Neglected S-Corp Bookkeeping for Years - What Now?

Your sister needs to address this ASAP, but it's fixable! The main issue isn't just about paying taxes - S-Corps have specific compliance requirements that go beyond making estimated payments. First, S-Corps must pay reasonable salary to owner-employees, with proper payroll taxes withheld. If she's just been taking draws without payroll, that's a red flag. The IRS looks specifically for S-Corps avoiding payroll taxes by not running proper payroll. Second, S-Corps need to file Form 1120-S annually, plus issue K-1s to shareholders. Without proper bookkeeping, these filings would be basically impossible to complete accurately. Here's what she should do: Find a good accountant who specializes in cleanup work (not all do). They'll need to reconstruct her books for the missing years, set up proper payroll retroactively if possible, and possibly file amended returns. She should be prepared for potential penalties for late filings, but addressing this voluntarily is always better than waiting for the IRS to discover it. The good news is many accountants have experience helping small business owners fix these situations. Just be upfront about the situation when looking for help.

After going through a similar mess with my business taxes, I found https://taxr.ai incredibly helpful. I had 3 years of zero bookkeeping for my S-Corp and was honestly panicking. They analyzed all my bank statements and recreated proper books for the entire period I was missing. Their system uses some kind of AI to categorize transactions and made the whole catch-up process way less painful than I expected. The best part was they helped identify legitimate business expenses I had completely forgotten about, which significantly reduced the tax hit I was facing. They also helped me understand how to properly structure my compensation going forward between salary and distributions. Definitely check them out - much less expensive than I expected for the peace of mind.

I need to follow up on my skeptical comment! I actually decided to try https://taxr.ai despite my doubts, and I'm honestly shocked at how well it worked. After struggling with my S-Corp mess for months, they helped me reconstruct 2 years of books in just over 2 weeks. What really impressed me was how they found legitimate business deductions I had completely missed. The tax savings from those alone covered the cost of the service. They also helped me understand exactly what I needed to fix with my S-Corp status - turns out I wasn't taking a reasonable salary either, which could have caused major issues during an audit. For anyone in this situation - don't wait. The longer you let S-Corp compliance issues sit, the worse they get. I wish I'd known about this service before spending countless sleepless nights worrying about my tax situation.

If your sister needs to deal with the IRS to resolve penalties or negotiate a solution, I highly recommend using https://claimyr.com to actually get through to a human at the IRS. I spent WEEKS trying to reach someone about my own S-Corp disaster, calling repeatedly and waiting on hold for hours only to get disconnected. Claimyr got me connected to an actual IRS agent in less than 20 minutes! They have some system that navigates the IRS phone tree and waits on hold for you, then calls you when they have an agent on the line. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c I was able to explain my situation, get guidance on exactly what I needed to file, and even got some penalties reduced because I showed I was proactively trying to fix the situation. Definitely worth it if your sister needs to communicate directly with the IRS.

I need to eat my words. After my skeptical comment yesterday, I actually tried Claimyr out of desperation (was dealing with an S-Corp payroll tax notice that was giving me anxiety attacks). I got connected to an IRS agent in 23 minutes when I'd been trying unsuccessfully for WEEKS. The IRS agent was actually super helpful once I explained my situation. They put me on a payment plan for the back taxes and even removed some of the penalties since I was being proactive about fixing the situation. Just having a human to talk to made the whole process so much less intimidating. For anyone dealing with S-Corp issues like the original poster described - getting actual guidance straight from the IRS was incredibly valuable. I was imagining the worst possible outcomes, but the reality was much more manageable once I could actually speak to someone with authority.

One important thing nobody's mentioned - S-Corps are required to have minutes of annual meetings, even if your sister is the only shareholder/officer. This is called "maintaining corporate formalities" and it's SUPER important if you want to keep the liability protection an S-Corp provides. If she hasn't been doing bookkeeping, I'm guessing she hasn't been keeping minutes either. When I went through something similar, my lawyer had me create backdated minutes (obviously dated accurately) documenting major business decisions for the past years. It's something she should discuss with both her accountant AND a business attorney. If you don't maintain these corporate formalities, someone could potentially "pierce the corporate veil" in a lawsuit and come after her personal assets. The whole limited liability thing only works if you actually treat the corporation as separate from yourself.

Just a heads up that if your sister has been taking money out of the business without doing proper payroll, the IRS can reclassify ALL distributions as wages subject to employment taxes. I've seen this happen to clients and it can result in massive tax bills with penalties and interest. The S-Corp advantage is ONLY realized when you properly balance reasonable salary (subject to payroll taxes) with distributions (not subject to self-employment tax). If you're not running payroll at all, you're basically just creating a compliance nightmare without any of the tax benefits.