If you're feeling lost and wondering how to file back taxes, it may make you feel better to know that you aren't alone.
“It's a problem that applies to all groups in the society—W-2, self-employed, entrepreneurs, high-level executives and professionals," says George Connelly, a tax attorney who works in the Houston office of the national law firm Chamberlain Hrdlicka. "For businesses, it tends to fall on small businesses."
Thomas J. Williams, an enrolled agent who operates Your Small Biz Accountant, LLC, in Kissimmee, Florida, agrees that small-business owners often struggle with filing taxes.
“Small-business owners frequently have the mindset that they're just a little guy, so they don't need to be concerned with compliance or tax issues that larger companies pay to resolve," Williams says.
But, of course, that isn't the case. So if you haven't filed with the IRS in some time and don't know how to file back taxes, consider the following your road map out of the wilderness.
1. Gather your paperwork.
You'll want to provide a profit and loss statement (your P&L), a balance sheet and a general ledger, along with receipts, Williams says.
And what if you don't have a P&L, balance sheet, a general ledger and receipts?
“If you have no accounting in place, then you'll want to supply the bank statements, but be prepared to write a large check because it's not cheap to recreate your books from scratch," Williams says.
Steven Weil, an enrolled agent and president of RMS Accounting in Fort Lauderdale, Florida, agrees. But, at least, on the plus side, he says that it can be done.
—Thomas J. Williams, agent, Your Small Biz Accountant, LLC
“If revenue is deposited into a business bank account, with checks, debit cards and credit cards being used for expenses, a good tax pro can reconstruct your books and get your taxes filed," he says.
And if you are behind, most tax experts and business consultants argue that you should get help from a tax professional. But if you want to at least start off on your own, the IRS has some resources that may prove helpful, including the following webpages:
- Tax Information for Businesses
- Small Business and Self-Employed Tax Center
- Small Business Forms and Publications
2. Resist the urge to fudge details when filing your old tax forms.
You're as honest as the day is long, but you're also human. As you figure out how to file back taxes, you may notice that you really owe a lot.
And sometimes business owners, upon realizing that their tax bill has really piled up, will find themselves leaving out some income here and there, or perhaps exaggerating deductions, to reduce that tax bill, according to David Klasing, a certified public accountant and tax attorney who runs Tax Law Offices of David W. Klasing, with offices in Orange County, California and Los Angeles.
You're in enough of a jam already—don't make it worse.
“If you have not done your taxes in several years, you have technically committed a misdemeanor for each year you had taxable income and failed to report it," Klasing says.
He also points out that if you then cheat on your taxes while trying to get back in the IRS's good graces, you could be found to have committed a felony.
Even if that doesn't occur, Klasing says, “Your risk of audit goes through the roof—so what I tell my clients is, 'Do not compound your errors by getting caught cheating coming back in the door.'"
That means accurate books and records and no omitted income, Klasing stresses. “Only valid deductions [should be] claimed," he says.
Of course, that's another benefit of hiring a tax professional to file your back taxes. You can't be tempted to cheat or fudge on your taxes if someone else is doing them.
3. Mail in your back taxes; don't hand deliver them.
When trying to figure out how to file back taxes, some business owners may want to go straight to the IRS.
“Small-business owners often figure they will get preferential treatment if they take everything—returns, receipts, forms—to the IRS all at once, like going to confession. In my experience that often results in a bad surprise," Connelly says.
He also makes the analogy that some business owners believe that they'll be treated like "the prodigal son" who comes back to the family, and that the IRS will cut him or her some slack. Connelly doubts that you'd be audited if you walked into an IRS office with a pile of paperwork and your sob story.
"Instead, the IRS will likely take a harsh view of anyone who has not filed, especially for several years, and will take the most aggressive collection action it can," Connelly says. "While there are procedural protections against immediate levies on bank accounts and salary, since 1998, the filing of a notice of federal tax lien alone can shatter anyone's credit rating and can be a ground for default of existing credit line."
Connelly suggests using certified mail for each year you're late (so you have proof that you sent in the return) and sending them to the appropriate IRS office “with whatever payment can be made."
Maybe you can't pay everything you know that you owe, but pay what you can.
“Await contact from IRS after the taxes are assessed and the payments applied and only then respond and provide requested documentation," Connelly says.
4. Once you get started learning how to file back taxes, don't stop.
Experts advise against putting off working on those back taxes. It isn't as if it'll be easier to file even more overdue returns next year.
“The biggest mistake is letting one missed year lead to a pattern on the assumption that since you did not do a return last year, that means you can't do one this year," Weil says. “This is just not true. We often start by getting the current return done and then work back to get the prior years out of the way. It's important to remember that the statute of limitations for tax returns does not even begin to run until the return is filed."
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