Finishing your tax return early may sound like a good idea, but rushing through your tax prep for the year comes with risks. If you’re relying on unorganized books or accounts that haven’t been updated, your tax returns may include incorrect information.
Overstating income can lead to overpaying taxes while underpaying taxes can lead to penalties and interest; your chances of an audit also increase. To help you avoid those troubles, we’ve compiled a checklist of accounting red flags. If your records have any of these issues, your books may not be ready for tax time.
Transaction Level
Start by looking at items on the transaction level—that’s the foundation of your books. If your transactions are missing, incomplete, or incorrect, then any reports or conclusions based on those figures are misleading. Check for these red flags:
Items Left in Bank or Import Feeds
Your records should include every transaction that passes through your accounts. Record and categorize them properly, even if the transactions were fraudulent or for personal spending.
Uncategorized Items
To maximize your deductions, categorize every transaction. Before you work on tax returns, any holding accounts like Ask My Accountant or Unclassified Assets should be clear.
Be careful about what goes into a miscellaneous category, though. The Schedule E has a line for Other Expenses, but not everything is deductible.
According to Accounting Today, disagreements about deductions and credits are the second most common dispute taxpayers have with the IRS. Selecting an accurate account from your chart of accounts helps you avoid claiming more deductions than you should.
Transactions Without Vendor Names
If transactions are missing vendor names, your vendor payment totals may be inaccurate. Annual payment totals affect whether a vendor should receive a 1099 form, and the IRS penalizes businesses that issue incorrect forms or fail to send required forms.
Missing Receipts or Support Documents
For the IRS, summarizing your annual income and expenditures isn’t enough. They also require supporting documentation. If the IRS audits you, you must produce evidence to support the figures on your returns. If you’re missing receipts, invoices, or statements, now is the time to get copies.
Unrecorded Noncash or Barter Transactions
Sometimes, tenants provide property or services instead of rent. When that happens to you, determine the fair market value of the property or service, then record it as income. Include that same amount as an outlay for the service the tenant provided.
Did you know? Income reporting is one of the most common errors for rental property owners—and disputes with the IRS, which can lead to accuracy-related penalties.
Records Using Posting Dates Instead of Transaction Dates
In January, double-check how your debit and credit card transactions are recorded. Sometimes, purchases won’t post to your credit card or bank account until a day or two after the transaction. At the end of the year, this is especially important. You want December transactions recorded in the books for December, not January.
Need some help getting your books off to a strong start for the new year? Refer to our full discussion here.
Credit Card Payments Listed as Expenses
The transactions making up your credit card balance are your expenditures. The payment itself should go against the credit card liability account in your chart of accounts, not an expense line.
A liability account, like your credit card or bank account, shows on your balance sheet. The purchases you make with your credit card make up the expense lines on your net income (profit and loss) report.
Account Level
Once you’ve addressed any issues at the transaction level, check for these items at the account level.
Unreconciled Accounts
Reconcile your accounts to ensure your account books match your bank, credit card, and loan statements. This will help you spot any discrepancies, such as if a transaction clears for a different amount or the bank returns your deposit.
Outstanding or Uncleared Items
Reconciling your accounts also helps you spot any items that haven’t cleared yet. Relying on your bank balance is risky since checks don’t clear immediately. Mail goes astray, and people lose checks occasionally.
Legal tip: Each state has laws regarding unclaimed property, like checks that haven’t been cashed. Use the National Association of Unclaimed Property Administrators website to learn more about the requirements in your area.
Looking for uncleared transactions is also a great way to watch for commingling funds. Are deposits going to the correct account? Are business purchases made using a personal credit card account? Investigate uncleared transactions to make sure your records are accurate.
Incorrect Fixed Assets
Double-check your list of fixed assets. Is the list current? If you sold or disposed of assets this year, make sure they’re off your balance sheet.
Negative Numbers in Asset or Liability Accounts
If you see negative balances in your asset or liability accounts, that’s usually a sign that a transaction was recorded or classified incorrectly. Make a note of any transactions that are throwing off your balances, and have your accountant review them.
Did you know? With an REI Hub subscription, you can give your CPA access to your books so they can easily review your accounts or update your books.
Missing Depreciation
Your accountant may calculate and record depreciation for you, and that’s great. But if you handle your own books and tax returns, make sure you track and record depreciation annually.
Refer to this article for REI Hub’s bulk depreciation option. For instructions on how to enter depreciation for a specific asset, click here.
Missing Adjusting Journal Entries
Your tax preparer may provide a list of adjusting journal entries once they’ve filed your return. Make sure the entries from last year are on the books.
Reporting Level
No, you’re ready to look at the big picture. Red flags at the reporting level indicate lingering problems at the transaction level or gaps in records.
Unbalanced Balance Sheet
The asset section on your balance sheet should equal the liabilities and equity. If the balance sheet doesn’t balance, you may have damaged data or an improperly recorded transaction. Your accountant can help you correct this issue.
Mismatched Prior Year Balances
The closing balances for last year’s books should match last year’s tax return figures. And the figures reported on last year’s tax return should be the opening balances of this year’s books.
If any of these three are off, find out why. Were the adjusting entries for last year recorded with the wrong date? Was a transaction updated or deleted? Correct the error so your starting balances for this year are correct.
Incorrect Year-End Loan Balances
Compare your loan balances with the year-end statements from your lender. If the balances are off, double-check how you recorded the loan payments for this year. Are all the payments split between principle and interest?
With REI Hub’s Loan Payment Template, we’ll help you automatically split your loan payments into principal, interest, and escrow amounts.
Remember to move any late fees or penalties from the liability account to an expense account.
Missing W-9 Forms
You don’t need a W-9 form for every vendor you do business with. But you will need W-9 forms for vendors who qualify for 1099 forms. Look at your list of vendors who received $600 or more from your business for the calendar year. If you’re missing W-9 forms for any of them, confirm the vendor’s tax classification. If the vendor doesn’t qualify for a 1099, make a note in your records so you don’t have to worry about them next year.
Pro tip: Use REI Hub’s Documents and Notes feature to store digital copies of vendors’ W-9 forms. Our Vendor Tracking feature keeps names, contact information, and tax ID numbers safely stored and organized for you.
How REI Hub Can Help
Checking off items on your to-do list feels good, but rushing through your tax prep is risky. Small issues can have big consequences, like IRS fines and audits. Avoid overpaying your taxes or getting hit with penalties by working through REI Hub’s checklist of accounting red flags. Once your books are clear of these potential problems, you’ll be ready to tackle your tax return.
Looking for a better way to handle your books this tax season? REI Hub can help! We designed our accounting platform just for real estate investors and rental property owners like you. Our straightforward interface and built-in templates take the guesswork out of bookkeeping, allowing you to update your books and get on with your day. But don’t take our word for it. We’ve got 211 five-star reviews (and counting!) like this one:
“I searched and searched for the best accounting software for our vacation rentals. I found REI Hub and have been using them for two years. Now, I have recently added a new account for my newly acquired long-term rental and it’s working wonderfully for that too! I LOVE THIS SOFTWARE!
“It is easy to use, super affordable, custom designed specifically for rentals and provides me with everything I need to keep everything in order throughout the year and gives me exactly what I need for tax time and to evaluate how my rentals are doing. The best part is their customer service, which is so hard to find these days! Adam has helped me on multiple occasions and provides the best customer service out there. I am so glad I found this resource for my properties!!!” —Christi Richards
Let us help get your rental property’s books in shape for tax season. Sign up for a 14-day free trial today!
