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My Workflow for Preparing Taxes

This post isn’t about the process of actually filing your taxes, rather it’s the workflow I follow over the calendar year so that I can just plug-in the numbers come tax-time and be done with it.

I use the following 4 tools to help me:

  1. Online Google Word document with potential tax events
  2. My YNAB transactions labeled with the word “tax”
  3. Online Spreadsheet tracking my income
  4. Email folder with any tax related emails

 

Tax Filing Mentality

My friend N. and I have this argument frequently – she is convinced that it’s much better to file conservatively and not get on the IRS’s radar while I favor keeping impeccable records to keep every penny of what I earn.

I disagree with N. because if I pay a CPA to do my taxes then they will take the most conservative route and the easiest route. The reason I go through the time-consuming task of doing my own taxes is the money savings.

Physicians are risk averse – thank allah! Imagine us being cavalier, that might not end well for patients. Perhaps we apply that same mentality to our personal financial lives and don’t take enough risk or file our taxes too timidly.

Being audited by the IRS doesn’t mean you did something wrong. Lying on your taxes, now that’s wrong. Not wrong from a moral perspective but wrong as in you’ll eventually get caught and have to deal with a lot more headaches later.

Read this post about where it’s worth it to hide cash from the IRS.

The reason I keep such detailed records is so that I can file my taxes without any fear that I’m exaggerating my numbers. When I flew to San Diego for my Professional Boundaries course, stayed at a hotel there, and paid for the course then you best believe I wrote every last penny of that off. And when I had drinks down there, when I ate food down there, and when I took an Uber to go to the gym there then I wrote that off as well.

 

1. Online Word Tax Document

I have an online word document which I can access from my phone or laptop in which I document every single transaction for the year which might be a potential tax event. Below is a sample of what I write in my document:

Over the year I write down anything and everything that comes to mind – I don’t filter it until tax-time. Once you sit down to do your taxes you can sift through these categories and decide what’s relevant and what you can ignore.

This is a great place to write down any tax refunds you might get which might need to be reported the following year. We’ll talk about the redundancy of recording tax events in other places as well.

You might have contributed to a Traditional IRA early in the year and forgot so it’s worth writing it down. You may have earned some income from a company or have been gifted a cell phone and this is a good place to write it down.

When I sit down to do my taxes I cross out each item after I’m sure that I’ve addressed it. I also keep these documents for several years in case there are audits. I can refer back to them and use them to refresh my memory.

 

2. Budgeting Software

If you’re not using a budgeting software then you’re likely leaving a lot of money on the table because your brain isn’t meant to tabulate all the times you pull out your wallet.

“Tax” Label

I use YNAB for my budgeting software and for each expense which I think might be a tax-event I write the word “tax” in the memo section. It might something like “dinner with Mark tax” or “flight to SD tax”.

When I’m ready to sit down to fill out my tax software I open YNAB and type “tax” in the search bar and filter the results for the specific tax-year and I’ll have every transaction that I need to account for.

This is the easiest method and that way I don’t need to have a separate tax category. I’ll talk about what some others do online which involves creating a tax category and I’ll tell you why I’m not a fan of this below.

Tax Category

Some like to use a separate tax category. When they spend money on a work-related expense then they can categorize it under that “tax” category and they’ll know exactly what they spent that year on potentially tax-deductible expenses.

The only tough part here would be that since everything falls under the taxes category, you may not be able to recall what category a specific expense falls under. For example, you may have spent $20 for some online fee but you may not know that it was a renewal fee for a subscription or purchasing some item for your work.

One work-around here would be to write what category you spent this money for in the memo section of YNAB. That way when you are doing your taxes you can indicate exactly what the spending was there for.

 

3. Tracking Income

Tracking your income can be a bit of an issue if you don’t stay on top of it. Especially if you are an independent contractor like myself then you might completely forget that you earned some money from some company that you worked for only a couple of weeks.

Or a company might send you your last paycheck in the following calendar year and you might forget to record it in the correct year and then have to deal with an amended tax return or a letter from the IRS.

My tax word document comes in handy for this because I write down every company for which I will need an income report from (a 1099-MISC or W2). Even if they don’t send me one in time, I can always list the income from my own records.

This takes us to yet another document I keep which is my income spreadsheet. I know, it seems like I’m doing a lot but frankly it all feels really natural to me and my detailed documents are why I have no problems going toe-to-toe with the IRS every few months.

My spreadsheet is simple and I write down every paycheck that I receive whether by mail or direct deposit.

Tracking my income has saved me nearly $20,000 and fighting the IRS audits has saved me $25,000. These aren’t exaggerated numbers – these are from only 2 isolated events.

I don’t think the IRS or my employers have been malicious but whenever there is a mistake it’s always in their favor. Keeping track of my income as well as my hours has helped me fight back.

 

4. Emails Related to Taxes

This is the last thing I do for taxes. When I get an email that’s related to taxes such as an email confirmation that I paid for a medical license then I file it under my tax category.

This might seem redundant but when it comes to documents, digital documents specifically, there is no such thing as enough redundancy. A great example came up just now – I went to look for my 2017 taxes which I just completed and filed and thought I uploaded into my digital folder and it’s not there. I was certain I uploaded it so I went looking for the copy which I downloaded to my desktop and it wasn’t there either. I found it in my desktop trash bin.

Redundancy baby, it’s necessary because the mind isn’t trustworthy. Or maybe it’s the meth.

It only takes me minutes to review these emails because there aren’t a whole lot. And if I identify an item that wasn’t accounted for then I download it as a PDF, add it to my digital tax folder, and delete all the tax emails and I’m ready for next year’s taxes.

 

Read this post about how I am doing tax planning now for 2018.

2 replies on “My Workflow for Preparing Taxes”

does the IRS ask for your receipts during your audit? or are your spreadsheets and such sufficient proof for the IRS? you said in another blog post that you take pictures of your receipts, but do you ever have to send in these pictures?

They asks only for the receipts and documents relating to the part of my tax return which they are auditing. This isn’t a full audit where I have to provide all my ins & outs. It’s very unlikely to get that kind of audit.
I usually keep solid records and send them a lot more information than they ask for which is helpful. I never send in the actual copies of the receipts, I explain the numbers and might share a spreadsheet with them. I end my letters with letting them know that I have the receipts which I’m happy to share with them.

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