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Fortunately, there’s a path to getting caught up with back taxes—even if you’ve lost your records, or never kept them in the first place. Here’s a look at the process of putting together back tax returns when you don’t have records.
Where do you start?
When you don’t have financial records for past years, they have to be recreated from other available documents. This process, known as forensic accounting, relies on Internal Revenue Service (IRS) transcripts, financial statements, and other documents to substantiate information that you’d usually get from your bookkeeping records—receipts, income statements, and other more detailed sources typically used to create an income tax return.
You can then use those documents to help piece together your business’s historical revenue and expenses. If all your transactions are processed through one or two bank accounts and credit cards, for example, you can go through those statements, categorize your expenses and income, and recreate the financial records you need to file back taxes in a fairly straightforward, though time-consuming, manner.
However, businesses that rely heavily on cash, that mix personal and business expenses, or have funds scattered throughout many different accounts, may have a more difficult time.
Depending on where your business lies on that spectrum, you can either handle the task of recreating your records yourself, or hire a professional forensic accountant. The more complex your situation, the more likely it is that you’ll need professional assistance.
Remember: It’s always better to at least file your tax returns, even if you’re not able to pay right away, than continue putting off filing.
This is because the failure-to-file penalty is 5% of your taxes due per month, up to 25% of your total tax bill. The failure-to-pay penalty is much less—0.5% per month with the same 25% limit. So if you don’t file, you’re paying 10 times higher penalties than you do if you do file, but don’t pay the taxes you owe right away.
Sources to use when recreating past financial records
Recreating your past financial records to file your overdue tax returns is complicated, but it is possible. Here are some of the most common methods used in forensic accounting to file back taxes with no records:
Request tax transcripts from the IRS
The IRS maintains a massive database of financial records reported through various methods, including W-2 forms, 1099s, and other tax records.
Some of these forms may have come from your business, your payroll provider, vendors or freelancers whom you paid, or your banks or investment firms. Financial information pertaining to your business is then pulled from these forms, and compiled into tax transcripts.
There are several different types of tax transcripts, each containing different information:
- Tax return transcript: Contains information from your current and past three annual tax returns. If you haven’t filed in the past three years, these won’t be available to you, but if you’re behind less than three years, your tax return transcript may be useful in helping you get up to date.
- Tax account transcript: Shows your basic information like filing status, any payments you’ve made, and your taxable income according to the IRS (which may be very different from your actual taxable income when you complete your past bookkeeping).
- Record of account transcript: Contains the information from both your tax return and tax account transcripts.
- Wage and income transcript: Compiles the information about your business that the IRS has received from other sources, like 1099s and W-2s filed by other businesses you’ve worked with, your employees, etc.
You can request access to your tax transcripts at any time to help you piece together prior years’ financial results.
For most business owners, the best and fastest way to get your tax transcripts is through the Get Transcript Online tool from the IRS. You can also order a tax return or tax accounting transcript via mail or phone, although this will add an extra five to 10 days for delivery.
If you’re not using the online tool to request your income transcript, you’ll need to fill out Form 4506-T. This is the form you’ll use to request any type of IRS tax return transcript.
Gather bank and credit card statements
Bank and credit card statements can be used as an official record of deposits, withdrawals, and business expenses. Business owners who use a dedicated set of accounts for their business will have the easiest time here. If you mix personal and business expenses in the same account, figuring out what was for work and what wasn’t can be extremely difficult.
To gather these statements, go online and download your forms from your bank, or contact your financial institutions directly if you need help.
If you use some kind of accounting or tax software, you may be able to download your transactions from that software directly.
You can also look at your Social Security statements, Forms W-2, and any other tax forms you’ve received related to financial accounts.
When you don’t have any other records to support your business activities, financial statements can act as a source of truth for the history of your business.
Dig into past emails and paper records
Finally, you’ll want to look for any additional records you can come across. Any scrap of information could prove useful, whether it’s a big shoebox of receipts labeled “keepers” or invoices and receipts archived in your email inbox.
If you’re a service-based business, things like appointment books, order forms for supplies, and other unconventional records may be used to substantiate business expenses and income.
Ultimately, your goal is to identify as many revenue and expense transactions as possible using one or a combination of these three main sources. Take care to avoid duplicating transactions on your tax records if you have them both on a bank statement and another receipt, invoice, or data source.
Tip: To avoid this challenge in the future, hire a bookkeeper or bookkeeping service so your records are always updated monthly. With updated accounting records, you can have tax-ready financials with just a few clicks.
Hire a professional team
When the situation is too complex for you to handle on your own, or you’d rather hand the task of putting your accounting details together to someone else, a professional accountant or bookkeeper could be what you need.
Many accounting professionals have experience with forensic accounting and piecing together financial records for small businesses, even without detailed accounting information available (just be sure you verify that this is a service they offer before you hire them!).
To prepare your past due tax returns, your forensic accounting team will need those same records you would use to complete your taxes, including any tax transcripts, financial statements, and other records. If you have any of this on hand, you can give it to them right away. They’ll also likely request additional records or information from you as they go through the process of recreating your records.
Finally, they will e-file or send in your taxes via other methods to ensure you are caught up and in compliance with the law.
In addition to completing your back tax records, an accountant can also search for tax credits, tax deductions, and other types of exemptions that may help you decrease your tax liability.
How Bench can help
Bench is the largest professional bookkeeping service for small businesses in the United States. In addition to helping businesses keep their books updated monthly and taxes filed on time going forward, Bench has a special historical bookkeeping team that specializes in handling back tax issues. Our bookkeepers are experienced in getting your books up to date fast, so you can get back in the IRS’s good graces as quickly as possible.
Businesses with past unfiled and unpaid taxes can accrue big penalties (plus interest) every month without even realizing it. Getting Bench on your team can stop additional penalties and help you get on track to get ahead of your taxes for the future.
Tax Professional Tip: If you owe taxes, there’s a good chance that you can get on a tax payment plan that allows you to pay over time for any past tax year. And if you don’t have a tax liability, but you are owed a tax refund, you can’t get your money until you file a tax return.
The bottom line
Even with no records, you can still get caught up and in good standing with the IRS. Putting together back tax returns isn’t always easy, but using any available financial records, combined with accounting expertise, can put your business on track for long-term tax compliance. When you’re done with your federal income tax return and any required state tax filings, you can take care of your tax debt and move on from your old tax problems permanently.
If you’re in doubt or don’t know how to move forward with back taxes on your own, working with a professional bookkeeper or forensic accounting specialists could be the right call to get your business back on track.
