How to file back taxes for a business

Why act before the IRS contacts you?

If you do not file, the IRS can prepare a substitute return using only the income it knows about, with none of your expenses, and assess tax on that. It can then move to collection, including liens and levies. Filing yourself, before that happens, lets you claim every deduction you are entitled to and keeps the full range of payment and relief options open. If the missing returns belong to an LLC, see your LLC never filed a return.

How many years do you need to file?

The IRS generally expects the most recent six years of missing returns to bring a taxpayer into compliance, although it can ask for more. Businesses that owed nothing in some years still need to file where a return was required, for example partnership returns and a foreign-owned LLC's Form 5472.

If you are owed a refund for an old year, claim it quickly. Refunds are generally lost when the return is filed more than three years after its due date.

How do you catch up, step by step?

1. Get your IRS transcripts

   Account transcripts show which returns the IRS has on file, what it has assessed and what you have paid. Wage and income transcripts show the Forms 1099, W-2 and 1099-K the IRS received for you. Individuals can get both through their IRS online account. Businesses can request them through a business tax account or on Form 4506-T.

2. List every missing return

   Federal income tax returns, payroll returns, information returns and state filings, year by year.

3. Rebuild the books

   Use bank, card and platform statements to reconstruct income and expenses for each year. See catch-up bookkeeping.

4. Prepare the returns on the correct year's forms

   Each year uses that year's form, rates and rules.

5. File them

   Filing all the missing years together is common. Keep proof of when each was sent.

6. Deal with the balance

   Pay, or set up a payment arrangement, as below.

7. Ask for penalty relief

   Once the returns are filed.

8. Stay current

   File and pay the current year on time. Missing a current return can end a payment arrangement.

To correct a personal return already filed, use Form 1040-X.

How do you pay what you owe?

• Pay in full if you can. That stops the late payment penalty and interest.
• A short-term plan gives up to 180 days to pay the balance in full.
• An installment agreement spreads payments over time. Individuals owing $50,000 or less in combined tax, penalties and interest, and many businesses with smaller balances, can apply online without submitting financial statements. While it is in force, the late payment penalty drops to 0.25% a month.
• An offer in compromise settles for less than the full amount, but only where the IRS agrees you cannot pay in full. It is a detailed application with its own fee and rules.

What about the penalties?

Late returns usually carry late filing and late payment penalties, plus interest. First-time abatement removes those penalties for one tax period if your record for the previous three years is clean. Reasonable cause relief can remove them where circumstances outside your control stopped you complying. Small partnerships may also qualify for relief from the per-partner late filing penalty. How each penalty works is explained in late filing and late payment penalties.

What if your LLC is foreign-owned?

A foreign-owned single-member LLC that missed Form 5472 faces a $25,000 penalty for each late form, which is far larger than any tax that might be due. Prepare each missing year's pro forma Form 1120 and Form 5472 carefully, and take advice on how and when to submit them, including any reasonable cause statement. See late Form 5472 relief.

What about the state?

Missed state filings are usually just as important. A state may have dissolved the company for missing annual reports or franchise tax. Reinstating it means filing the missing reports and paying the fees, penalties and taxes owed. See administrative dissolution and reinstatement. States also have their own voluntary disclosure programs, for example for sales tax that should have been collected.

What if you have already received an IRS notice?

Read it carefully, note the response date, and respond by then. A notice proposing tax on a substitute return can usually be replaced by filing your own return. A notice of intent to levy has short deadlines and appeal rights, so act on it immediately.

This guide is general information. It is not tax or legal advice for your situation.