I want to add some perspective from someone who works in tax compliance. The IRS has very sophisticated methods for protecting informant identities, and they take this seriously because they rely heavily on tips from the public to identify tax fraud. When you submit Form 3949-A, the information goes through what's called a "classification process" where it's evaluated and then sanitized before any investigation begins. The IRS will often wait several months before initiating contact with the taxpayer, and they may gather additional information from other sources first to further obscure the origin of the investigation. One thing that might give you additional peace of mind: the IRS often batches these investigations with other cases or combines them with broader compliance initiatives. So even if there are only two people who know about the fraud, the taxpayer might assume the audit is part of a larger sweep of similar businesses or high-income individuals in their area. The key is providing detailed, specific information in your initial report. Include exact amounts, dates, and describe the evidence you have. The more complete your initial submission, the less likely they'll need to contact you for clarification, which further protects your anonymity.

I want to share my recent experience that might help ease your concerns about anonymity. I was in almost the exact same situation last year - had solid evidence of someone hiding substantial income and was terrified about being identified since only a few people knew about it. I ended up filing Form 3949-A and requested to remain anonymous. About 8 months later, I learned through a mutual acquaintance that the person was being audited by the IRS. What really struck me was how the person talked about it - they genuinely seemed to think it was a random audit and kept saying things like "I can't believe they picked me" and "it must be because of my income level." The IRS approached it exactly as others described - they sent a standard examination letter requesting documentation for various income sources, not just the specific items I had reported. The person never once suspected that someone had reported them, even though the audit focused heavily on the exact areas where I knew they were hiding income. The whole experience really reinforced that the IRS takes informant protection seriously. If you have solid documentation and are thorough in your initial report, I'd say your anonymity risk is very low. Just make sure to be as detailed as possible in the form so they don't need to contact you for clarification.

Don't forget about state tax implications too! Federal and state treatment of involuntary conversions don't always align. I'm in California and had to pay state tax on gains that were deferred for federal purposes because CA has slightly different rules.

I went through something very similar after a warehouse fire destroyed my manufacturing business. One thing that really helped me was getting a formal letter from my insurance company breaking down exactly what portion of the settlement was for physical property versus business interruption. Even though my original claim paperwork had this information, having it in a separate letter specifically for tax purposes made the audit process much smoother. The IRS agent could immediately see the clear distinction between the $180k for destroyed equipment (which qualified for deferral when I bought replacement machinery) and the $95k for lost income (which I had to report as taxable income). Also, keep detailed records of when you reinvested the money. The timing requirements for involuntary conversion are strict - you generally have until the end of the second tax year after the year you realized the gain to purchase replacement property. Since you bought your new business 8 months after receiving the payout, you should be well within the deadline, but document those dates clearly for your tax preparer.

As a tax professional who's seen this exact scenario play out many times, I want to echo what others have said - your instincts are absolutely correct here. UPEs should be reported on Schedule E, and your CPA's refusal to provide clear documentation supporting his Schedule C position is a major red flag. What's particularly troubling is his claim that Schedule E reporting creates "immediate scrutiny." This is simply not supported by any IRS guidance or data. If anything, the mismatch between K-1 partnership items and Schedule C business expenses is more likely to trigger questions during processing. I'd recommend giving your CPA one final opportunity to provide written IRS authority supporting his position. Ask specifically for the regulation, revenue ruling, or other official guidance that says UPEs should go on Schedule C instead of Schedule E. When he inevitably can't provide this (because it doesn't exist), you'll have your answer about whether to continue working with him. Your concerns about signing a return that contradicts IRS instructions are completely valid. Don't let anyone pressure you into filing something you're not comfortable with - especially when multiple professionals here have confirmed your understanding is correct.

As someone who's been through partnership tax issues myself, I completely understand your frustration with this situation. What's most concerning to me is not just the technical disagreement, but your CPA's unwillingness to engage in a professional discussion about it. I've read through all the responses here, and the consensus from multiple tax professionals - including a former IRS revenue agent - is crystal clear: UPEs should be reported on Schedule E according to IRS instructions. Your instincts about this are absolutely correct. What really stands out is that your CPA is making claims about "immediate scrutiny" and "red flags" without being able to provide any actual IRS guidance to support these assertions. Any legitimate tax position should be backed by regulations, revenue rulings, or other official guidance. The fact that he's "flat-out refused" to consider the technically correct approach is deeply troubling. I'd suggest giving him one final opportunity to provide written documentation from the IRS that supports putting UPEs on Schedule C. When he can't (because it doesn't exist), you'll know it's time to find a new CPA who prioritizes compliance with IRS instructions over their own unsubstantiated theories about audit risk. Don't compromise on filing a return you're not comfortable with. Your concerns about following IRS instructions are completely valid, and you deserve a tax preparer who will work with you rather than dismissing your legitimate questions.

This is really helpful information! I'm in a similar boat - I've been doing freelance graphic design work and selling prints on Etsy, made about $3,200 this year. I had no idea about the $400 threshold for self-employment tax vs the $600 for 1099 forms - that's a crucial distinction that I think a lot of people get confused about. One thing I'm still unclear on though - when you mention deducting business expenses, do you need to have receipts for everything? I bought a lot of art supplies throughout the year but didn't always keep receipts for smaller purchases. Also, if I use my personal laptop for both design work and personal stuff, can I deduct a portion of that as a business expense? Thanks for breaking this down so clearly - definitely makes the whole process seem less overwhelming!

Just to add another perspective - I've been doing freelance illustration and selling handmade pottery for about 3 years now. The transition from regular W-2 employment to dealing with self-employment taxes was definitely a learning curve, but it's totally manageable once you get the hang of it. A few practical tips that helped me: - Set aside 25-30% of your side income in a separate savings account for taxes. This way you won't be scrambling to pay when tax time comes. - Use a simple spreadsheet or app to track income and expenses monthly - don't wait until the end of the year! - Take photos of all your receipts immediately and store them in a dedicated folder on your phone/cloud storage. The good news is that creative businesses often have lots of legitimate deductions that can significantly reduce your tax burden. Art supplies, craft materials, booth fees for markets, even business meals with clients - it all adds up. Just make sure everything is actually used for your business and keep good records. Don't let the tax stuff discourage you from pursuing your creative side income - it's really not as complicated as it seems at first!

@Mia Roberts - I went through this exact same situation two years ago! The transition from married filing jointly to head of household can definitely be confusing. Here are the key things that helped me: 1. **Head of Household**: You likely qualify since you're providing more than half the cost of maintaining a home for your kids. This gives you better tax rates than filing single. 2. **Child Tax Credit**: With two kids under 17 and your $58k income, you should definitely claim the full credit. Put $4,000 in Step 3 of your W4 ($2,000 per child). 3. **Don't forget about childcare**: If you're paying for daycare or after-school care so you can work, look into the Child and Dependent Care Credit. This won't affect your W4 but will help at tax time. 4. **Consider quarterly estimated payments**: If you have any side income or irregular earnings, you might need to make estimated payments to avoid underpaying. The biggest mistake I made my first year was not adjusting my withholding enough to account for losing the "married filing jointly" benefits. Better to have a little extra withheld than owe a big chunk next April! You've got this - being a single mom is tough but you're taking all the right steps by asking for help.

@Mia Roberts - As someone who went through a similar transition last year, I wanted to add a few practical tips that really helped me navigate the W4 as a newly single parent: **Double-check your qualifying dependents**: Make sure your divorce decree specifies who claims the kids each year. Even if you have physical custody, sometimes there are agreements about alternating years for tax purposes. **Consider your new marginal tax rate**: At $58k as head of household with two kids, you're likely in the 12% bracket, but it's worth running the numbers. The child tax credit will significantly help, but don't forget about the earned income credit if you qualify - it phases out around $50k for HOH with 2 kids, so you might still get some benefit. **Timing matters for mid-year changes**: Since you started this job after your divorce, make sure your withholding accounts for the partial year. If you worked part of the year under different circumstances (married, different job, etc.), your annual withholding calculation needs to reflect that. **Keep good records**: Start tracking any work-related childcare expenses, as these can be deductible. Also, if you're paying health insurance premiums for the kids, those might be deductible too. The learning curve is steep, but you'll get the hang of it! Feel free to ask if you have specific questions about any of these points.