5 Tips to Get Ready for Tax Day

by Communications and Corporate Relations & Business Strategy Staff

February 14, 2006 -- According to the Internal Revenue Service, audits of small businesses that are organized as corporations recently jumped more than twofold following years of decline. Nearly 18,000 such IRS audits were completed in 2005, compared to only 7,300 a year earlier.

That statistic alone may help motivate you to be sure you are taking important steps to have your 2005 business tax return in order well before the April 17, 2006 filing deadline. Keep in mind that the legal model for your practice determines how your business income is taxed. Various legal arrangements such as sole proprietorships and limited liability companies have different income tax requirements regarding filing dates, required forms, and tax rates.

Though your preparations likely are well under way, this article offers five tips for checking to see if your federal tax filing is on track, followed by references to several online resources:

If you haven't done so already, pull together all necessary receipts and other documentation now. You don't want to realize as April 17 draws near, for example, that you are missing a Form 1099 report you need in order to complete your taxes.

Consider whether the right person, or combination of individuals, is handling your tax preparation. With the increasing availability of tax software packages such as TurboTax*, more individuals are preparing their own business returns. That may make sense if your practice finances are relatively straightforward. On the other hand, many business circumstances are sufficiently complicated that you need to think about taking advantage of an outside financial professional's expertise .

As part of your decision making, consider whether it would it be more profitable to spend the equivalent number of hours seeing patients in lieu of preparing your tax return yourself.

A division of labor can work well for some practitioners. For example, the psychologist keeps careful financial records throughout the year and provides these records to the accountant to complete the business tax forms. Not only do some practitioners find that this arrangement keeps them disciplined about maintaining basic financial information for their practice, but it also makes them more knowledgeable in reviewing the return their accountant prepares.

It is beyond the scope of this article to describe in detail various categories of financial professionals who may have expertise in tax preparation. General options include tax attorneys, certified public accountants and other accountants, enrolled agents (a tax adviser and preparer who is licensed by the IRS), and individuals who operate or work with businesses that prepare tax returns.

Be sure you are clear about the nature and extent of an outside professional's working relationship with you in the event that your return is audited. For example, will that person represent you during an audit and pay any penalties that result from his or her errors? Make sure that your professional relationship is clearly defined and is consistent with your needs and expectations.

Be sure you are taking maximum advantage of available deductions, such as the increase in the standard mileage rate from 40.5 cents to 48.5 cents a mile for business miles driven effective September 1, 2005 through year-end. Another example involves increased dollar limits for property that you purchased and placed into service during 2005 (additional information is available in IRS Publication 946).

A tax advisor can help you avoid missed opportunities for saving on taxes by ensuring that you claim all the deductions you are eligible to take-for example, related to payment of insurance premiums. A knowledgeable financial expert who prepares your taxes also can help you steer clear of penalties and other fees by making sure that you pay the correct amount of quarterly estimated taxes.

Look ahead to filing taxes for 2006. For example, if you notice something has changed that may affect your taxes, go ahead and make appropriate changes in anticipation of filing taxes next year. For example, file an updated a federal W-4 form if there is a change in the number of exemptions that you will be able to claim for 2006.

A special note for practicing psychologists who were affected in 2005 by Hurricanes Katrina, Rita and Wilma: You may find it helpful to review IRS Publication 4492, "Information for Taxpayers Affected by Hurricanes Katrina, Rita and Wilma." A pdf of this publication is available from the IRS website.