A Few Ways To Make Tax Season A Bit Less Painful (Next Year....)

Every year, without fail, I rail to friends, family, and even at times all but total strangers, about the absurdity, complexity, and pain-- financial, emotional, and mental-- the tax preparation causes. This outpouring of angst invariably starts in early January and crescendos about now in late January, a time which coincides with my birthday (an increasingly unpopular event in my life) and the outpouring of notifications, paperwork, warnings and tax plan "helping" advertisements and announcements. In their own way, each adds to my indigestion over the entire process.

One of the truisms of this annual ritual is it never has gotten easier in the forty odd years I have dutifully filed the various local and federal returns for which I am responsible. I tell anyone who will listen, and some who probably prefer not to hear my tales again, that I find it ridiculous that a responsible citizen, with a MBA from a very good university, is utterly incapable of completing the tax preparation process without soliciting professional help and still spending copious amounts of time and energy completing the "Tax Planner" for the tax "experts!" In fact, the likelihood of me successfully, legally, and profitably (i.e. finding and declaring the various deductions for which I am legally entitled), completing the maze of paperwork diminishes with each passing year. For all the lip service our elected representatives give to "simplifying" the tax system and "broadening" the tax base, it seems the special interests camping out in Washington make more inroads, protecting  sacred rules and regulations than making it easier for the everyday citizen to comply with our tax obligations.

My father was a brilliant attorney. Much of his practice revolved around tax and estate planning. He made a very good living and helped a great many individuals and companies during his storied decades of  practice. I miss him in so many ways and as the anniversary of his passing approaches, I reflect on his thoughts, contributions, and the love and camaraderie we shared. My father would freely admit that the tax code has become bloated, dense, and all but unknowable. Even Harvard educated, attorneys, devoted to the practice over decades, find the tax laws all but immutable.. Pop, and several kind, infinitely patient, members of his firm, guided me through my annual tax preparations in past years. Without them, I don't know where I would be today.... The past couple of years, I have had to navigate most of these issues alone and my awareness of the problems involved in "preparing for the preparers" has grown all the more!

As most of you know, you don't have to be Mitt Romney or Barack Obama to have to file detailed IRS reports. If you qualify for the "EZ" form, I think you should be able to get this "to do" off your desk using Intuit's Turbo Tax, or one of the other CD/DVD based or online services. While I don't use these products personally, Turbo Tax gets good reviews and I have several friends and associates who swear by the process and the end results. I also know of several individuals who avail themselves of low cost, sometimes even "free," services from H&R Block, Hewitt, and others.

However, if your tax situation goes beyond all but the most basic, you probably rely on an Accountant, Tax Attorney, or some combination of experts to get your "shoebox" distilled to the proper page and lines of the proper sea of forms our state, local, and federal governments require. (This "machine," which represents a not insignificant economy in and of itself, and it is yet another reason I hold little hope of seeing real tax reform, much less the mythic, post card sized "flat tax" solution, that I truly believe a majority of Americans would welcome, in my lifetime. If we could all simply add up our income, multiply by some constant and hit send, what would this industry, and all who they employ, do!?)

Even having a small company (and by this I mean small, self-employed, wondering where your pay check is after paying the expenses, small!), requires including the dreaded Schedule C which in turn requires detailed records if you wish to avail yourself of legitimate deductions (by this I mean taking the same deductions Mitt, Barack, Hillary, and Newt enjoy, probably with significantly more zeros following each number). 

So even if you are in a situation where the "EZ" form is out of the question and for whatever reason(s) you don't feel comfortable using Turbo Tax or some other direct service, how can you help yourself and minimize the time you pay for assistance (and no matter how it is pitched, you are paying your tax assistants by the hour, make no mistake!):

First, if you aren't using accounting software, stop what you are doing and install an appropriate solution today! For individuals, Quicken is the gold standard. Quicken's main historic competitor, Microsoft Money is basically an abandoned Redmond project. There are alternatives to Quicken, particularly for mid size small businesses. Mass 90  is one such product, but if you don't have full time, in house, expert, this software is probably beyond your needs.

Many companies swear by Quickbooks and it has withstood the test of time. I will tell you that to get the most from QuickBooks you can't fire your accountant (to the contrary, you two may be talking more often, but more productively, after you begin using this software to your advantage). If you are like me-- somewhere between tracking purely individual taxable events, and a LLC with a periodic payroll and/or physical inventory-- consider Quicken  Home and Business 2012. This middle ground version of Quicken is often overlooked in the accounting software decision making process and tends to get less attention from Intuit. Generally speaking, the company would rather trade you up to one of the growing number  of QuickBooks variations or steer you to a high end version of Quicken for Personal use.

Quicken Home and Business allows you to invoice, create meaningful personal and business reports, import credit card detail (see below), and much more without all of the complexity and double entry bookkeeping required by the various flavors of QuickBooks. (You also can't do complex payroll, inventory tracking, and take advantage of certain other accounting features, but these bells and whistles may be wasted on your situation.) Here's a quick comparative table of these products.

Now for the critical nuggets which may help you navigate this more smoothly next year:

Track everything!!! Set up every credit card in Quicken (or your program of choice). Set it up so downloading is automatic through One Step Update or a similar system if at all possible! This makes the process very easy. Unfortunately, many banks, including  and especially  the "too big to fail," but too big to give a dam about little businesses-- you know who I am writing about BofA, Citi, and Chase-- make it difficult, even impossible, to use "One Step" services without having multiple accounts (i.e. savings accounts drawing little or no interest, or checking accounts accruing monthly fees) with their institution. In essence, these banks making easy access to your own transactional data a "premium service." You shouldn't work with companies who hold your data hostage if at all possible.

You can still get your data from these banks into your Quicken files, but there will be some manual components to the process. Typically, these steps entail manually going to the bank's site, finding the "proper" portal page, logging in, hunting around for the download instructions and links, finally,  hitting download now and then accepting the QFX (for Quicken and Quickbooks, other formats usually also available) file itself. 

Obviously, this isn't as easy or automated as setting this up the link one time and allowing the software, actually databases, to pass information back and forth. The banks don't want to make it "easy" which is a shame. You should consider this when applying for and using credit cards. One big company, American Express, happens to make One Step Updating work. The key is to get at least two cards set up-- one for personal use, one for business expenses.

Secondly, use Categories!!! Categories are your friend, especially at tax time. Quicken and other financial software allows you to tie purchases to categories and if you aren't using this feature you are missing out on most of the software's real power. The only "winner" in this scenario is your accountant. Effectively,  you are giving him or her an electronic shoebox which still must be sorted, calculated, and transferred to the appropriate line(s) on various tax schedules. Tax professionals will be happy to perform these tasks for you and bill you accordingly, often at head spinning rates for what amounts to basic clerical duties. Not only is this unnecessary, it is far from desirable, Quicken will remember categories for you-- for instance, if I order product from TigerDirect, it will "suggest" Business Expense: Hardware, it may also provide other alternatives such as Business Expense: Software and Business Expense: Client Reimbursable if I have used such categories with a particular vendor or merchant in the past. For many transactions, the category remains the same and it is a very simple matter of accepting the transaction and moving on. Admittedly, this memorization feature  is of less value for a company such as Amazon where purchases may well straddle personal and business and can easily span multiple categories as well but these will be the exception not the rule.Categorization can be something of an art-- too much granularity and you get caught up in the process, use buckets which are too encompassing and you will find yourself doing double duty

I began the categorization process decades ago and created many categories for myself and my small businesses along the way. I wish I could do it over again (and may try this year) and here's why. Quicken now has many very good default categories which weren't part of the database many years ago. These categories are tied to specific lines on various tax forms! (This makes exporting to Turbo Tax all the easier if  you elect to go that route! It also makes your tax preparers life much simpler, and your bill for "Tax Preparation Services" a lot more palatable.) While my manually entered categories are just as descriptive (actually sometimes more so) and legal, tying them to specific lines on the tax forms makes the data truly powerful.

This entire process works best if you don't use cash! Sadly, making this system work to your maximum advantage requires you to pay (everything) by credit card. Preferably, you will make a "top line" separation by using your personal card for "personal stuff" and your business card for.... Yep, business stuff. If you use cash, keep the receipt and make manual entries (which you Categorize!) 

Receipts! You would think this level of bookkeeping would be enough to satisfy the IRS and your Accountant. At least in some cases, actually many, you have to go another significant step. Keep your receipts! If you live in Tennessee as I do (a number of other states have similar tax provisions), there is another reason detailed receipts are necessary (but can benefit you in a backhanded kind of way). Tennessee has no state income tax per se (sadly, investment income which has already typically been taxed as corporate income and the investment funding itself as personal income, is taxed again in The Volunteer State, here's hoping this gets eliminated in my lifetime).

In my state and a few others, you are allowed to deduct sales tax on your Federal Return! You can take a standard deduction which does allow for supplemental amendments for big ticket items such as an automobile purchase, but this formulaic deduction is always far lower than my actual contribution to local and state economies. So if you have to track receipts for record keeping why not keep actual sales tax records? The simple answer it seems almost impossible (and truthfully, you will likely underestimate even using my method because of cash purchases, but this works).

NeatReceipts is a combination software and scanning system. Neat has been around for a number of years. Conceptually their product is fantastic-- take OCR (optical character recognition) software and optimize it for receipts. Feed a receipt into the scanner and it will try to fill in the blanks-- company name; purchase date; total purchase; sales tax!! and category. The software  populates the database with these fields and keeps a PDF (electronic image) of the actual receipt for reference. (If you are ever audited, the IRS will accept the PDF images.) Once this process is completed, you can shred the physical receipt and remove this pile of paperwork from the clutter of your office and life.

The software is designed to do more. It offers a passable means for cataloging business cards (again with PDF files for reference). You can even  sync these contacts with your Outlook file (and by extension into the cloud, but this is another post). 

You can also create Expense Reports which would have been useful to me in another life, but being self-employed, I spare myself this needless drudgery and haven't used this feature. You can also use the Neat scanner and software as a Document Scanner. This allows you to keep a digital copy of the paperwork as well as a searchable PDF. I make limited use of this feature and rely more on Evernote as my personal document search box, but I will review this too in a follow up post.

The hardware comes in a couple of form factors-- a desktop scanner and a mobile scanner. Most people certainly don't need both (although Neat would no doubt love for you to keep one on your desk and another in your briefcase). I have an early version of the company's mobile scanner and generally, it has been more than capable of meeting my needs. In fact, the mobile appliance takes up less desk space and seems very good at dealing with most of the crumpled receipts which find their way from my pocket to my "pile of stuff" and ultimately, my Neat Receipts Database. If you have experience with the Desktop model, I would love for you to share your comments below.

Version 5 of the software was recently released. As a longtime user, there are elements of the new design, which are radically different than the versions which came before. I am not a big fan of several design changes. In fact, I would gladly go back to Version 3.X were this possible (but changes in the database structure itself make this impossible). Those of  you just beginning with Neat may actually like Version 5 more; a lot of what I like, and dislike, is subjective and biased by my use of earlier releases. Regardless of which version you prefer, this is great software which will go a long way towards making your business and personal tax preparation easier and far more accurate. Begin using it today before 2012 moves into second gear. You won't regret it.

There are other companies which try to do similar bookkeeping tricks, if you have found something which works well for you, please share your comments. One of the advantages of all this record keeping is you are "forced" to review transactions, expenses by Category, continually through the year. You are also going to find any erroneous transactions caused through identity theft, employee theft, or even some purchase by a family member which may warrant discussion. 

In the spirit of The Four Hour Work Week (which isn't even a distant dream of mine at this point), I allow the receipts and bills to accumulate. Twice a month, I devote a couple of hours to updating Neat Receipts and Quicken Premiere. I download all credit card transactions; get electronic filings of my bank statements, and feed receipts into my scanner and then (happily) into my shredder. While I detest doing this in anticipation of tax season, I find I am far more aware of my business and personal financial health as a result of these few hours a month. 

In the next installment, I will talk about the reports you can create to make your life, and your accountant's, better. 

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Companies:  Intuit, Neat

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