Organization Pays Dividends

Press your tax preparer. If your CPA seems hazy or hesitant, consider hiring one who is more aggressive. How aggressive? You want to claim every penny you're due, but you don't want to risk the ire of the IRS. One good rule of thumb is to submit your prospective write-offs to the laugh test.

"If it makes you snicker, chances are you've gone too far," says Hurok.

With the 15th of April just weeks away, many entrepreneurs are involved in a fevered annual exercise. 'Tis the season to reconstruct last year's expenditures. Owners and their bookkeepers are rifling through bewildering piles of dimly remembered receipts.

This is no way to live. Better to have a thorough system for recording expenses. "Have someone gather all receipts, annotate them when necessary, go through them regularly - once a week or month - and place them in well-labeled folders," urges Chet Burgess, owner of Brookwood Tax Service, based in Atlanta.

Vigorous record keeping will help you claim all the deductions you're due. It will also make you far better prepared for an encounter with the IRS, an increasingly likely event. A few years back, the IRS -- under congressional scrutiny for overzealousness -- trimmed its collection activities. Now the pendulum has swung back. Small businesses are notoriously sloppy record keepers, say accountants, making them easy marks for the IRS.

Neil Mammen, 45, is founder of Tentmaker Systems, a San Jose chip and circuitboard fabricator with eight employees. Recently he had a brush with the IRS that served as a wake-up call. In 2006 the agency contacted him about $30,000 worth of receipts. They assured him that this was not an audit ... yet. They just wanted clarification. Yes, the IRS often takes steps short of an audit, contacting business owners by mail. Fail to satisfy them and an agent will probably show up on your doorstep for a dreaded "field audit."

As a typical disorganized entrepreneur, Mammen found that he was woefully underprepared. Some of the receipts in question he found stuffed in a shoebox (no kidding). For others, he had to call vendors and ask for invoices. Others still required him to contact Visa to get originals at $10 a pop. (The IRS won't usually accept a credit card statement, though it will accept the digitized receipt copies that some card issuers send with each bill.) "It was scary, a nightmare, and it ate up a lot of my time," says Mammen. Ironically, those $10 receipt fees -- along with any other costs incurred while satisfying an IRS inquiry or audit -- are tax-deductible. In the end, the IRS did not deny any of his deductions.

Mammen has since found record-keeping religion. He uses a device called Neat Receipts to scan receipts directly into his PC. There he organizes them according to standard categories such as meals and office supplies. Then he backs the whole thing up in triplicate. Tentmaker Systems is profitable and had $1.6 million in revenues in 2007. After getting more organized, Mammen says, he was able to increase his deductions by about 20% this past year.

A word to the wise: Even original receipts won't be enough to appease the IRS in certain cases. With entertainment, for example, you need to annotate the receipt, listing who was present and what business was discussed. "The IRS likes to look closely at things that seem fun," says Joseph Anthony, a tax preparer based in Portland, Ore. "Items like cars and travel and cellphones require enhanced substantiation."

This may seem like a hassle, but it pales in comparison with the kind of mayhem the IRS can stir up. If you are audited, typically agents will start with one year's tax return. Produce neatly organized receipts, and they may just go away. Arouse the IRS's suspicions, and it may start digging into other years.

At their discretion, agents can disallow questionable or poorly substantiated deductions. Meaning that a business owner has to pay back taxes. Throw in interest on the back taxes and penalties, and the tab can grow to be eye-popping. In rare instances, when the IRS suspects out-and-out fraud, it brings criminal charges that can result in jail time.

NEXT: Get the Timing Right

1 2 3 4 5 6