Hi, I’m Bette Hochberger, CPA, CGMA. Today I will discuss the importance of bookkeeping and why it is the first step in settling tax debt. Bookkeeping is crucial, especially if you have tax debt, and it should be your first priority.
It’s reassuring to know that you can take a clear initial action to tackle your tax debt: bringing your bookkeeping records up to date. Regardless of the amount you owe in taxes, it’s crucial to prioritize addressing your past financial records to start resolving your tax issues.
Also, it’s not widely known, but the IRS frequently makes errors when estimating an individual’s income and expenses. This means that the taxes you owe could be significantly less than the IRS’ initial estimate.
So, how does the IRS come up with their estimate of your income? For business owners accepting credit and debit cards, a Form 1099-K from their processor is required and sent to the IRS. Similarly, banks and financial institutions usually issue a 1099 for personal income from sources like savings account interest or investment earnings, which is also sent to the IRS.
However, this only provides a partial picture of your income. The IRS then compiles this information into your Wage & Income Transcript, which you can access online.
As for your expenses, the IRS is usually unaware of most of them (except for payroll). Expenses such as rent, supplies, inventory, equipment, and more are only accurately reported on your tax return when you have proper, updated bookkeeping.
Importance
So, why is bookkeeping important for settling tax debt? It accurately records your business’s financial transactions. When you owe taxes, the IRS will want proof of income and expenses to determine how much you owe. Without accurate records, you may not be able to provide this proof, leading to disputes with the IRS and potentially larger tax bills.
With accurate bookkeeping, you can track your income and expenses and ensure you properly report them on your tax returns. This can help you avoid underreporting income, leading to penalties and interest charges from the IRS. You don’t want to add more debt by gaining interest on your current debt!
In summary, proper bookkeeping is essential for settling tax debt because it provides accurate records of your financial transactions. This can help you avoid disputes with the IRS, defend your tax returns, and ensure you pay the correct taxes owed.
If you need help with bookkeeping, look for a tax professional who can help. It’s vital to start managing taxes, even if you’re not dealing with tax debt, as it can be challenging to handle alone. Feel free to schedule a meeting with me if you have any questions; I’d be happy to help.
As always, stay safe, and I will see you next time.
