Six signs your books need a clean-up before tax season

A tax preparer can only work with what you hand them. If the file is wrong, the return is wrong, and the cost of fixing it afterwards is always higher than the cost of fixing it in January. Here are the six symptoms we see most often during diagnostic reviews.

1. Undeposited funds that never clear

In QuickBooks, Undeposited Funds is a holding account. Money sits there between receiving a payment and depositing it. A balance of a few thousand dollars mid-month is normal. A balance of $84,000 that has been growing for two years means payments are being recorded twice: once as a received payment and once as a bank deposit. Your revenue is overstated, and so is your tax bill.

2. A negative liability balance

A liability account with a negative balance is telling you that you have paid more against a debt than the ledger says you owe. Usually this is payroll taxes recorded as an expense when paid and never accrued, or a loan where every payment has been coded entirely to principal. Either way the balance sheet is not describing reality.

3. An owner draw account that only grows

Owner draws and owner contributions should both move. If the draw account climbs every month and nothing is ever reclassified, personal spending is very likely mixed into business accounts, or legitimate business expenses have been miscoded as draws. In an S corporation this also has direct payroll implications.

4. Uncategorised Expense with a meaningful balance

Ask Miscellaneous or Uncategorised Expense to show its detail. If there are three hundred transactions in there totalling $60,000, nobody has been reviewing the bank feed — they have been accepting whatever the software suggested. Every one of those lines is a deduction that may not survive scrutiny.

5. Reconciliation reports that stop

Open the reconciliation history. If the last reconciled statement is fourteen months old, the file has not been closed since then. Bank feed accuracy is not reconciliation; the feed can miss transactions, duplicate them, and re-import after a connection reset.

6. Retained earnings that do not match the prior return

Retained earnings on your balance sheet should agree to the closing figure on last year's tax return. If it does not, someone posted entries into a closed period after the return was filed. That difference has to be identified and explained before this year's return is prepared, or the discrepancy compounds.

What a clean-up actually involves

A proper clean-up starts with a diagnostic: we review the file, quantify each issue, and send a written findings memo with a fixed quote before any correcting entry is made. The work itself is rebuilding periods in order, reconciling each one to the statements, and documenting every adjustment in a log your tax preparer can follow.

Most clean-ups we run cost between $600 and $4,500 and take two to five weeks. The right time to start is now, not in April.

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This article is general information for US small business owners and is not tax, legal or accounting advice. Desert Ledger Bookkeeping is not a CPA firm. Speak to a licensed preparer about your own situation.

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