How to Fix Years of Missing Bookkeeping for an S-Corp?

This is actually a fairly common situation, believe it or not! Many small business owners convert to S-Corps for the tax advantages but don't realize the additional administrative requirements that come with it. The biggest issue here is that S-Corp owners are required to pay themselves a "reasonable salary" through payroll with proper withholding of income taxes, Social Security, and Medicare. The IRS is particularly interested in this because it prevents S-Corp owners from avoiding payroll taxes by taking income as distributions instead of salary. Your sister needs to address this ASAP by finding a CPA who specializes in S-Corp catch-up work. They'll need to: 1) Reconstruct bookkeeping records for those years 2) Determine what a reasonable salary should have been 3) File any missing payroll tax returns (Form 941s quarterly and Form 940 annually) 4) Prepare amended tax returns if necessary 5) Calculate and pay any penalties/interest The good news is that her estimated tax payments will help offset some of the tax liability, but she'll likely still owe some payroll taxes plus penalties and interest. The sooner she addresses this, the better - the IRS tends to be more lenient with voluntary disclosure than if they discover the issue in an audit.

I went through something kinda similar last year and stumbled across this service called taxr.ai (https://taxr.ai) that was super helpful for my situation. I had about 3 years of messy S-Corp records that needed to be cleaned up, and traditional bookkeepers were quoting me thousands just to get caught up. What I liked about taxr.ai is that it can actually analyze all your bank statements and automatically categorize everything to reconstruct your books for those missing years. I just uploaded my statements and their AI did most of the heavy lifting to recreate my bookkeeping history. Then their CPAs helped me figure out the reasonable salary issue and file the back payroll reports. Saved me a ton of time trying to manually reconstruct everything, and their specialists really understood S-Corp compliance issues. Definitely worth checking out for your sister's situation since it sounds almost identical to what I went through.

Just wanted to follow up - I ended up trying taxr.ai for my cousin's situation and it's been a game changer! I was skeptical since his books were such a disaster (2 years of mixed personal/business expenses and zero organization), but their system was surprisingly good at figuring out what was what. The best part was not having to manually enter 2+ years of transactions. We just uploaded bank statements and credit card statements, and it built most of the books automatically. Then we had a meeting with their accountant who helped us understand what needed fixing and how to handle the missed quarterly filings. They're still finishing up the amended returns, but the relief of having organized books again is huge. Definitely recommend for anyone in a similar situation who's dreading the manual catch-up work.

I've been in a similar situation and let me tell you, calling the IRS directly was IMPOSSIBLE. I tried for literally weeks to get someone on the phone who could help me understand my options for catching up on missed S-Corp filings. After wasting hours on hold only to get disconnected, I tried this service called Claimyr (https://claimyr.com). You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. Basically, they have a system that navigates the IRS phone tree and waits on hold for you, then calls you when an actual human IRS agent is on the line. I was super skeptical but desperate. Within a day I was actually talking to someone at the IRS who walked me through my options including a voluntary disclosure program that reduced some penalties. The IRS agent even helped me understand which forms I needed to prioritize. Saved me thousands in potential penalties by getting actual guidance directly from the IRS.

I have to eat crow here and admit I was wrong about Claimyr. After posting my skeptical comment, I was desperate enough to try it for my own tax situation (had issues with missing K-1s from an S-Corp investment). The service actually did exactly what they claimed. Their system called the IRS, navigated the menu hell, waited on hold for almost 2 hours (which I didn't have to sit through!), and then connected me once they got a human. The IRS agent was able to see the missing forms on their end and resolved my issue in about 15 minutes. Saved me from what would have been my fourth attempt at calling them directly, which always ended with me getting disconnected after 60+ minutes on hold. For anyone dealing with complex S-Corp issues that need direct IRS guidance, it's definitely worth it just for the saved time and frustration.

Just want to add something nobody's mentioned yet. Your sister should check ASAP if annual S-Corp tax returns (Form 1120-S) have been filed properly for all those years. If she's missed filing those returns, the S-Corp election could potentially be terminated, which creates an even bigger mess. Also, most states require annual reports or statements for corporations, sometimes with fees. If those weren't filed, there could be state-level penalties or even administrative dissolution of the corporation. The missing bookkeeping is definitely a problem, but the missed filings could be an even bigger issue with more immediate consequences.

Something else to consider: How much income are we talking about here? If it's fairly minimal (like under $50k/year), the penalties might be manageable. But if your sister's business has substantial income, the missing "reasonable compensation" could mean significant unpaid payroll taxes. The IRS looks at the nature of the S-Corp's business to determine reasonable salary. If it's a service business where the owner is the primary service provider (like consulting, design, accounting, etc.), they typically expect a higher percentage of income as salary compared to businesses selling products.