The hardest thing to understand in the world is the income tax. ~ Albert Einstein
Now that 2014 is over, it is time to file taxes. Most businesses will rely on accountants to help them complete this task. However, there is a big difference between having an accountant do your taxes once a year and having an accountant monitor your operation to ensure you are not blindsided when it comes time to pay the IRS.
A profitable company I was working with was notified by their accountant late in 2014 after they had applied for extensions that it owed an additional $230,000 to the IRS. The company had not expected this and ended up having to borrow money from their financial institution. If this company had an accountant monitoring their tax liability each month, they would have been able to hang on to enough cash
to meet their obligation.
A similar situation happened more than once, so the fed-up owners changed accountants and now have one who monitors their financials throughout the year. Every month, the new accountant calculates how much they will owe at the end of the year.
Clearly, you want an accountant who will minimize your tax liability in accordance with tax laws. It is also important to have one who will file your tax returns in a timely manner -- not like the next example.
A company had been using the same accountant to file their tax returns for years, and they thought all was going well. Though the accountant had been filing their returns as late as possible every year, they had never been audited. However, when they were audited, the IRS found a number of glaring problems. In the end, the firm had to pay more than a million dollars in back taxes, interest, fines and penalties.
The bottom line is that tax laws are complex, and business owners do not have any way of knowing whether their accountants are doing a good job. This firm wanted to pay the right amount in taxes but was not because of poor advice they were getting from their accountant. Sure, getting a clean audit is one test of accounting quality, but you do not want an audit to be the way you find out whether your accountant is doing a good job.
This firm admitted that one of the reasons they chose this accountant was because he was cheap. But as they found out, picking the accounting firm with the lowest cost is not the answer. Paying a reasonable fee for a great accountant is important.
Too many firms see accountants as people they only need once a year when their taxes are due. On the contrary, your accountant should be an integral part of your team so you have access to great financial advice and someone knowledgeable to deal with complex tax and regulation issues. Both of these are important to ensuring your company's success.
It is good practice to meet with your accountant on a regular basis so that they can give you an update as to your taxes and the financial health of your business.
Jerry Osteryoung, a business consultant, is a Jim Moran professor of entrepreneurship (emeritus) and professor of finance (emeritus) at Florida State University. Reach him at email@example.com