Tax Returns vs. IRS Transcripts: What Really Matters When Calculating Lost Self-Employment Income

When a self-employed individual experiences an interruption to their business due to an accident, calculating their lost self-employment earnings becomes an important part of the claims process. In order to calculate lost self-employment earnings, two documents are frequently relied upon; the personal income tax return and the IRS tax return transcript. Although closely related, they serve different purposes and provide different levels of detail. Understanding their differences is important when determining an individual’s lost self-employment earnings.

A personal income tax return contains the full breakdown of self-employment revenue, expenses, and the resulting net earnings. When several years of returns are reviewed together, they reveal patterns, trends, and seasonality in earnings; which provide a better understanding of what an individual would have earned had the accident not occurred.

In contrast, an IRS tax return transcript is a summary of what the IRS has on file for the taxpayer. Although it mirrors certain line items from the tax return, it does not include the detailed schedules or supporting documents necessary to calculate lost self-employment earnings. Rather than serving as a substitute for the tax return, the transcript functions more as a verification tool. 

In practice, the two documents work best together. The tax return provides the information necessary for calculating lost earnings, while the transcript, while not sufficient on its own for performing these calculations, provides confidence that the figures used from the tax return are accurate and can be relied upon.