Why it’s important to have your accounting records in order….
At a previous firm, I was assigned on a job that involved an IRS audit of a newly-acquired HVAC client that never had an accounting system or a set of books since its existence. The audit required going back 6 years and was due to pay steep penalties for failure to file.
Since the client had nothing in place, it required ordering all bank statements, credit card statements, payroll records, and any other transactional statements that were needed to create financial statements for each year. This was not an easy task, if you know how hard it is to get records from years past.
We took each year and broke it down by month to keep it from being so overwhelming, and from scratch, entered all the transactions into the accounting software. From there, we were able to get the statements needed in order to prepare the tax returns. The tax returns resulted in the client having substantial refunds; however, the client could not get them due to the statute of limitations passing. Because we were able to get all six years complete within the specified timeframe, the client was able to be pardoned by substantial fines for not having filed returns all those years.
In conjunction with this exercise, that took 6 months, we discovered fraud from one of the previous bookkeepers. Because the client never had any idea what was going on in and out of their cash and credit card accounts, they never knew she had been stealing. The client was able to press charges against this ex-bookkeeper.
The client ended up passing the audit, and as a result of both that and the fraud, saw the value of not only having solid accounting records and internal controls, but also keeping up with it on a timely basis.