For a growing business, tax return preparation can become complicated long before the tax return itself. The revenue can originate from multiple eCommerce platforms. The inventory goes through several locations. There are multiple ways to pay contractors and employees. The company is likely to have customers, property, or employees in different states. The owners may either have set up another entity during the year or conducted a transaction which at first might look simple from an accounting standpoint but may need additional tax considerations.
This invites a few errors with tax returns, not with the tax return form alone. They start from the missing document, unexplained reconciliation differences, old assumptions, or a transaction which nobody thought worth checking.
The Internal Revenue Service (IRS) recommends that taxpayers needs to be careful in choosing tax preparers, understanding their filing eligibility, providing necessary documents, closely reviewing the prepared tax return and remembering that despite the fact that the tax returns are submitted by certified preparers, the taxpayers bear the responsibility for what is reported in the tax returns on their behalf.
For business owners, the practical question is therefore not simply, “Who can prepare my return?” It is “What process gives me reasonable confidence that the information going into that return is complete, supportable, and properly reviewed?”
What Should Be Ready Before Preparing a Tax Return?
No tax preparer should prepare a tax return in the US based on disorganized emails, bookkeeping entries, and pieces of paper with information extracted from bank records.
The tax return preparation file will vary from taxpayer to taxpayer but may include prior years’ returns, financial data, general ledger information, bank statements, and credit card records, payroll information, contractor documentation, documentation of purchases and disposal of assets, documents regarding loans, investment information, and any documentation that substantiates deductions and credits.
The IRS states that proper business documentation should support any revenue earned, as well as expenses, credits, and deductions made in the tax form. The documentation needs to be sufficient to determine the basis of certain transactions.
The importance of bookkeeping services becomes much bigger than just accounting and has a direct impact on the quality of the tax return.
A company that reconciles its accounts and has documentation organized has a much better position than a company that just prints its profit-and-loss report and sends it to its tax preparer.
When should one start preparing the tax return? The answer is much sooner than the business owners would like to believe. Begin the process with year-end closing, then collect documents, and analyze the changes made during the year. Before getting deeper into the return, any transactions that are significant or unusual must be determined. The purpose is clear: ensure that the accountant has a record that is understandable, and not just a pile of numbers when preparing a tax return.
What Are the Commonly Made Errors During Tax Preparation
1. Thinking That the General Ledger is All You Need
The accounting system can show revenues, which seem reasonable but still need reconciliation.
For an e-commerce business selling products on their website and on various platforms, the accounting records show gross sales, but the payment processor shows deposits after charges. Besides, refunds and chargebacks may be processed at different times of the month.
A better approach: Verify major sources of revenue prior to the preparation of the return. Be prepared to provide an adequate explanation for timing variance, fees, refunds, and other reconciling factors. If you cannot explain why your expenses differ materially from what is usual, settle the issue prior to filing the tax return.
2. Treating All Expenses Recorded in Bookkeeping as Tax Deductions
A transaction being an expense in the bookkeeping system does not imply that it is accepted as a deductible expense by the tax authorities merely because the transaction is business-related. Doubtless, the record must be able to provide adequate evidence of expenses as well as be able to corroborate its circumstances. The IRS says that achieving this is the taxpayer’s responsibility.
The problems arise with expenses that look obvious when they occur but become difficult to justify when it comes to tax filing: travel, meals, service fees, or purchase of mixed-use and one-off goods.
A better approach: It’s always good to monitor the unusual expenses incurred and all the relevant documentation providing evidence of purchases made by the individual, the date of purchase, and the link of such expenses to the business. Documentation is not about documenting every little transaction but enabling the user to remember significant deductions.
3. Intermixing Business and Personal Finances
It is a standard practice in owner-operated enterprises and is especially pronounced within their start-up periods. The owner pays a business bill using his personal card. A personal expense is charged on the business card.
Such an arrangement may function for some time but is not workable when the number of operations is growing. When you hire a Certified Professional Accountant (CPA), it’s their responsibility to deal with the number and nature of payments while preparing the tax returns.
A better approach: Maintain distinction between business and personal accounts and create a proper procedure for owner reimbursements, distributions, and other non-business transactions. It is advisable to check those accounts throughout the year instead of waiting until tax season. The advantage is not only better tax preparation, but better control over actual business expenditure.
4. Copying Last Year’s Return Without Considering New Tax Updates
A tax return from the previous year is an essential document during tax preparation, but it is also an easy place to form bad habits. If last year’s return showed some kind of expense, entity structure, or ownership structure, it’s not sure whether the same will be applicable this year.
But one should remember that there is no stagnant life of a company. It could purchase another business, have another owner, sell real property, receive financing, create a subsidiary, enter into new states, change ways of selling its product.
A better approach: The previous year’s returns serve as a benchmark to analyze what has changed in terms of ownership, operations, means to generate income, assets, and so on. There should be an explanation regarding every difference that appears to be significant in comparison with the previous year.
5. Considering State Tax Issues & Obligations As Unimportant
Preparation of federal tax returns takes more time, but state obligations of a developing business should also be assessed separately.
The statement is especially true for the e-commerce industry, where it is common for a business be registered in one state, regularly sell its products to customers from different regions, hire people in various locations, possess assets, etc.
A better approach: Keep a current record of the foreign operations and a list of the relevant activities that are carried out there as the only way to provide enough information for evaluating the respective state tax requirements. It is not just a matter of knowing where sales were carried out. The important question is what business activities were carried out by the company in every jurisdiction.
6. Letting Legal and Ownership Tax Records Drift Apart
Businesses might have transformed in the meantime, but the administrative records may not have changed that quickly. Someone changes ownership. A new company is incorporated. A company restructures itself. A company changes its tax status and yet the records show information from a year ago.
As a result, no one knows what the latest numbers are by the time the tax preparation process is initiated.
A better approach: Prior to tax preparation, the legal and ownership information of the company must be consistent with the accounting records and tax return. If there have been major changes in the ownership structure, it is important for the preparer to be notified about such changes. A tax return should reflect the business structure as it was during the reporting period according to different tax regulations.
7. Thinking Tax Software Takes Away the Need for Judgment
Tax software is capable of handling a lot of chores. It can make the necessary calculations, organize data efficiently, measure its integrity, and make estimates. However, tax software is incapable of making decisions on its own without understanding the overall picture of business deals executed.
If the wrong data gets into the tax preparation software, the latter will handle this incorrect process very efficiently.
A better approach: The key difference is not technology against people. It is processing against judgment. The former can be automated. The latter needs a person who knows about facts and rules.
8. Making Significant Transactions Resemble Bookkeeping Entries
A business acquisition, just like a sale of the asset, acquisition of important equipment, refinancing, or ownership change, may be just a few accounting entries in the books.
But it does not mean that the tax preparation is simple. For instance, a hypothetical producer buying important equipment does not have the right to think that the accounting entry is enough to decide how the purchase should be treated for tax purposes.
A better approach: Keep track of all noteworthy or exceptional transactions throughout the year and review them with a tax preparer. This is crucial, especially in cases when the transaction is significant enough to influence different components of the financial reports or change the legal/economic position of the company.
9. Selecting a Tax Preparer Solely Based on the Lowest Fee Charged
Price is always important, but not the only factor to take into consideration. According to the IRS, there are many levels of skill and knowledge among professional tax preparers.
It advises considering the expertise, availability, fees and payment, and whether the preparer belongs to the PTIN directory, among other factors. In case of a straightforward return, the differences may not be very significant.
A better approach: When you hire a tax preparer, ask:
- Who will actually prepare the return?
- Who reviews it?
- What records will you need from me?
- How do you handle unusual transactions?
- Will you be available after filing?
- What qualifications and relevant experience do you have?
- How are fees determined?
The IRS specifically advises taxpayers to choose preparers carefully, provide records, review the return before signing, and avoid signing a blank or incomplete return.
10. Treating the Final Assessment as a Formality
The final assessment may occasionally turn out to be the weakest part of the whole process. The owner can get a completed return that was prepared by an expert and sign it without closely checking it on the matter.
This is a mistake, not because the owner should become an expert in taxation, but because only management can find out certain facts that the preparer does not know about. Was the acquisition of the assets made during this particular year? Did the ownership really change? Does the revenue that is stated look logical? Is the provided banking information correct? The IRS states that the taxpayer is responsible for the information given in the return no matter who prepared it.
A better approach: Instead of technically re-doing the return, the best idea is to make the final assessment a short review undertaken by the management team, concentrating only on the facts that the owner or the executive team is capable of confirming and then asking the preparer about everything that does not look reasonable.
When Does It Make Sense to Hire a Tax Preparer?
It is not necessarily a bad idea to do your own tax return. Some taxpayers may feel comfortable filing their own return, especially when their investment is straightforward.
The same is not the case when it comes to more complicated situations. Owning multiple companies, major transactions, multi-state activity, complicated ownership and investments, real estate, or major changes from the previous year can contribute to the added value of professional help.
Professional qualifications matter, too. According to the IRS, only licensed lawyers, CPAs, and enrolled agents have the authority to represent taxpayers before the IRS. Other preparers might have a limited number of rights depending on their qualifications and IRS program participation.
Every paid federal tax return preparer needs a PTIN number. The question that should be asked is not about whether the software or the preparer is able to prepare a tax return for an individual. Instead, it should be whether the complexity of the specific tax preparation accounts for professional assistance.
Frequently Asked Questions
Can I prepare my own tax return?
Yes. Taxpayers can prepare their own federal returns. Whether that is appropriate depends on the complexity of their financial circumstances and their ability to accurately understand and report them.
If my tax preparer makes a mistake, am I still responsible?
The IRS states that taxpayers are ultimately accountable for the accuracy of the information reported on their returns, even when a paid preparer prepares the return.
That is one reason choosing a preparer and reviewing the completed return matter.
What should a reputable tax preparer ask me for?
A reputable preparer should generally want to see relevant records and receipts rather than simply asking the taxpayer to provide a number for income or deductions. The IRS notes that good preparers ask questions when information is incomplete or unclear.
What is a PTIN?
A PTIN is an IRS-issued Preparer Tax Identification Number. Anyone who prepares or assists in preparing federal tax returns for compensation generally must have a valid PTIN.
Is tax preparation the same as tax planning?
No. Tax preparation looks primarily at accurately reporting the relevant tax year. Tax planning looks forward and considers how business and financial decisions may affect tax obligations.
For an owner planning an acquisition, restructuring, expansion, or major investment, that distinction is worth discussing before the transaction rather than after the books have closed.
Key Takeaways
A strong tax process is not created by adding more work at the end of the year. It is created by making the information easier to understand throughout the year.
For business owners, the priorities are straightforward:
- Reconcile revenue rather than assuming the general ledger tells the whole story.
- Keep evidence that supports important deductions.
- Separate business and personal transactions.
- Use the prior-year return to identify changes, not simply to copy information forward.
- Give state and multi-state activity proper attention as the company grows.
- Keep legal, accounting, and tax records aligned.
- Use software for processing without treating it as a substitute for judgment.
- Flag major transactions for specific review.
- Evaluate a tax preparer on qualifications, process, and availability, not price alone.
- Read the completed return before signing it.
The best tax preparation process is usually the one that makes difficult questions visible early.
How CapActix Helps Strengthen Tax Return Preparation Workflows
CapActix Business Solutions is an outsourcing tax filing company, providing outsourced tax preparation and tax review support for CPA firms, tax firms, and businesses. We help with US tax preparation and support tax returns including Forms 1040, 1065, 1120, and 1120S.
We also provide dedicated tax reviewer support for CPAs, enrolled agents, and accounting and tax firms, for services including but not limited to US income tax, payroll, and sales and use return review procedures.
Consider Calling Us Before Your Next Tax Filing
If your tax preparation process still depends on reconstructing information at the last minute, it may be worth examining where the bottleneck occurs.
A conversation with our qualified tax advisor can help identify whether the issue is bookkeeping quality, document collection, preparation capacity, review capacity, or the complexity of the tax work itself.
