Wondering if anyone knows how this would affect future W-2 employment? If the friend doesn't file for the sole proprietorship but then starts filing normally with their new W-2 job next year, will that trigger the IRS to look backward?

Your "friend" really needs to file that return, even if it's messy. I work in tax prep and see this situation all the time - the fear of filing an imperfect return often makes people avoid it entirely, which always makes things worse. Here's what I tell clients in similar situations: the IRS would rather see an honest attempt at filing with some organizational issues than no filing at all. They have programs specifically for first-time business owners who made mistakes. A few practical steps your friend can take right now: 1. Gather ALL bank statements for the business account (or personal account if mixed) 2. Make a simple spreadsheet listing income and expenses by month 3. Don't worry about perfect categorization - basic business expenses vs personal is enough to start 4. File for an extension if needed to buy more time to organize The penalties for not filing are harsh, but there are often penalty abatement options for first-time filers who can show reasonable cause. The key is showing good faith effort to comply, which means filing something rather than nothing. Also, closing the business license doesn't erase the tax obligation for the year it operated. The IRS will still expect to see that Schedule C on the 2022 return.

Week 5 here and honestly this community has been more helpful than the IRS website itself 😭 @Ryan Andre thanks for the Tuesday/Thursday info - that's literally the first concrete timeline I've heard anywhere. Going to try that taxr.ai thing @Lauren Zeb mentioned because the "where's my refund" tool has been useless. At least now I know I'm not alone in this waiting game!

Week 2 of test batch here and honestly feeling way better after reading this thread! @Ryan Andre that Tuesday/Thursday processing schedule is incredibly helpful - finally have actual dates to work with instead of just refreshing constantly. @Charlotte White your success story after 6 weeks gives me hope! Going to definitely check out that taxr.ai tool @Lauren Zeb mentioned since the regular WMR has been completely useless. Thanks everyone for sharing your experiences - makes this whole waiting process feel less isolating when you know others are going through the exact same thing 🙏

Quick tip - if you're filing just one or a few 1099-NECs, the IRS actually has a free online filing portal called the FIRE system (Filing Information Returns Electronically). You don't need fancy software if you only have a few to do. You'll need to register for an account first, which takes a little time to set up, but once you have it, filing is pretty straightforward. For real estate commissions specifically, I've done this several times without issues.

Just want to add one more important point that I learned the hard way - make sure you keep detailed records of when you sent the 1099-NEC to the brokerage and when you filed with the IRS. I had a situation where a brokerage claimed they never received their copy, and having proof of mailing saved me from potential penalty issues. Also, double-check that the brokerage's legal name on the 1099 exactly matches what's on their W9 form. Even small differences like "LLC" vs "L.L.C." or missing punctuation can cause processing delays or correction notices from the IRS. With a $74k commission, you definitely want everything to be perfect the first time around. One last thing - if this is your first time filing 1099s, consider doing a test run with the forms before the actual filing. Most software and even the IRS FIRE system let you preview everything before submitting, which can catch mistakes early.

Has anyone dealt with state taxes in this situation too? I'm 3 years behind on both federal and state, and I'm wondering if I need to handle them differently or if the process is similar.

I really appreciate everyone sharing their experiences here. As someone who's been in a similar dark place, I want to emphasize something that might get lost in all the technical advice: you're being incredibly brave by facing this now. The guilt and fear around unfiled taxes can be paralyzing, especially when you're already dealing with grief and mental health struggles. But the IRS really is more interested in compliance than punishment, particularly when life circumstances were genuinely difficult. A few practical points from my experience helping others in similar situations: 1) Don't let perfect be the enemy of good. Even if you can't find every single document, file with what you have. You can always amend later if needed. 2) The statute of limitations works in your favor too - after 3 years, you can't claim refunds, but after 10 years (6 in some cases), they generally can't collect either. 3) Consider reaching out to a local VITA (Volunteer Income Tax Assistance) program or Low Income Taxpayer Clinic. Many offer free or low-cost help specifically for situations like yours. 4) Document your hardship circumstances. The IRS has provisions for reasonable cause that can reduce or eliminate penalties when taxpayers faced genuine hardship. You've already taken the hardest step by deciding to address this. The path forward exists, and you're going to get through it.

Don't overlook the liability aspects too! Being a partner potentially exposes you to more business liability than being just an employee, depending on how the partnership is structured. If it's a general partnership interest, you could have unlimited personal liability for the business's debts and legal issues. If it's a limited partnership interest, your liability is usually capped at your investment. Since you mentioned it's an LLC, you should have some liability protection, but make sure to understand exactly what your partnership agreement says about this. Also check if the company maintains proper liability insurance for partners.

One aspect that hasn't been fully covered is the potential impact on your Social Security benefits calculation. As an employee, your employer pays half of your Social Security taxes, but as a partner, you'll pay the full 15.3% self-employment tax on your earnings (though you can deduct half of it). However, this actually means more of your income will count toward your Social Security earnings record, which could result in higher future Social Security benefits when you retire. Also, regarding the 401(k) loss - while you'll lose access to any employer matching, a Solo 401(k) as a partner can actually allow you to contribute both as the "employee" (up to $23,000 for 2024, or $30,500 if over 50) AND as the "employer" (up to 25% of compensation), potentially letting you save much more for retirement than a traditional employer plan. The key is running the numbers for your specific situation. The immediate tax changes might look concerning, but the long-term wealth-building potential of ownership, combined with the tax advantages available to business owners, often makes it worthwhile.