Reconstructing lost business records is an art that may enable taxpayers to complete a missing tax return and eliminate worries about how to pay off the IRS because they were self-employed and, for whatever reason, no longer have any records. Both income and expenses have to be reconstructed and reported as accurately as possible.
The IRS Just Wants to Get That Guy!
No. When the IRS files a substitute return for a taxpayer, it knows the tax liability (coupled with penalties and interest) upon which they then pursue collection is, in most cases, highly inflated. It is the taxpayer’s responsibility to file a correct tax return. It is the taxpayers’ responsibility to assert the items of income and deduction relevant to their tax situation in any given year. When the IRS files a substitute tax return, what they really want is for the taxpayer to submit the correct return, even if the original records supporting income and deductions no longer exist.
Thus, the taxpayer needs to recreate or reconstruct its business records. Sustainable reconstructions of income and expenses should be well-reasoned. While any given taxpayer may feel the IRS already has enough knowledge about their income, bank and credit statements, Forms 1099, and what the taxpayer owns and the taxpayer’s lifestyle, are considerations in reconstructing income.
