MyBusiness Manual - February/March 2009

Tools of the Tax Trade

Use technology to take control of tax documentation

by Karen J. Bannan

Three years ago Christopher D. Mansu, the owner of Sacramento, Calif.-based Front Office Staff, kept his business receipts in a shoebox. Every April, he would hand them to his tax preparer.

"Every year she’d look at the box and tell me, ’We’re filing an extension.’ It was a pain. Because the return wasn’t done, I’d have to pay estimated taxes. I’d end up paying more than I owed because you never want to be short with the IRS."

Then Mansu came across The Neat Co.’s NeatReceipts handheld scanner. The product, which comes with software that scans and categorizes receipts and documents that can be output to Excel, Quicken, QuickBooks or TurboTax, helped him take control of his business finances. That year, says Mansu, he filed his taxes on time. Today, the software helps him keep track down to the dime exactly how much he is spending and taking in.

"We scan things on a daily basis," he says. "Everything is categorized and broken down by tax schedule so I know, ’Is this something that would go on Schedule A or Schedule C?’ "

Mansu has the right idea. Keeping careful track of receipts and documentation is a must for any business owner, says Michael Rozbruch, founder and CEO of Tax Resolution Services Co., an Encino, Calif.-based tax negotiation and mediation firm. If you’re audited--and that happens more often today than it did in the past--you’ll need to provide the IRS auditors with a full paper trail, or risk paying additional taxes and penalties. "You can’t have enough documentation," Rozbruch says.

You can turn to NeatReceipts or one of the many handheld scanners and copier/printers available to help you keep digital copies of your receipts. Scanning paperwork daily and categorizing it provides an additional benefit, too: You can sync it with your accounting software and print out everything at tax time.

There is one caveat to storing the data electronically, Rozbruch says.

"If you’re scanning original documents, make sure you have some sort of backup on a memory stick or a DVD," he says. "If your hard drive crashes, you need a way to retrieve all your data."

Should It Stay or Should It Go Now?

No matter how you store your records--electronically or stuffed in a drawer--they can pile up quickly. It’s not uncommon for small business owners to accumulate pages and pages of receipts, invoices, 1099 forms and other documents. So how long should you hold on to everything?

"You should keep your documents for at least four years from the date you file a return," says Michael Rozbruch of Tax Resolution Services Co. "The IRS has three years from the date you file a return to audit you."

However, since during the course of an audit the IRS can go back and reexamine six years worth of returns, Rozbruch advises his clients to keep everything for seven years.

"You should keep cancelled checks, credit card statements, charitable contribution receipts--anything you’re including on that tax return," he says.