Non-Filers have a particular problem when they decide to come in from the cold and rejoin the tax system. That is nonexistent records. Non-Filers are most likely to be people with small businesses that can dodge the 1099/W2 reporting systems. Coming clean with the IRS requires them to report their net income for any returns missing in the last 6 years. What should they do if those records do not exist?
First, you must realize that records do exist. They are just not in the possession of the taxpayer. Here is a list of places to start to rebuild those resources:
- The IRS transcripts are the first place to start. You can download these from the irs.gov website. Life is a lot easier if late filed returns agree to the 1099s in IRS possession.
- Bank statements are still on file at the various banks. There may be some cost to get them depending upon their age.
- Credit card statements are also available from the various banks that issue them.
- Vendors have records of their billings and collections from their customers. This is particularly important if the transactions were primarily in cash.
Finally, there is the Cohen Rule. Cohen was a 1930 case in which the Court allowed the use of estimates if there is a reasonable basis to assume that the expenses had occurred. This won’t work with travel and entertainment expenses but is still better than nothing when it comes to other costs.
Yes, the fees for cobbling all this stuff together are going to be higher than they would have if you had never gone out of compliance. Think of it as a motivation to avoid this situation in the future.