One thing that hasn't been mentioned yet is timing considerations for 529 distributions. If your parents-in-law took the distribution in 2024 but your daughter's scholarship was awarded for the 2024-2025 academic year, make sure you have documentation showing the scholarship applies to the tax year in question. Also, since they transferred the money to their own account first before gifting it to your daughter, this creates a clear paper trail that they (not your daughter) are responsible for the tax consequences. The 1099-Q should be issued in their names as the account owners who received the distribution. For future reference, if there are leftover 529 funds after a scholarship, consider changing the beneficiary to another family member (sibling, cousin, etc.) who might need education funding. This avoids the non-qualified distribution issue entirely while keeping the tax-advantaged growth intact for education purposes.

Just a heads up for anyone dealing with 529 distributions - make sure you understand the difference between who owns the account versus who the beneficiary is when it comes to tax reporting. In your situation, since your parents-in-law owned the account and received the distribution into their own bank account, they're the ones responsible for reporting the taxable earnings and paying any penalties on their tax return. The fact that they then gifted the money to your daughter is a separate transaction entirely. As long as the gift was under the annual exclusion limit ($17,000 for 2023, $18,000 for 2024), there shouldn't be any gift tax consequences either. One more thing - if your daughter received any scholarship money that was tax-free, make sure your in-laws claim the scholarship exception on Form 5329 to avoid the 10% penalty on up to that scholarship amount. They'll still owe income tax on the earnings portion, but avoiding the penalty can save a significant amount. Keep all scholarship documentation handy in case the IRS has questions later.

As a newcomer to this community, I'm really impressed by how supportive and knowledgeable everyone has been in this thread. I'm actually facing a somewhat similar situation with my small S-Corp - not a missed deadline, but I'm in the middle of switching accountants and feeling overwhelmed by all the paperwork and deadlines. Reading through all these responses has been incredibly educational. I had no idea about things like First-Time Penalty Abatement or that S-Corps without direct tax liability might face minimal penalties for late filing. The resources people have shared (taxr.ai and Claimyr) sound like they could be really valuable for anyone dealing with IRS issues. What strikes me most is how common these situations seem to be, and how the IRS appears to be more reasonable than I expected when there are legitimate circumstances involved. The advice about documenting everything and not rushing to file incorrectly is something I'm definitely going to keep in mind as I work with my new accountant. To the original poster - it sounds like you're getting excellent advice here and you're taking the right steps to resolve this. The community support here is amazing, and it's clear you're not alone in dealing with these kinds of business tax challenges. Thanks to everyone for sharing their experiences and knowledge!

As a newcomer to this community, I'm amazed at how helpful and thorough everyone's responses have been! I'm currently dealing with my first year operating an S-Corp and this thread has been incredibly educational about potential pitfalls I need to avoid. The distinction everyone's made between S-Corps with and without direct tax liability is something I never fully understood before. It's reassuring to know that if you're in a pass-through situation with no corporate-level taxes, the penalties for late filing might be minimal or even zero. That takes a lot of the fear out of the process. I'm also bookmarking the resources mentioned here - taxr.ai for penalty analysis and Claimyr for actually reaching the IRS. As someone who's never had to deal with business tax issues before, knowing these tools exist gives me confidence that if I ever face a similar situation, there are practical solutions available. To the original poster, it sounds like you're getting excellent guidance here and taking all the right steps. The fact that you're being proactive about resolving this shows good business judgment, even if the initial deadline was missed. Best of luck with your new accountant meeting next week!

Quick question for those who know - does anyone have experience with the statute of limitations for unfiled gift tax returns? I'm in a similar boat where I made 529 contributions over several years without filing Form 709. Some of these were over 6 years ago. Should I still file for those older years?

I've been following this thread closely as someone who went through a very similar situation about two years ago. After 15 years of funding our kids' education through various methods, I discovered I had completely missed the gift tax reporting requirements. One thing I learned that might help you: the IRS has a "reasonable cause" provision for late-filed gift tax returns when no actual tax is owed. Since most people are nowhere near the current lifetime exemption limit ($13.61 million for 2024), you typically won't owe any actual gift tax - just need to properly report your use of the exemption. I ended up filing Form 709 for about 8 different years. The process was tedious but not as scary as I initially thought. The key is being thorough and consistent in your documentation. I created a spreadsheet tracking every contribution by year, child, and source (529 vs. direct tuition payments). Also worth noting: if you have good records showing the contributions were legitimate educational expenses, the IRS is generally reasonable about late filings in these situations. They understand that many parents are genuinely unaware of the gift tax implications of funding their children's education.

Can someone explain the actual math difference between paying properly vs under the table? If I'm paying someone $20/hr for 40hrs/week, what's the actual cost difference?

Thanks for breaking down the real costs, everyone. As someone who's been through this decision process, I want to emphasize that the "savings" from paying under the table are largely illusory once you factor in the lost tax deductions. When I calculated it for my business, paying a $40K employee properly costs about $45-48K total, but I get to deduct the full amount from my business income. If I'm in a 25% tax bracket, that deduction saves me $11-12K in taxes. So my real cost is more like $33-37K. Paying $40K under the table means no deduction, so I'm paying the full $40K after-tax dollars PLUS taking enormous legal and financial risks. The math just doesn't work unless you're planning to never report the income properly - which opens you up to fraud charges, not just tax penalties. The administrative burden of proper payroll is also much less scary than it seems. There are affordable payroll services that handle everything for under $100/month for a single employee.

Great thread everyone! As someone who's been doing small business payroll for 8 years, I want to add a few key points that might help newcomers like Omar: 1) The December shutdown is frustrating but predictable - use it to your advantage by getting organized early rather than stressing about transmission timing. 2) Don't forget that your employees need their W-2s by January 31st regardless of when you submit to SSA. Many business owners focus on the government deadlines and forget about the employee deadline. 3) If you're using a payroll service, ask them NOW about their year-end timeline. Some providers have different cutoff dates for year-end processing that are earlier than you'd expect. 4) Keep good records of your submission confirmations. Whether you use third-party tools or just screenshot everything, having proof of timely submission can save you major headaches if there are processing delays or questions later. The learning curve is steep in your first few years, but once you understand the rhythm it becomes much more manageable!

As a federal employee who works adjacent to IRS systems, I can add some inside perspective on the shutdown timing. The December maintenance window is actually mandated for security updates and system modernization - it's not optional for the IRS. What many people don't realize is that this shutdown affects different systems differently. The e-file system goes down, but other IRS functions continue. So if you need to call about account issues or payment questions, those phone lines stay open. One tip I'd add to this great discussion: if you're really concerned about timing, you can always file a paper backup of critical forms. It's more work, but paper submissions aren't affected by the e-file shutdown. For a small business owner like Omar, having that peace of mind might be worth the extra effort in your first few years. The IRS actually appreciates when taxpayers plan ahead like you're doing. Shows you're taking compliance seriously rather than scrambling at the last minute like so many do.