Scenario: You are a busy small business owner. Business has been busy. As a result, you have fallen seriously behind on your accounts. You feel the stress! Work has been overwhelming! Your friendly tax authority is talking about fining you, or worse, if you don’t catch up. Your now have to do something. These five steps will help you get back in control of your out of date accounts.
Step 1: Assess the situation
Don’t panic! Keep calm and assess where you are at:
- Are your accounts reliable up to a certain date? You may have filed or lodged tax returns up to a certain year. This suggests that your accounts might be reliable to that point.
- Is your paperwork intact? In particular, paperwork dated after when your accounts are up to? It’s now time to find those shoe boxes of paper. Sort them into your financial years. Following on, group them into revenue/sales records, stock purchase records and general expenses.
- Perhaps you have multiple sources to cover your paperwork gaps. You may have deleted that Paypal payment receipt, but you can go online to retrieve details. Someone else has recorded your payments, apart from those in cash.
Step 2: Talk to the tax authority
Talking to tax authorities like the Internal Revenue Service (US) or the Australian Tax Office can be stressful. It is important; however, to talk as soon as you can. This is particularly the case if you are suffering from anxiety or depression. Many tax authorities have specific support programs to help in these kinds of situations. For instance, the Australian Tax Office has support for small business owners struggling with mental health problems, including anxiety and depression. The Internal Revenue Service can reduce penalties if reasonable cause is shown.
Step 3: Focus on transactions and details that matter
Tax authorities are very concerned about you declaring all revenue and other income. They are less concerned about you claiming all your eligible expenses as deductions. This means it is most important to have captured all your receipts in your accounts. If you are under significant time pressures, focus on ensuring you have at least got the revenue recorded, even if it is not in the right income account.
Tax authorities may not be worried about you claiming all your legitimate expenses. You; however, don’t want to pay any more tax than you have to. This is particularly the case when filing/lodging late, because the tax authority is likely to load your late tax with penalties and interest. In light of this, you should try to find details of at least larger claimable expenses as soon as you can.
You may have several options to cover missing paperwork. For all of your income, purchases and expenses:
- banks can reissue bank statements. In particular, most banks make this easy through an online facility where you may be able to access statements going back many years
- services such as Stripe/Paypal or similar may have a record of the invoice, or at least a payment receipt. This applies to both payments you make and payments you receive
- ask your suppliers to reissue invoices that are missing. You can ask the same of your customers. You must balance this against the risk of loss of confidence your customers may have in you if you ask them for invoices you once issued them
- invoices might have been sent to your email. If you are using a cloud email service, or even GSuite or gmail, you may find a copy online. This also applies to invoices you used email to send
Accountants try hard to make financial statements as accurate as possible. Consider If you are playing catchup, this principle might have to be suspended for a while. Your financial statements can be “good enough” for the time being. Accounting has a principle of “materiality”. This concept suggests that you focus on the larger issues and don’t spend all your time on minor issues. You can’t; however, miss any of your income. Namely, you must declare all income. Spend some time getting a good understanding of your debtors and especially creditors and other liabilities. Understanding your trade creditors, tax debts and payroll obligations is critical for your business.
Step 4: Put in place measures that will work in the future
Once you have gone to the great effort of getting your accounts up to date, you need to think about the future. Specifically, how did you fall behind in the first place? Were you doing the accounts yourself and got too busy? You need to think realistically about whether time management and discipline is enough to keep you on track. Stress can be cumulative and if you were overcome by anxiety in the past, then you are likely to be overcome by it again. Consider using outsourced bookkeeping services. They can be quite cost effective. Many of these services will customize their workflows to fit into your business, like they are virtual staff.
Step 5: Amend tax forms once you have fully caught up
Most tax authorities allow you to amend your tax forms/returns for a few years after your initial filing/lodgement/submission. It is much safer to do this when the amendment is in your favor. Your initial filing should include all of your declarable income. This is because missing income on your tax can expose you to higher or more severe penalties. You can then amend your filing later to include smaller expenses that you missed. These small expenses may reduce your tax, plus penalties and interest loading. Consider it a nice present for getting everything in order.
Allowing your accounts to get out of date is stressful. It can easily happen when you get too busy, or simply overwhelmed with running your business. You have to take action to get back in control. Start by assessing where you are at now. What is the gap to get up to date. Talk to your tax authority. They may be able to help, or at least reduce or waive penalties. Focus on transactions that really matter, such as income, large expenses and who you owe money to. Then put in place measures to ensure you don’t fall behind again. This might mean outsourcing. Finally amend your tax to claim smaller expenses you skipped earlier in the process.