Make sure your merger agreement specifically addresses how tax audit responsibilities will be handled if the IRS or state agencies come calling about pre-merger operations! We merged our LLC two years ago, and the IRS just selected our OLD company for audit for the year before the merger. Now there's a huge fight about who's responsible for handling it, providing documentation, and potentially paying any adjustments. Nobody thought to address this in the merger agreement and it's causing major drama.

This is exactly the situation I went through 18 months ago when our 3-member LLC merged with a larger entity. The undistributed profits piece was the most complex part to navigate. One thing that hasn't been mentioned yet is the importance of getting a formal valuation of your LLC before finalizing the merger terms, especially with $87K in undistributed profits. The acquiring company will likely want to see how those profits affect your capital account balance and overall contribution to the merged entity. Also, make sure you understand whether the merger will be treated as a contribution of assets under IRC Section 721 or as a sale. If structured properly as a contribution, you're right that it should be tax-free, but the devil is in the details of how the exchange is documented. For the K-1 handling, I'd recommend asking the acquiring company's accountants specifically about their process for issuing partial-year K-1s. Some firms are better at this than others, and you want to make sure they have experience with mid-year mergers to avoid delays in getting your tax documents. The undistributed profits will definitely transfer as part of your capital account, but make sure the merger agreement specifies exactly how they'll be valued and allocated in the new entity structure.

Just to add another data point - this EXACT issue is why I stopped using TurboTax for my foreign tax returns. I switched to TaxAct which actually lets you override the amount on line 19 without jumping through a million hoops.

I went through this exact same issue last year! The key thing to understand is that Form 1116 doesn't automatically force you to use all your foreign tax credits - you absolutely can elect to carry forward excess amounts. Here's what worked for me: On Form 1116 Part III, line 19 is where you enter the amount of foreign tax credit you want to claim for the current year. Most tax software defaults to the maximum allowable amount, but you can manually enter a lower amount if you want to preserve credits for future years when you might have higher tax liability. Since you mentioned having different categories (like passive income), make sure you're filling out separate Form 1116s for each category. The carryover election is made separately for each category. One tip - if your tax software won't let you override line 19, look for an "override" or "manual entry" option in the forms section. Every major tax software has this capability, though they sometimes hide it pretty well! If all else fails, you might need to file a paper return to have complete control over your foreign tax credit elections. Keep detailed records of your carryover amounts since they can be used for up to 10 years. Good luck with your return!

According to the National Taxpayer Advocate's 2023 Annual Report to Congress (available at taxpayeradvocate.irs.gov), identity theft cases now average 195 days to resolve. I've personally seen this timeline play out with multiple clients. Here's what typically happens: 1. Initial processing delay: 4-6 weeks 2. Case assignment to ITVA unit: 2-4 weeks 3. Investigation period: 3-4 months 4. Resolution and refund processing: 4-6 weeks The IRS has implemented a new Identity Theft Victim Assistance (IDTVA) program that's supposed to streamline these cases, but in practice, I'm still seeing similar timeframes to previous years.

I went through this exact situation in 2023 and can share some hard-learned lessons. First, make sure you keep detailed records of EVERYTHING - every phone call, letter received, and date submitted. The IRS lost my paperwork twice during the process. Second, if you haven't already, request an IP PIN (Identity Protection PIN) for future tax years - this prevents someone from filing with your SSN again. Third, consider setting up credit monitoring if you haven't already, as tax identity theft often indicates broader identity compromise. The investigation timeline is unfortunately unpredictable right now, but stay persistent with follow-ups every 30 days. Document each interaction. Good luck, and don't give up - you will eventually get your refund, even if it takes longer than expected.

Has anyone here actually been audited regarding prepaid expenses? My CPA is super conservative and basically refuses to let me prepay anything except trivial amounts. Says it's a "red flag" but I think he's being overly cautious.

Great question about prepaying expenses! I actually work as a tax preparer and see this situation all the time with small business clients. The key is understanding that legitimate prepayments are perfectly acceptable - it's not about gaming the system, it's about timing your cash flows strategically. One thing I'd add to the excellent advice already given: consider prepaying your quarterly estimated taxes for next year if you expect similar income levels. You can make your Q1 estimated payment in December and deduct it immediately, which can provide significant tax savings without any compliance risk. Also, don't overlook professional development expenses - conference fees, certification renewals, or training courses scheduled for early next year can often be prepaid in December. These are usually clear-cut deductions that auditors rarely question. Just make sure whatever you prepay represents a genuine business expense you would incur anyway. The IRS doesn't care about the timing strategy as long as the underlying expenses are legitimate and properly documented.

Has anyone else had issues with the bar association not sending proper receipts for these expenses? I paid almost $2,000 for my initial licensing but the receipt they sent doesn't break down the costs properly. My accountant says I need better documentation if I want to deduct these as business expenses.

The timing distinction mentioned by GalaxyGuardian is spot-on and crucial for your situation. Since you paid most of these fees while working as a 1099 contractor, you're likely in good shape for deducting them on Schedule C for 2022. One additional consideration: make sure you can demonstrate that obtaining your bar license was "ordinary and necessary" for your paralegal/contractor work. Even though you weren't yet practicing as an attorney, having legal credentials could reasonably be considered necessary for advancing your legal consulting services or enhancing your value as a contractor in the legal field. Keep detailed records of exactly when each payment was made relative to your employment status changes. The $1,800 bar exam fee and $950 character and fitness application were likely paid while you were still a 1099 contractor, making them strong candidates for business deductions. The $650 licensing fee timing will depend on exactly when in September you received your license versus when you transitioned to W-2 status. Also worth noting: some attorneys have successfully argued that bar admission costs are startup expenses for their legal practice, which can sometimes provide additional deduction opportunities even if the timing doesn't work perfectly for Schedule C treatment.