Maintaining financial records plays a key role in every business. Analyzing them helps get a clear picture of the financial health. When it comes to accounting and tax firms, they must store the necessary data the right way and help clients break through the financial maze easily. They are instrumental in filing taxes and understanding the complicated financial scenario for their clients. Another important thing that the firms need to be mindful of is that the data is never misused by internal or external members and that the relevant people can access it at any point.
Record keeping is not merely to keep track of what has been done for the clients; the IRS mandates that businesses keep financial records and produce them as and when necessary. However, for small tax firms, who deal with an enormous amount of data, deciding which information to store and making it a simple process can be challenging.
Record keeping is proof of business transactions. Small tax firms also need this data to analyze the work they have done and measure the success they have achieved. Keeping the records in order also helps reduce stress, especially when the aim is growth and profitability.
In this blog, Finsmart Accounting – trusted globally for outsource bookkeeping services – will share everything about digital documentation for tax filing. Let’s start with the evolution of documentation in the field of taxation!
Evolution of Documentation in the Field of Taxation:
Just like the other aspects of the finance industry, record-keeping has also undergone massive change. Traditional record-keeping involved heaps of paperwork, which led to lots of errors. Digital documentation has made the process streamlined and improved the number of people needed to ensure accuracy, which has resulted in better efficiency and accuracy.
The shift from paper-based documentation to digital platforms marked a shift in the taxation landscape. Digitalization is one of the earliest forms of automation that tax firms have adopted. It significantly reduces the chances of human error that are quite obvious in manual record keeping.
Rules for record-keeping in taxation:
Picking the duration to store records can be tricky. However, most businesses store records for 3 years. Some specific paperwork might need to be preserved for longer than that. Firm leaders can take a call on how long they want to store the records depending on the volume, complexity, and importance of these data. However, once you receive all the relevant data, it might be wise to store them forever.
Here are some basic rules that modern tax firms must follow to keep records:
– No matter what it is, preserve all financial documents
– Keep electronic or digital records to avoid paperwork and manual labor
– Keep a backup of the digital records
– Keep the records password-protected
– Even if you consider discarding a piece of information, it is wise to let some time pass. Don’t forget to check with the client before discarding.
What Are the Records You Should Consider Retaining?
The files that the tax firms preserve are often not the ones that fall under the mandatory category. These are the records based on the professional judgment of the tax preparer. While making such decisions, considerations should also include which records will help them in providing continued services. They also have to consider if this information has the potential to provide a future defense. As a part of the best practices, records should include:
– Deliverables given by a client (written tax advice, tax returns, etc.)
– Important communication with the client
– Documents with calculations that include the deliverables
– Calculations that affect the future years (loss and credit carryforward calculations)
– Research that includes the calculations reached within the deliverables
– Engagement contracts that elaborate the scope of work provided by the client
– Evidence of the clients assigning the task
– Any other records that need to be kept for the IRS
Besides analyzing which documents to retain, it is important also to analyze the ones you do not need to retain:
– Client-provided original documents should be returned to them and not retained
– Non-final versions of documents that were not provided by the client
Another aspect that needs to be considered here is email correspondence. In a small tax firm, several communications are exchanged via email. Whether it is a document of tax advice or a mere exchange of communication, careful consideration has to be made on whether the information available there should be stored.
Tips to Master the Art of Digital Documentation:
1. Establish a systematic document organization process: From clearly defining who gets access to documents to the file they are being saved on – a well-organized system is critical in document management. Categorize and label them according to their type and relevance. Most often your software will have the ability to categorize. It makes it easier to locate and retrieve information as and when needed.
2. Embrace cloud-based software: Most firms have already switched to cloud-based solutions. But if you are one of them who still hasn’t, it’s time! It is time to streamline the record-keeping processes. Choose your cloud-based software based on what your firm needs and what will further ease the process of accounting and tax. Choosing cloud-based solutions ensures that the data is backed up and reduces the risk of data loss or theft.
3. Bring multiple-factor authentication: Security is key when dealing with financial data. Multiple-factor authentication plays a key role in accessing accounting systems. It acts as an additional layer that keeps sensitive client information safe and helps prevent breaches by preventing unauthorized access
4. Use electronic signature solutions: When it comes to dealing with financial data, forging a signature is one of the most common ways of data theft. Implementing electronic signature platforms across organizations and all functions might be an ideal way to reduce forgery. Besides, it is also a great technique to move document approval around faster. They help eliminate the number of papers used and the number of physical signatures needed.
5. Back-up digital records: Data loss not only costs financial loss but also loss of face. Most software provides automatic backup features. However, small firms must also conduct periodic manual backups. Regularly backing up digital records ensures that even during a system failure or any other technical issues, there is no loss of critical tax data.
6. Provide staff training: No matter how much you invest in technology, the true difference lies when you make your team aware of what needs to be done and when. Invest in the staff members and trust them for efficient data and documentation management. Make sure that the team members are aware of the best practices in digital documentation and keep the data protection policies in mind.
Simplifying Record-Keeping for Tax Forms – Endnote
With small tax firms working on several tax forms, the firm leaders need to assess and master the art of record keeping. With automation taking over the taxation scene, it has become all the more essential for these firms to move from traditional documentation and record-keeping to digitalization. Tax form management is intricate and complex and the records can become essential at any point. Integrating financial systems seamlessly not only helps expedite the documentation process but also ensures that they are safe and protected. It is equally essential for the teams to follow a simplified process of documentation to ensure that the data can be accessed anytime, anywhere, and by any of the stakeholders involved.
Want to outsource your tax practice? Write to us at connect@finsmartacounting.com.
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Director Growth Strategy & Alliance
Maanoj Shah is a finance and outsourcing expert with strong Business Strategy and Scaling-up experience. Over the last 20 years, he has incubated multiple businesses and helped build global enterprises in verticals as diversified as hospitality, technology, and healthcare.
