What was broken
A construction company had operated for years with fragmented bookkeeping spread across spreadsheets, informal ledgers, and multiple bank accounts. When the promoters sought a working-capital facility, the bank required audited financials the company simply could not produce. Several years of accounts had to be reconstructed before any filing or financing could proceed.
What we did
CapEasy rebuilt the books from source — bank statements, vendor and customer records, tax filings, and contracts — reconstructing multiple years of financial statements, reconciling balances, and preparing the accounts for audit. The team then completed the overdue statutory filings and set up an ongoing accounting process to keep records current going forward.
Where it landed
The company obtained a clean set of reconstructed, audit-ready financial statements and cleared its backlog of filings. With reliable numbers in hand, the promoters were able to progress their banking facility and finally see an accurate picture of the business.
What the IRS actually asks of a US business’s records
The IRS gives businesses latitude on the recordkeeping system itself — Publication 583, Starting a Business and Keeping Records, says you may use any system suited to your business, as long as it clearly shows your income and expenses. What it does not give latitude on is the burden of proof: it is the business, not the IRS, that has to substantiate every entry, deduction and statement on a return. Records generally have to be kept as long as they may be needed to support that return — the standard period runs three years from filing, extends to six years if unreported income exceeds 25% of gross income shown, and has no limit at all for a return that was never filed or was fraudulent. Employment tax records have their own floor: at least four years.
Gross receipts are expected to trace to cash register tapes, bank deposit slips, receipt books, invoices, credit card slips and 1099 forms. Expenses are expected to trace to canceled checks, account statements, credit card slips, invoices and petty cash slips. A business that has been running on spreadsheets and informal ledgers — a familiar pattern — usually still has the one document a bank and the IRS both start from: the bank statement.
The IRS’s own reconstruction method
The IRS publishes explicit guidance for businesses that need to reconstruct records — written for disaster and casualty situations, but the sequence is identical whether the records were destroyed or simply never kept up. It tells a business to get copies of bank statements first, because deposits closely reflect what sales were for any given period, and to contact the bank or card company directly for statements reaching back — most provide online access to prior periods. It tells a business to get copies of invoices from suppliers, reaching back at least a year where possible, and to pull last year’s federal, state and local tax filings — sales tax reports, payroll tax returns, business licenses — as a cross-check on what the reconstructed numbers should show.
That is the same discipline CapEasy applied in this engagement: bank statements as the anchor, vendor and customer records and statutory filings layered in to corroborate them, balances reconciled month by month rather than estimated for the year in one pass. It is also why the sequence matters — a deposit total from a bank statement is a fact; a remembered description of what a payment was for is not, and the IRS’s own guidance treats them accordingly.
Why reconstruction beats re-entry — and where an estimate is allowed to stand
Re-entry means typing what memory or a shoebox of receipts suggests happened. Reconstruction means tying every deposit, payment and balance to a source document and reconciling the account to its statement ending balance, for every closed period in the gap — the same standard our own catch-up bookkeeping work holds to. The difference shows up under a substantiation test: proof of payment by itself does not establish that a deduction is allowed, so a canceled check or bank line without the invoice or contract behind it is a fact recorded, not a deduction proven.
Where a business genuinely cannot recover a document, US tax law does allow for an estimate in narrow circumstances — the Cohan rule permits a court to approximate a deductible amount when the taxpayer can show the expense was real but not its exact figure, provided there is a rational basis for the estimate. It does not reach travel, meals or entertainment, which Internal Revenue Code §274(d) subjects to stricter, receipt-level substantiation that an estimate cannot satisfy. The honest version of a catch-up engagement, wherever it happens, is one that reconciles what the records support and flags — rather than quietly fills — what they do not.
What to take from it
- The tax authority does not mandate a specific bookkeeping system, but it does put the burden of proof on the business — every entry has to trace to a document, not a memory.
- When records are missing, start from the bank and card statements: deposits track sales, payments track expenses, and both are available from the institution even when your own files are not.
- Reconstruction reconciles each account to its statement, period by period; re-entry from memory or a shoebox is not the same exercise and will not hold up the same way.
- An estimate can stand in for a lost receipt under the Cohan rule if the expense itself is credible — but never for travel, meals or entertainment, which the tax code holds to a stricter standard.
- A reconstructed, reconciled set of books is what turns a stalled financing request or an overdue filing into one that can actually move.