and the item ships on May 2, revenue recognition rules affect the March, April, or May tax returns. The same situation on Dec. 31 will change annual revenue.
So, be consistent. No one methodology is superior, but you can’t change revenue recognition rules from one month to another or from one state to another. Particularly if your different clients apply different revenue recognition rules, be vigilant about calculating revenue and taxes correctly for each company.
2. Do not conflate deductions with tax groups. CPAs sometimes take shortcuts, especially when work is piled high. Whatever shortcuts you take, if your client (or company) sells to an exempt entity, do not group it as sale of a nontaxable item, or vice versa.
Sure, in terms of what you owe tax collectors, the outcome is the same. Exempt sales and nontaxable items both eliminate the obligation of sales tax. However, your client (or company) might combine all nontaxable sales together under one roof, even though each exemption requires different support. The sale to an exempt buyer requires an exemption certificate, while the sale of an exempt item requires an invoice describing the specific item.
Even if your client made a mess out of exemptions and nontaxable goods, take the time to fix it. Without supporting documentation for each transaction, your client will be on the hook for uncollected taxes. Just think of Hawaii as you clean up the mess.
3. Do not let carelessness take you down. You might have to file dozens of returns for dozens of clients. You have to file the correct return, with the correct tax payment, for the right client, with the proper tax agency. But in the push toward April 18, things will go wrong without processes and redundancies to save you.
I’ve seen cases where an accountant mailed returns for different tax agencies in the same envelope. In one case, the tax agency notified the accountant and forwarded the different returns to the right agencies. In another case, they returned the envelope without explanation (all returns were then deemed late). And in yet another case, that still amazes me, the agency trashed the returns and denied receiving them. The outcome of mistakes all depends on who receives the mail and what mood they’re in.
To prevent these snafus, first and foremost, take regular breaks. By reading this article you’re accomplishing that. If you want to be really CPA-ish about your breaks, work in 52- minute intervals with 17-minute breaks. Apparently, that is what the most productive people do.
More importantly, have checkers verify your calculations and others who confirm what goes into which envelope. Just as a newspaper without fact-checkers will eventually publish false and inaccurate stories, an accountant without backup eyes will inevitably mess up.
Back to the Grind
Refreshed on some of the mistakes that commonly buck CPAs, it’s time to get back on the saddle (after your 17-minute break is over). Although the work pile is ominous, give yourself a moment to slow down and smell the coffee fumes. If work is as crazy as I suspect, that means there is demand for the work you do. Be grateful for that, and starting on April 19, enjoy the tropical beach.