I never heard the word contemporaneous until my freshman year of college, in a public speaking class. According to my professor, a good speech is always contemporaneous; meaning the actual wording and flow of the speech is being constructed at the appropriate time. Pre-planning a speech is always important, but it’s not contemporaneous if you write the entire thing ahead of time and simply read it aloud; and producing a speech after its due date is good for nothing more than a failing grade. Contemporaneous, essentially, means “on time.”
If you’re wondering why we are flashing back to my old college classes, it’s because the word contemporaneous is also crucial in the accounting and tax world, but with regard to taxpayer records. Just like in public speaking, having a plan for record keeping is essential, but a plan alone is not enough and recording events that haven’t happened yet is ill-advised for a number of reasons. In addition, compiling your records after-the-fact will result in a failing grade from the IRS – just like the failing grade my college professor promised – except far more costly.
Auditors often examine actual documents such as invoices, sales tickets and bank statements so they may compare them with what is included in tax or accounting totals. If a taxpayer cannot produce an item that is recorded in his or her accounting system, the auditor may disallow expenses or make other changes. In addition, if payments, sales, or other transactions are recorded long after they took place, with incorrect dates or vague descriptions because it was too long ago to remember, the strength of the accounting records is greatly diminished, and the pain of the audit is greatly increased.
Luckily, there is a simple solution to the issue of contemporaneous record keeping – establish an accounting system, and develop the discipline necessary to follow it. Save invoices, sales tickets, and other important documents, and record them into your accounting system in a timely manner. Categorize your expenses appropriately, and use good descriptions in the memo section of your electronic accounting software, if that’s what you use. Finally, balance or reconcile your bank accounts regularly, and pay attention to what your records are reflecting throughout the year; don’t just wait until tax time.
A good system of record keeping not only serves to provide protection in an audit; it provides you with timely data that can help you and your advisors make good decisions quickly. It’s also likely that your tax preparer can deliver better results with a clean picture of your finances, because he or she can spend time looking forward, instead of looking back to straighten up messy records appropriately.
So be contemporaneous. Be on time. People will appreciate it, and it will get you good grades – in public speaking, and more importantly, with the IRS.
