Small Business Tax Mess: Should I see a CPA or Tax Attorney for missing records & inventory issues?

I'm actually a tax professional who deals with this exact situation all the time. Your friend isn't alone - many small business owners get overwhelmed with the operational side and let bookkeeping slide. For this specific situation, a CPA is probably more appropriate than a tax attorney initially. CPAs generally cost less and have the accounting expertise to reconstruct records from bank statements and receipts. Tax attorneys are more valuable when you're already facing a serious legal issue like an audit or tax fraud allegations. Regarding the Cash method - yes, smaller businesses (under $26 million in gross receipts) can typically use this method, which does simplify things. However, you still need some basic record-keeping. While you don't need to track inventory as formally, you should still have documentation for cost of goods sold to justify deductions. The good news is that credit card statements and receipts can be a starting point. A good CPA can help reconstruct a reasonable accounting system from these documents, especially if bank accounts weren't mixed with personal funds.

After struggling with a similar situation in my woodworking business (missing receipts, no inventory tracking, mixed personal/business expenses), I finally found real help using https://taxr.ai for reconstructing my business records. I was totally stressed about potentially facing an audit with my mess of "documentation." What made it actually useful was uploading my statements and receipts (even the disorganized ones) and having their system automatically categorize everything. Their accountants helped set up a defensible COGS tracking system even though I had minimal records. They specifically helped me implement the Cash method correctly since my business qualifies. The best part was they helped create documentation that would actually hold up if questions came up later. My situation sounds very similar to your friend's - I literally just had a shoebox of receipts and my bank statements.

Just wanted to update that I actually tried taxr.ai after asking about it here. My sister's boutique situation was a complete mess - she had been mixing personal and business expenses for years with almost no documentation beyond bank statements. The service was actually really helpful. They helped us properly categorize her bank transactions, separate business from personal, and create a defensible set of books even with limited documentation. They showed us how to implement the Cash method correctly for her business size and created an expense tracking system that satisfied her accountant. What really surprised me was how they helped reconstruct reasonable COGS estimates based on her industry standards and the partial documentation we had. The accountant we showed it to said it was actually sufficient for tax filing purposes given the circumstances. She's still implementing better practices going forward, but at least she's not terrified of getting audited anymore.

I had a somewhat similar situation with my consulting business last year. After multiple failed attempts to reach someone at the IRS about my options (literally spent HOURS on hold), I found https://claimyr.com and used their service to get a callback from the IRS. You can see how it works here: https://youtu.be/_kiP6q8DX5c What surprised me was that once I actually got through to a human at the IRS, they were surprisingly helpful about my recordkeeping issues. They explained exactly what documentation would be acceptable in my situation and how to proceed with filing without complete records. I learned I had more options than I realized. Getting actual guidance directly from the IRS (once I could actually reach someone) was invaluable - they explained the "safe harbor" provisions I could use and what level of documentation would be considered reasonable for my situation.

I need to eat my words here. After posting my skeptical comment, I actually tried Claimyr because I've been trying to reach the IRS for weeks about a similar situation. I got a callback from an actual IRS agent within a few hours. The agent walked me through exactly what would be considered "reasonable documentation" for my situation, which was incredibly helpful. They explained that bank statements combined with even partial receipts can be acceptable if you're making a good faith effort to reconstruct records. They also confirmed what others mentioned about the Cash method qualification for smaller businesses and clarified exactly what level of inventory tracking would be required in my industry. Most importantly, they weren't judgmental about the situation - they actually seemed genuinely interested in helping me comply correctly rather than trying to "catch" me. I'm still working through my documentation issues, but at least now I have clear guidance directly from the source.

I'm going against the grain here but sometimes a tax attorney actually IS the better first step, especially if there's ANY chance the IRS might view this as willful neglect rather than honest mistakes. A tax attorney has client privilege protection that CPAs don't have. I went to a CPA first with a similar situation (3 years of minimal documentation in my landscaping business) and ended up with serious issues when they had to disclose certain things they discovered. When I finally went to a tax attorney, they were able to structure a voluntary disclosure that protected me from the worst penalties. Just something to consider depending on how serious the situation might be.

Has your friend considered just using QuickBooks Self-Employed and doing the reconstruction themselves? I was in a similar mess with my Etsy business and managed to import the last 2 years of bank/credit statements and categorize everything retroactively. It took about a weekend per year of transactions, but I managed to create a reasonable accounting system that my tax preparer was able to work with. The software lets you split transactions, categorize them, and export reports that look professional enough for tax purposes. For the inventory issue specifically, I just created a spreadsheet showing reasonable COGS calculations based on my sales and industry standards. Wasn't perfect but it was acceptable.

I went through something very similar with my freelance graphic design business - had about 4 years of terrible recordkeeping with just bank statements and random receipts stuffed in a shoebox. Here's what I learned from the experience: First, definitely start with a CPA rather than a tax attorney unless there are signs of serious legal issues. CPAs are much more cost-effective for reconstruction work and most have dealt with this exact situation many times. The cash method is absolutely your friend's best option here. For businesses under $26 million in gross receipts, you can generally use cash accounting which means you deduct expenses when paid rather than trying to match them to specific sales. This eliminates a lot of the complexity around timing issues. For the inventory question - if your friend's business qualifies for cash method, they may also qualify for the small business exception that allows them to treat inventory as non-incidental materials and supplies, which means they can deduct costs when the items are used or sold rather than maintaining complex inventory accounting. The key is being proactive. I spent about $2,800 with a CPA who specialized in small business reconstruction, and it was worth every penny. They were able to create defensible books going back 3 years using just my bank statements, credit card records, and about 40% of my actual receipts. Most importantly - this is fixable! Your friend isn't doomed. The IRS would much rather see someone make a good faith effort to comply than ignore the problem entirely.