When it comes to running a business, good bookkeeping isn’t just about staying organized — it’s about staying compliant to avoid fines and fees.
Bad books can cost you.
If your tax return is wrong due to negligence or a failure to keep accurate books and records, the IRS could impose a 20% accuracy-related penalty on your business.
Make sure your business doesn’t lose thousands of dollars due to poor recordkeeping. Learn about this penalty and how you can prevent it from impacting your business.
What Is the §6662 Accuracy-Related Penalty?
Under Internal Revenue Code §6662, the IRS can impose a 20% accuracy-related penalty on small businesses that underpay taxes due to negligence or disregard of rules and regulations, including failing to keep accurate books and records.
If your financial records aren’t accurate and lead to mistakes on your tax return, the IRS may tack on an extra 20% penalty on top of the taxes you already owe.
Small businesses may receive a fine if they:
- Neglect recordkeeping or fail to maintain proper books.
- Disregard tax rules or regulations when preparing returns.
- Substantially understate income tax liability (typically when the reported tax is much lower than it should be)
Related: Protect Your Bookkeeping From Fraud, Mismanagement, and Compliance Problems
The Cost of Poor Bookkeeping
A failure to keep accurate bookkeeping can lead to a variety of problems within a business. It can:
- Cause cash flow issues
- Provide no or inaccurate financial forecasting
- Prevent you from developing plans to grow your business and increase profit
- Increase the stress of running a business
Bad bookkeeping makes it difficult to run your business at the highest level, and it can cost you more than that.
If bad books lead to inaccurate tax returns, it can lead to:
- 20% penalty on top of unpaid taxes
- Accrued interest until the balance is paid
- Increased audit risk, since poor recordkeeping is a red flag
- Lost deductions because you can’t substantiate expenses
For example, if the IRS determines you understated your taxable income by $20,000, the penalty could be $4,000 — before interest. That’s money that could have stayed in your business.
Related: 10 of the Most Common Bookkeeping Mistakes Small Businesses Make
What Do You Need to Avoid Fines & Fees?
To avoid penalties and fines from the IRS for having poor bookkeeping, you need accurate records. If the IRS thinks you underpaid your taxes, you may be required to submit the following.
The IRS may request you, as the taxpayer, to provide books of original entry including:
- The general ledger
- Cash receipts journal
- Cash disbursements journal
- Sales journal
- Purchase general
- Accounts receivable journal
- Accounts payable journal
- A chart of accounts
The IRS may also request your tax accountant’s work including:
- Year-end worksheet reconciling books to return
- Year-end adjusting journal entries closing entries
- Year-end bank reconciliations
- Beginning and ending inventory valuations
- Copies of financial statements prepared for business entity
- Any other workpapers or schedules used in preparation of the tax
- Return work papers explaining all Schedule M-1 and M-2 Adjustments
- Support for all amounts shown on the year-end balance sheet
- Fixed asset schedule and depreciation work papers
- Report from any prior Internal Revenue Service audits
If you don’t have systems to track this documentation, now is the time to set it up. Accurate recordkeeping prevents you from making errors on your tax return, and it also provides you with the data needed to back up your return if it is questioned.
Related: How to Do Bookkeeping for Small Business: The 11 Things You MUST Do
Get Your Books In Order
If you are startled by this information, don’t worry!
You can’t get everything you need to set up an accurate bookkeeping system that prevents you from making tax errors that can lead to fines and fees.
- Start early. Don’t wait until tax time to start sorting through your books to see what you might be missing. A proactive approach sets you up for success and less stress.
- Move your books to reliable accounting software. When you use cloud-based accounting software, you can more easily track all business transactions as well as pull reports when needed. No more flipping through receipts and papers or searching spreadsheets. Software like QuickBooks Online organizes all of your finances.
- Get professional help. If you feel too far behind on your books to catch up, get help. A professional can assess and fill in gaps in your information, set up systems to prevent future errors, and help you stay up-to-date so you never fall behind again.
Investing in cleaning up your books is an investment that is worth it. The time and resources you spend updating your bookkeeping systems will benefit your business by providing more data, visibility, and insight for planning — and it can prevent you from expensive tax fines and fees.
Your books are too important to overlook or undervalue. Make sure you give them the attention they deserve.
CFO2U Is Here To Help
If your books are in bad shape, now is the time to get them in order before tax time.
See how CFO2U can update your books, remove inaccuracies, and ensure you have what you need to file an accurate tax return to avoid fines and fees. Don’t delay. Get peace of mind that your books will lead to accurate tax returns. Our packages start for as little as $300/month.
Take a step toward a stress-free tax season today. Explore our monthly bookkeeping packages or schedule a free discovery call with our team.
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