Closing a Sole Proprietorship with Missing BIR Records: Compliance, Audit, and Cancellation Guide (Philippines)

This is a practical legal guide for sole proprietors in the Philippines who need to close a business but no longer have complete Bureau of Internal Revenue (BIR) records. It covers legal bases, compliance steps, documentation, risk points, and tactics for reconstructing lost books and returns, along with related cancellations at DTI, LGU, and government agencies.

1) Legal framing and key principles

You and the business are the same legal person. A sole proprietorship is not a separate juridical entity. The owner is personally liable for tax and regulatory obligations incurred while the business was operating.
Tax obligations survive closure. Cancellation of BIR registration does not erase liabilities. You must file all pending returns and pay any deficiency taxes, penalties, and interest up to your last day of business.
Missing records do not excuse non-compliance. The Tax Code requires keeping books and source documents for at least the statutory retention period (commonly 10 years from the deadline for filing the return or from the date the return was filed, whichever is later, when electronic systems are involved—keep longer if there are unsettled cases). If records are lost, you must reconstruct them in good faith and promptly notify the BIR of the loss and your remedial steps.
BIR may audit before cancellation. The RDO (Revenue District Office) can subject the taxpayer to verification or full audit as a condition for cancellation of registration.

2) Overview roadmap (with missing records)

Cease operations cleanly. Fix a clear last day of business (LDB). Stop issuing invoices/ORs after LDB.
Secure evidence of loss and start reconstruction. Affidavit of Loss, police blotter (if theft/calamity), landlord/building incident reports, bank records, vendor reprints—start within days.
File pending/short-period returns. File all unfiled monthly/quarterly/annual returns up to LDB, including “short period” final returns (e.g., VAT, percentage tax, income tax, withholding).
Prepare BIR cancellation pack. BIR Form 1905 for closure; surrender unused receipts/invoices; cancel ATP/PTU and POS/CAS; books (or reconstructed books) for inspection.
Undergo verification/audit if required. Respond to any notices; execute waivers only if necessary and understood.
Obtain tax clearance/cancellation of registration.
Parallel cancellations. DTI business name, LGU business and barangay permits, SSS/PhilHealth/Pag-IBIG employer accounts (if any), and DOLE notifications if there are employees.
Retain reconstructed records. Keep the reconstruction file and proof of submissions for the full retention period.

3) Reconstructing missing BIR records: what “good faith” looks like

When official books and source documents are missing:

3.1 Immediate notices and baseline documents

Affidavit of Loss (notarized) detailing:
- What is missing (books, invoices/ORs, POS Z-readings, vouchers, bank statements).
- When and how the loss occurred (fire, flood, theft, hardware crash, accidental disposal).
- Search/recovery steps taken.
Supporting incident proof: police blotter, barangay certification, fire report, IT service report (for corrupted drives), landlord letter for water ingress, etc.
Notification to BIR RDO: submit your affidavit and intention to reconstruct; request guidance on any local RDO requirements (e.g., formats, timelines, presentation of secondary evidence).

3.2 Sources for reconstruction (primary to tertiary)

Bank statements & deposit slips: Tie deposits to sales by day/week; annotate cash sales vs. non-sales deposits (capital infusions/loans).
Supplier statements & reprinted invoices: Ask suppliers for certified copies or statements of account; reconcile purchases and input VAT.
Customer confirmations: For B2B clients, request SOAs or reprinted ORs/invoices; obtain email trails or contracts.
POS/Device data: Pull Z-readings, X-readings, or back-end exports; if device failed, request service center logs or memory card dumps (if feasible).
Digital traces: E-commerce dashboards, payment gateways, GCash/PayMaya reports, accounting system exports, email receipts, delivery platform statements.
Tax return copies: Reprint eBIRForms/eFPS filing confirmations and bank payment slips (if available via your bank/landbank/DBP/authorized agent bank).
Other: Lease contracts (for allowable expenses), utilities (power/water/telecoms), payroll records, government remittance receipts.

Practical tip: Build a Reconstruction Index (spreadsheet) mapping each month/quarter to: sales per bank, sales per POS, sales per platform, purchases per supplier, payroll cost, and adjustments. Keep PDF bundles for each period.

3.3 Reconstructing the books of accounts

If your manual books were lost: apply to open replacement books; continue entries based on reconstructed schedules.
If you used loose-leaf or CAS/Point of Sale: retain system printouts/exports covering the periods, plus system descriptions and user access logs.
Prepare the minimum ledgers: General Journal, General Ledger, Sales Book, Purchases Book, Cash Receipts/Disbursements, and subsidiary ledgers (accounts receivable/payable, inventory). Summarize monthly and quarterly.

3.4 Replacement of receipts/invoices

Unused: Surrender remaining unused printed ORs/invoices to BIR for cancellation; record serial ranges.
Used but copies lost: Keep reconstruction copies (supplier/customer reprints) and attach a cross-reference sheet.
ATP/PTU: File to cancel the Authority to Print (ATP) or Permit to Use (PTU) for machines at closure.

4) BIR compliance sequence for closure (with missing records)

Requirements may vary slightly by RDO; bring originals and two sets of photocopies.

Fix your Last Day of Business (LDB).
- Set a hard cutoff for issuing ORs/invoices and operating POS.
- Conduct a final inventory count as of LDB (for VAT, see 4.4).
File all outstanding returns up to LDB.
- Income tax: Annual ITR and, if closing mid-year, short-period return from Jan 1 (or start of tax year) to LDB.
- VAT or Percentage Tax: File final month/quarter that includes LDB.
- Withholding taxes (compensation, expanded, final): File monthly remittances and quarterly/annual summaries up to LDB.
- Excise or other special taxes: If any, file final returns.
Settle open cases and penalties.
- Late filings typically incur surcharge (25% or 50% for willful neglect/fraud), interest (pegged to the legal rate per annum, computed daily), and compromise penalties (administrative schedule). If cash flow is tight, ask about installment arrangements.
VAT-specific considerations (if VAT-registered).
- Output VAT on remaining inventory upon cancellation: Goods on hand on the date of VAT cancellation are generally treated as deemed sold; compute and pay output VAT on the lower of acquisition cost or current market price. Keep the inventory worksheet and supporting purchase docs.
BIR Form 1905 (Application for Registration Update).
- Purpose: Cancellation/Closure of Business (check the appropriate box).
- Attachments often include:
  - Copy of DTI Business Name Certificate.
  - Mayor’s/Business Permit and Barangay Clearance (or cancellation proofs later).
  - Books of accounts (originals or reconstructed), ready for inspection.
  - Final inventory and reconciliation schedules.
  - Affidavit of Loss with annexes.
  - Proof of filing and payment of all final returns.
  - Surrender of unused invoices/receipts and ATP/PTU cancellation request.
  - Machine de-registration documents (POS/CRM/CAS), including serial numbers and PTU details.
RDO verification / audit.
- Expect a desk verification; some RDOs require a letter of authority (LOA) audit before issuing tax clearance.
- Prepare to present: bank statements, sales and purchase tie-ups, proof of withholding compliance, and reconciliations.
- If an LOA is issued, respond promptly and completely; consider engaging a tax professional for representations.
Tax clearance & cancellation of TIN registration (as a business).
- For individuals, the TIN remains (for future employment or new businesses), but the business registration and tax types (VAT/PT/withholding) are cancelled.

5) Local government and other agency cancellations

5.1 DTI (Business Name)

File DTI Business Name cancellation (voluntary cessation). Keep the acknowledgment; you cannot use the same BN indefinitely without renewal/cancellation.

5.2 LGU: City/Municipal Hall and Barangay

Business permit closure with the Treasurer’s/Business Permits & Licensing Office:
- Submit closure application promptly after LDB.
- Pay prorated local business taxes up to the LDB (some LGUs assess to quarter end).
- Secure Certificate of Closure / Cancellation of Mayor’s Permit.
Barangay clearance: File a notice of closure to cancel barangay business clearance.

5.3 Employers and labor law (if you have employees)

Authorized closure requires 30 days’ prior written notice to both employees and DOLE.
Separation pay:
- If closure not due to serious business losses, at least ½ month pay per year of service (or 1 month, depending on policy/CBAs—½ month is the statutory floor for closure not due to serious losses).
- If closure due to serious losses, separation pay may not be legally required, but be ready to prove the losses.
Final pay: release within prescribed timelines; provide Certificates of Employment and quitclaims (properly executed).
SSS, PhilHealth, Pag-IBIG: File employer account closure/de-registration, remit final contributions, and submit separation reports.

6) Practical computations and worksheets

6.1 Short-period returns

Income tax: compute from start of taxable year through LDB; include allowable deductions supported by your reconstructed schedules.
VAT/Percentage tax: compute based on receipts up to LDB; remember output VAT on inventory when cancelling VAT registration.

6.2 Penalties and interest

Surcharge: generally 25% for failure to file/pay on time; 50% in cases of willful neglect/fraud.
Interest: imposed on any unpaid amount at the legal rate per annum, computed daily from original due date until full payment.
Compromise: fixed amounts per return/violation per administrative schedule; payable upon late filing even if no tax is due (depending on RDO practice).

Tip: Build a per-return matrix (Form number, period, due date, actual filing date, tax due, surcharge, interest, compromise) to avoid missed items and duplicate payments.

7) Evidence package for BIR (when records were lost)

Prepare a bound file (physical and PDF) with tabs:

Cover letter: Requesting cancellation and describing the loss and reconstruction measures.
Affidavit of Loss + incident proofs.
Reconstruction Index and methodology memo.
Sales schedules: per month/quarter; tie to bank/POS/gateway; attach confirmations.
Purchases & expenses: supplier SOAs/invoices, utilities, payroll, rentals; input VAT summary (if VAT).
Withholding compliance: 1601 series filings and MAP/Alphalists; BIR Form 2307s (as withheld from you/by you).
Final returns: ITR, VAT/PT, withholding, excise (if any) + payment proofs.
Inventory at LDB and VAT deemed sale computation (if VAT).
ATP/PTU cancellation and surrender of unused ORs/invoices (serial ranges list).
Books of accounts (reconstructed ledgers and trial balance).
DTI/LGU/DOLE/SSS/PhilHealth/Pag-IBIG closure proofs (if already available or submit later as supplemental).

8) Risk areas and how to mitigate them

Unexplained bank deposits: The BIR can treat unexplained deposits as taxable income. Mitigate by annotating deposits, preparing owner’s equity roll-forward, and documenting loans/transfers.
Cash sales without POS records: Use daily cash counts, delivery logs, and inventory roll-forwards to corroborate.
Inventory shrinkage: Document spoilage/obsolescence with photos and incident reports; adjust only with evidence.
Input VAT without supplier receipts: If you cannot obtain valid supporting invoices, do not claim the input VAT—better to forgo than face disallowance plus penalties.
Related-party transactions: Document pricing and terms; keep proof of settlement.
Payroll without time records: Rebuild from bank payroll credits, SSS R-3/R-5 histories, and employment contracts; align with withholding filings.

9) POS/CAS and e-systems at closure

De-register POS/CRM/CAS: Submit serial numbers, PTU/acknowledgment, last Z-read, and device photos/physical inspection if required.
Data extraction: Export transaction logs and sales summaries; keep archival copies for the retention period.
E-invoicing/EIS (if covered): Follow de-registration protocols and ensure transmission cutoffs align with LDB.

10) Timelines and sequencing (illustrative)

Day 0–3: Fix LDB; stop issuing ORs; final inventory; create Affidavit of Loss; lodge police/barangay blotter; request bank statements and supplier/customer SOAs.
Day 4–20: Reconstruct monthly sales and purchases; export POS/gateway reports; compile payroll/utilities; start filing late returns as computations finalize.
Day 21–35: File remaining returns; pay taxes/penalties; prepare VAT deemed sale (if any); surrender unused ORs/invoices; file BIR Form 1905 with evidence package.
Day 36–90: Attend verification/audit meetings; respond to queries; complete POS/CAS de-registration; process DTI/LGU/DOLE/SSS/PhilHealth/Pag-IBIG cancellations.
Thereafter: Keep all files securely for the full retention period.

11) Common questions (FAQs)

Q: Can I close even if I can’t reconstruct everything perfectly? Yes—show good-faith, reasonable reconstruction using available secondary evidence. Be transparent about assumptions and limitations.

Q: Do I need a tax clearance to close? Most RDOs require verification or clearance before final cancellation. Expect them to check open cases and unpaid penalties.

Q: What happens to my TIN? Your TIN remains as an individual. Only the business registration and tax types are cancelled.

Q: I have unused official receipts. What do I do? Surrender them with a list of serial ranges and request cancellation. Do not use them after LDB.

Q: If my closure is due to losses, do I owe separation pay? If you can prove serious business losses, separation pay may not be required; otherwise, at least ½ month per year of service applies for closure not due to serious losses. Always give the 30-day notice to employees and DOLE.

12) Templates (outlines you can adapt)

12.1 Affidavit of Loss (key elements)

Affiant’s name, TIN, business name, address.
Detailed list of lost items (books, receipts, digital files).
Date, place, and manner of loss; efforts to locate/recover.
Statement of immediate steps taken (police/barangay report, RDO notification, reconstruction plan).
Undertaking to reconstruct and submit to BIR upon request.
Jurat with notary.

12.2 Reconstruction Methodology Memo (attached to your 1905)

Scope period and tax types covered.
Data sources used (banks, suppliers, POS, platforms).
Reconciliation approach (bank-to-sales, supplier SOAs to purchases).
Limitations and conservative assumptions (e.g., unsubstantiated input VAT not claimed).
Summary tables per tax type.

12.3 Inventory and VAT Deemed Sale Schedule (if VAT)

Item, quantity, unit cost/market value (choose the lower), basis of valuation, computed output VAT.

13) Final compliance checklist

LDB fixed; ORs/Invoices stopped; final inventory done
Affidavit of Loss + incident reports filed; RDO notified
Bank statements, supplier/customer SOAs obtained
Books reconstructed; ledgers and trial balance prepared
All returns filed (ITR, VAT/PT, withholding, others) with payments
VAT deemed sale on inventory computed and paid (if applicable)
Unused ORs/invoices surrendered; ATP/PTU cancelled
POS/CAS de-registered; last Z-read and device papers compiled
BIR Form 1905 filed with evidence pack
DTI business name cancelled
LGU business permit and barangay clearance cancelled; local taxes settled
DOLE employee notice and separation pay handled; SSS/PhilHealth/Pag-IBIG de-registered
All proofs and receipts filed and archived for retention period

14) When to seek professional help

You have multiple years of unfiled returns or mixed tax types (VAT + withholding + percentage).
There’s an active LOA, Final Assessment Notice (FAN), or Preliminary Assessment Notice (PAN).
You suspect criminal exposure (e.g., willful failure to file).
You operated with complex systems (e.g., multiple POS, e-commerce platforms, foreign payments).

Closing note

Even with missing records, closure is achievable if you (1) document the loss, (2) reconstruct diligently, (3) file and pay what’s due, (4) surrender and de-register books, receipts, and machines, and (5) complete parallel cancellations with DTI/LGU and social agencies. A calm, evidence-driven approach is your best protection during verification or audit.