Are you the person who dumps a box of unopened envelopes, miscellaneous papers, and tells your accountant, “See you at 11:59 PM on April 15th.”, then at 12:00 AM on April 16th wonder why your tax preparation fees exceeded your refund, even though you’re in the 10% tax bracket? Well you might want to read a little more on how not to be that guy.

The first step toward realizing a favorable bottom line  begins with basic organization. You know, like when you get a receipt, instead of throwing it away, place it in a folder pertaining to its category. Or when you write a check to your favorite charity, make sure the support for that charitable transaction is filed along with the receipt you received for the contribution.

When your financial system is out of whack, you pay for the added cost of chaos. It’s like going to the doctor for the first time after 20 plus years of martini lunches, cigars for breakfast, country fried steak and potato dinners, chocolate sundae snacks. You’re going to pay the cost. When you walk into your accountant's office in late January, or on April 15th with a 30-gallon trash bag of receipts, bank statements, and unopened mail, please do not be shocked, when he pulls out the money scale of billable hours to bring your financial chaos into order.

RULE #1 THROGH 1,000 – GOOD TAX IS PRECEDED BY GOOD ACCOUNTING, WHICH IS PRECEDED BY GOOD ORGANIZATION.

There are simple rules that apply to any system. Input equals output. Bad information in –– Bad results out. Disorganization, lack of information, lead to wild guesses, unsubstantiated decision, wild estimates, undocumented conclusion, in lay mans terms a wild shot in the dark. Accountants are required to have done a certain degree of due diligence in support of their financial conclusions. Due Diligence means, essentially, to make sure that all the facts regarding a transaction are available and have been independently verified. In some respects, it is very similar to an audit.

RULE #2 – PREPARE YOUR TAXES AS IF YOU ARE GOING TO BE AUDITED.

Simply put, it is better to be safe than sorry.

There are parallels between any systems. Those parallels are signified with a common denominator of order. Each individual is a small corporation, who in effect may have hundreds of thousands of dollars in transactions that transpire in a given year. Like a corporation, it is essential to have systems of organization to account for the financial transactions in your life. A corporation establishes a chart of accounts that identifies the various financial activities that are germane to its industry, that represent the relevant categories of Assets, Liabilities and Debt, Income, and Expenses that the given business will encounter in a subject year. Accordingly files are created based on the various categories for the specific vendors and clients that represent common transactions in one of the relevant categories.

For example:

• Asset Files might be made up of First Bank of Around the Way Checking Account, and 2nd Bank of on the corner Investment Account
• Liability and Debt files might be made up of Loan from Grandma and Five and Dime Charge Card
• Income Files may be made up various customer files comprised of paid and unpaid client invoices, with any supporting documentation relating to that transaction attached.
• Expense files are made up of various vendor files comprised of paid and unpaid bills, with supporting documentation relating to that transaction.

These essential steps can save you the heart ache and pain of an audit, a tax preparation bill that rivals your mortgage payment, and help you realize a bottom line that can help pay some bills and give you some financial breathing room.

STEP ONE: ORGANIZE YOUR DOCUMENTS

A good way to organize your financial records for taxes is compiling your financial documentation by the relevant income and expenses. Start with your bank and credit card statements. Practically every financial transaction over the course of a given year is reflected in them. Compile the statements for the year being prepared, highlight and notate each potentially deductible expense. Let your accountant figure out if you can write it off or not, that’s what you pay for.

As we discussed earlier each transaction needs support. For those transactions that are in excess of $100 provide support in the form of actual checks, receipts, invoices, etc. Basically, Cover Your "YOU KNOW WHAT".

Pull out the old calculator and tally up the expenses in compiled by their various categories and write the totals for each category on a sheet for your accountant. Most good accountants will supply you with a tax organizer to assist you in compiling and summarizing common expenses and deductions, and other relevant yearend tax information. For your convenience a general organizer template is provided.

In addition there are some common items you should have included as essential supporting documentation for your tax return:

- Wage statements (Form W-2)
- Pension, or retirement income (Forms 1099-R)
- Dependents' Social Security numbers and dates of birth
- Last year's tax return.
- Information on education expenses
- Information on the sales of stocks and/or bonds
- Self-employed business income and expenses
- Lottery and/or gambling winnings and losses
- State refund amount
- Social Security and/or unemployment income
- Income and expenses from rentals
- K-1’s from any Partnerships, S-Corps or Trusts
- Record of purchase or sale of real estate
- Medical and dental expenses
- Real estate and personal property taxes
- Estimated taxes or foreign taxes paid
- Receipts for cash and non-cash charitable donations
- Mortgage or home equity loan interest paid (Form 1098)
- Unreimbursed employment-related expenses
- Job-related educational expenses
- Child care expenses and provider information. You will need the address and either their EIN or SSN.
- If you purchased a home and may be eligible for the Homebuyers Credit, the IRS generally requires you bring a copy of the settlement statement. Normally this will be a properly executed Form HUD-1.

Add any other items you think may be necessary. A good rule of thumb is if you are not sure you need a document bring it.
 

It’s as simple as 1, 2, 3:

1. Organize
2. Calculate
3. Summarize

Minimize your preparation fees, you'll maximize your bottom line.

Plus, your accountant will look forward to seeing your neat tallied folders.