Bookkeeping helps you meet IRS record-keeping requirements
The IRS requires businesses to keep records of income and deductions because it helps ensure accuracy in federal income tax filings.
According to the IRS, your record-keeping should include a summary of your business transactions in addition to receipts and other supporting documentation. If the IRS audits your income tax return, having bank account statements and receipts is helpful, but it will take a lot longer to complete the audit. Plus, if you lose a receipt or can’t prove that a transaction on your credit card statement was for business use, the IRS auditor may deny that deduction.
When you’re caught up on your bookkeeping, you’ll have an organized record of income and expenses. This will help you more easily determine your taxable income when filing your back taxes and make it easier for the IRS to review and approve tax filings.
It helps you maximize your deductions and lower your tax bill
When it comes to your taxes, every little bit helps. And one of the best ways to reduce your tax bill is by maximizing your deductions.
If you don’t file a tax return, the IRS will send you a CP2566 Notice. This IRS notice informs you that the IRS hasn’t received your tax return and provides a proposed amount due. If you still don’t file a return, the IRS will eventually file a Substitute for Return (SFR) for you.
While having the IRS file a substitute return may sound convenient, the problem is the IRS typically only has information on your income, such as W-2s and 1099s. They don’t have information about your deductible business expenses, depreciation, charitable contributions, and other tax write-offs.
As a result, you’ll almost certainly owe more when the IRS calculates your taxes due. In fact, even if your business is operating at a loss and you’re actually due a tax refund, you could owe money!
By keeping your books up to date, you’ll have a record of all deductions and tax credits that can lower your tax bill. If the IRS sends you a hefty tax bill after filing an SFR, your historical bookkeeping will give you more power in negotiating your tax liability.
It can support the need for an Offer in Compromise
If you have significant tax debt and don’t have the means to pay it, you might want to consider an offer in compromise (OIC).
An OIC is a settlement offered to the IRS by taxpayers who can’t pay their unpaid taxes, even with a payment plan. When you apply for an OIC, you make an offer on how much you can afford to pay and provide detailed financial information to the IRS. The IRS reviews your financial situation and may accept your offer if you meet the strict criteria.
As a self-employed person, the IRS will look at your income, expenses, assets, and liabilities—both personal and for the business—when determining whether to accept an OIC. Generally, you need to prove that you can’t afford to pay your total tax bill before the statute of limitations runs out.
If you’re considering an OIC, it’s crucial to get caught up on your historical bookkeeping. The IRS won’t seriously consider your offer unless you’ve filed all past-due tax returns. Plus, your bookkeeping can be used to support your declaration of income and expenses for your OIC application.
When you contact a tax attorney or CPA to get help applying for an OIC, having your books in order and getting caught up on unfiled returns will be the first step, so it’s smart to get ahead of it.
Why hasn’t the IRS reached out to me yet if I haven’t filed my taxes?
If you have several years of unfiled tax returns and haven’t heard from the IRS, you may think you’re flying under the radar and don’t have to worry about it. But that’s likely not the case.
It’s no secret that the IRS has been underfunded and understaffed for years. The pandemic only made a bad situation worse, resulting in delays in processing returns and pursuing collections.
However, the Inflation Reduction Act of 2022 allocated new funding to the IRS to help the agency update its decades-old systems, hire more IRS agents, and go after taxpayers who haven’t filed returns.
By getting your books up to date now, you can avoid scrambling at the last minute to get your finances in order.
How to get caught up on historical bookkeeping
If you’ve fallen behind on your bookkeeping, catching up may seem daunting. But it doesn’t have to be. There are plenty of resources available to help you get caught up, including Bench’s Catch Up Bookkeeping. We can quickly complete months or years of overdue bookkeeping, even if you’re missing documents or your records are a mess. We can also connect you with a Taxfyle tax professional to help you get caught up filing returns for previous tax years.
So don’t delay any longer—catch up on your historical bookkeeping, and you’ll be ready for any surprises the IRS throws your way.