Great question, and you've gotten some solid advice here! I want to emphasize one point that's crucial for your situation: the IRS is very strict about the "substance over form" doctrine when it comes to income splitting between spouses filing separately. Since you mentioned the brokerage account is only in your name, simply adding your wife to the account typically won't change the tax reporting for securities already held there. The gains would still be considered yours for tax purposes because you were the original owner when the appreciation occurred. Your best bet is likely the gift approach others mentioned, but here's what you absolutely need to get right: 1. Complete a proper gift transfer to an account solely in her name BEFORE any sale 2. Document the gift with a written gift letter including dates and fair market values 3. Wait a reasonable period (at least 30 days) between the gift and sale to establish clear ownership 4. Have her initiate and receive proceeds from the sale directly The annual gift exclusion for 2025 is $18,000 per person, so you can gift up to that amount in securities without any gift tax implications. One alternative to consider: if your wife has any traditional IRA funds, the Roth conversion strategy you mentioned might actually be simpler to execute and achieve similar tax bracket optimization without the transfer complexity. Plus, you'd be building her retirement savings while taking advantage of her lower bracket. Would definitely recommend running the numbers on both strategies to see which gives you the better overall outcome!

Just wanted to add another perspective on this since I work in tax prep and see these situations regularly. While the gift strategy and Roth conversion are both solid options, there's one more thing to consider: the timing of your house purchase. If you're planning to buy a house in the near future (within the next 1-2 years), you might want to think about spreading the capital gains realization across multiple tax years rather than doing it all at once. Even with your wife's 0% bracket, there are limits to how much can fit in that bracket each year. For 2025, the 0% capital gains bracket for married filing separately goes up to $47,025 in taxable income. So if your wife has earned income plus the capital gains, make sure the total doesn't push her into the 15% bracket. You could potentially do partial sales over 2025 and 2026 to maximize the 0% treatment. Also, don't forget about the net investment income tax (NIIT) - though at her income level it's probably not a concern, it's worth double-checking if you're doing large conversions or sales. The Roth conversion really is looking like your best bet given the simplicity and the fact that you're building long-term wealth. Sometimes the path of least resistance is also the smartest one!

I'm going through something very similar with our volleyball booster club right now. We're handling about $450k annually and I've been horrified by what I've discovered since joining the board six months ago. The financial recordkeeping is basically non-existent, we're treating all income the same way regardless of source, and our cash handling at tournaments is completely uncontrolled. What's been most helpful from reading this thread is realizing I'm not being paranoid - these are legitimate compliance risks that could seriously hurt our organization. The actual penalty amounts people have shared ($3,800-$12,000+) are significant but manageable, but the potential loss of tax-exempt status would be devastating. I'm planning to use several strategies mentioned here: creating a risk analysis showing compliance costs versus potential penalties, finding IRS Publication 4221-PC to bring to our next board meeting, and volunteering to lead the compliance project myself so other board members don't have to take on extra work. The most convincing point for me has been that once you're aware of compliance problems, you have a fiduciary duty to address them. Continuing to operate with known issues could expose board members to personal liability, and that's not a risk any volunteer should have to take. For anyone else in this situation - document everything you're seeing, research the actual costs of getting compliant, and present it as protecting the organization's future rather than criticizing past practices. The peace of mind alone is worth the investment.

I've been following this thread closely as someone who went through a very similar situation with our baseball booster club two years ago. We were handling about $580k annually with equally questionable practices - everything lumped together on tax forms, minimal documentation, and the same "we've always done it this way" resistance from long-time board members. What finally broke through the resistance was when I calculated the actual financial exposure. I showed them that our current practices could result in penalties of $10,000-$20,000+ based on similar cases, plus the catastrophic risk of losing our tax-exempt status (which would mean paying taxes on ALL our revenue retroactively). Compare that to maybe $4,000-$5,000 to get properly compliant, and it became an obvious decision. The key was framing it as insurance, not criticism. I presented three scenarios: do nothing and risk audit/penalties, do minimal fixes and still face significant risk, or invest in proper compliance and protect the organization's future. When you put it that way, the choice becomes clear. For those asking about timeline - we were able to get compliant within about 3 months working with a non-profit CPA. The hardest part wasn't the technical fixes but changing the culture from "casual volunteer group" to "organization handling significant public funds with real legal responsibilities." One practical tip: start documenting everything NOW. Take photos of current procedures, save copies of recent tax filings, and create a written record of the issues you've identified. If you do get audited, showing that you recognized problems and took corrective action can significantly reduce penalties. The peace of mind has been incredible. We now have proper controls, clean tax filings, and board members who understand their fiduciary responsibilities. Best money we ever spent.

One tip about filing these old returns - don't e-file! The IRS only accepts electronic filing for the current tax year and 2 years prior. For anything older than that, you have to mail paper returns. Also, be sure to mail each tax year in a separate envelope. If you send multiple years together, it increases the chances of processing errors.

Just wanted to add something that might help with your peace of mind - even though you can't recover that 2017 overpayment, filing both returns will at least give you a complete picture of your tax situation from those years. I was in a similar boat with unfiled returns and kept putting it off because I was overwhelmed by all the unknowns. Once I finally bit the bullet and filed everything, it was honestly such a relief to have it done and know exactly where I stood with the IRS. One thing that helped me was creating a simple spreadsheet tracking what I owed for each year including estimated penalties, so I could budget for the payments. The uncertainty was actually worse than the reality of what I ended up owing. Good luck getting everything sorted out - you're already taking the right steps by researching this and planning to file!

The tax preparer might have been talking about creating an S-Corporation instead of staying as a sole proprietor. With an S-Corp, you pay yourself a "reasonable salary" which is subject to FICA taxes (Social Security/Medicare) and then can take the rest as distributions which aren't subject to self-employment tax. Some people do this to reduce their overall tax burden, but it only makes sense when you're making significant income. There are additional costs like incorporation fees, separate tax returns, payroll services, etc. For most contractors, just filing Schedule C and Schedule SE is perfectly fine and DOES contribute to your Social Security.

Just to add to this conversation - I've been a 1099 contractor for schools for 7 years now. Make sure you're tracking your quarters of coverage for Social Security! You need 40 quarters (10 years) of coverage to qualify for retirement benefits. For 2025, you need to earn $1,820 in a quarter and pay self-employment tax on it to get credit for that quarter. If you earn $7,280 or more for the year and pay your self-employment taxes, you'll get credit for all four quarters even if you only worked part of the year.

I went through this exact situation with my teenage daughter two years ago! She filed independently by mistake and we were panicking about the timeline. Here's what I learned from experience: Your sister should absolutely file her own return now and claim her son as a dependent. Don't wait for his amendment to process - that could take months and there's no need to delay her refund. The IRS systems are designed to handle these discrepancies. When they eventually process his amended return, it will align with her claim. The worst case scenario is they might send a letter asking for documentation to prove he qualifies as her dependent (school records, insurance, etc.), but that's pretty routine. One thing to watch out for though - if your nephew received a refund from his original incorrect filing, he'll likely need to pay some of it back through the amendment process. Dependents get a much lower standard deduction, so his tax liability was probably calculated incorrectly the first time. Tell your sister to keep good records of everything and file her return with confidence. The IRS deals with first-time teenage filers making this mistake all the time!

Just want to add another perspective from someone who works in tax preparation - your sister is absolutely in the right to file her return now. The IRS computer systems are sophisticated enough to handle these kinds of discrepancies, especially when there's already an amended return in the pipeline to correct the original mistake. One thing I always tell clients in this situation is to make sure they have solid documentation ready in case the IRS requests it later. For a 16-year-old dependent, this typically includes school enrollment records, proof of residence (utility bills, lease agreements), and evidence that she provided more than half of his support (which is usually pretty easy to demonstrate for a teenager). The 16-week processing time for amended returns is unfortunately typical, especially during busy filing season. But the good news is that her son filing the amendment proactively shows good faith effort to correct the mistake, which the IRS appreciates. Your sister shouldn't stress about this - it's actually one of the more common and straightforward tax issues we see. File her return, claim her dependent correctly, and let the system work itself out over the coming months.