About five years ago, the owner of two local pubs came to me, frantically waving an audit notice. I’ll never forget his words…
“How can the IRS do this to me? I spend a lot of money to make sure that everything in my accounting is done perfectly!”
I asked to see his financial statements and he pulled out a four page income statement. Whenever I see a company grossing $1M annually that has a four page income statement, I immediately know that something is very wrong.
For some ridiculous reason, internal bookkeepers always want to chop the income and expenses up into as many categories as possible. In doing so, they make the data useless for comparison purposes.
It’s one of the first signs of poorly done work. The numbers are just too small to create relevant conclusions when analyzed.
A deeper look at his accounting found the following problems.
1 – His credit cards were expensed incorrectly. If you have fifty transactions on a credit card that belong in fifteen different expense categories, the transactions must be entered individually.
Instead, the part-time bookkeeper was just dumping the entire monthly payment into purchases.
2 – When bookkeepers “download” bank statements into accounting programs, even more transactions are miscategorized. Checks written for Food Purchases were in Restaurant Supplies. Liquor Purchases were in Outside Services.
The list of mistakes was almost endless.
3 – Non-Deductible Personal Items were expensed as regular business expenses. All of his personal prescription costs to Walgreens were deducted in Office Supplies because he’d bought paper for his copier there on one occasion.
Another example was that the non-deductible costs of his Life Insurance were deducted as regular insurance. The utility and maintenance costs of his home were also deducted as business expenses.
4 – The payroll wasn’t balanced. When you have a $350K payroll and somehow $390K is deducted, it’s going to red flag in the IRS System.
The Service already has a copy of your payroll tax returns and knows what the deduction is supposed to be.
5 – The internal financial statements had never been balanced to the external income tax return. This is one of the most fundamental problems we see with internal books and records.
When you start from the wrong place, you’ll never end at the right place. Period.
His Part-Time Bookkeeper was an out of work actress who’d tended bar at one of his establishments. At the end of the day, she just didn’t know any better, and somehow he was paying her $39K per year to do nothing but get him into trouble.
We certainly can’t lay all of the blame on her shoulders, because he had a CPA doing his income tax return. But his was one of the CPA’s who didn’t do anything to check the work, one who just took the numbers supplied and put them on a return, and who then demanded that he sign a liability waiver absolving the CPA of any wrong-doing in the case of an audit.
In my entire career, I’ve never asked a client to sign one of those waivers.
When I showed all of these problems to the owner, he simply said that he was too busy running his bars to really look at what was being done for him.
Let me leave you with this…
I can’t tell you how many times I’ve seen this scenario. When you add a Part-Time Bookkeeper with no public accounting experience, to a bad CPA who will put anything onto a tax return, and an Owner who’s too busy and un-knowledgeable to look at what he’s getting, what do you have?
An Audit.
This was a particularly ugly one because the IRS went back three years. It took over a year to complete the examination and the balance owed wasn’t unsubstantial.
We took over the monthly accounting and income tax preparation. There wasn’t that much work to be completed in the first place so our fees were around $8,000 per year.
And when you look at what he was paying his former bookkeeper and accountant, we saved him over $30K annually. That’s a lot on a company that only grosses $1M every year.
But that’s not the happy ending.
Normally, when the Service does an audit and they collect enough from the examination to cover their time, they’re going to come back. They would normally do this on a three year cycle.
But we never received another audit notice. They obviously looked at our work and couldn’t come up with a good enough reason to knock on his door.
We not only saved him $30K per year but ended the cycle. Think about it.
We’re all going to get through this. Let’s get through it together.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
888-310-0300
www.SalarySolutions.net
www.AccountingSolutionsLtd.com
Note that the only professional services provided by Accounting Solutions Ltd. are those specified in a written communication from our office detailing the scope of services to be rendered and the terms and conditions applicable to the engagement.