Slightly different perspective - I'd recommend talking to a tax attorney who specializes in partnership taxation, not just your CPA. While IRC 1341 seems like the right approach, there are nuances with carried interest that might affect your specific situation. For example, depending on how your partnership agreement was structured, there might be arguments for treating this as a capital loss rather than a Claim of Right issue, which could have different tax implications. A specialized attorney could also help if the IRS challenges your position.

This is a complex situation that touches on several areas of tax law. Based on your description, IRC 1341 does seem like the appropriate approach, but I'd strongly recommend getting specialized advice given the amounts involved. One thing to keep in mind is timing - make sure you're clear on when exactly the repayment obligation crystallized. For IRC 1341 purposes, it matters whether the repayment obligation arose in 2024 when you left, or if it was always contingent on not meeting the vesting requirements. Also, since you mentioned your accountant is researching this, make sure they're familiar with Revenue Ruling 2019-11, which provides guidance on applying IRC 1341 to partnership distributions. The IRS has been more active in this area recently, so having current guidance is important. The documentation everyone else mentioned is crucial - you'll want everything in writing showing the original allocation, the tax distributions made to cover your liability, and the subsequent repayment requirement. This creates a clear paper trail that supports your position. Given the complexity and dollar amounts, consider getting a second opinion from a tax professional who specializes in partnership taxation and carried interest. The intersection of these rules can create opportunities or pitfalls that aren't immediately obvious.

use a free filing service like cash app taxes if ur income under 73k

Just a heads up - with no federal withholding, you'll still get the full EIC and CTC as refundable credits! The IRS will cut you a check for the difference. Make sure you have all your docs ready (W2, SSNs for kids, etc) and double check those qualifying child requirements. Good luck! 💰

This is exactly the kind of confusion that trips up so many divorced parents! Your tax software is actually correct - you CAN claim the Earned Income Credit even though your ex will be claiming the Child Tax Credit for your daughter. The key thing to understand is that the IRS treats these as completely different types of benefits. The EIC is what's called a "custodial benefit" - it goes to the parent the child actually lived with for more than half the year, regardless of any custody agreements about who claims the child as a dependent. Since your daughter lived with you for more than 6 months, you qualify for EIC based on your income. Your ex can still claim the Child Tax Credit because your custody agreement gives him the right to claim her as a dependent, but that doesn't affect your EIC eligibility at all. Make sure you keep good records showing your daughter lived with you for more than half the year (school records, medical records, etc.) in case the IRS ever questions it. But you're absolutely entitled to that EIC - don't leave money on the table because of bad advice!

I've been following this thread and want to add something that might help clarify the situation even further. As someone who went through a messy divorce with complicated custody arrangements, I learned the hard way that there's a big difference between what divorce agreements say and what the IRS actually recognizes. Your custody agreement can legally transfer the right to claim your daughter as a dependent to your ex (which allows him to get the Child Tax Credit), but it absolutely cannot transfer away your right to the Earned Income Credit if she lived with you for more than half the year. The IRS considers EIC a benefit that belongs to the custodial parent, period. I made the mistake of not claiming EIC for two years because I thought our custody agreement prevented it. When I finally figured out I was wrong, I had to file amended returns to get that money back. Don't make the same mistake I did - if your daughter lived with you for more than 6 months, claim that EIC! The IRS has been very clear that custody agreements between parents don't override their rules about who qualifies for custodial benefits. Just make sure you can document where your daughter actually lived throughout the year, because that's what really matters to the IRS, not what your paperwork says about who claims her as a dependent.

10 Have you tried using tax software that lets you do tax planning? I use TurboTax and they have a feature where you can estimate next year's taxes and it tells you if you're withholding enough. Saved me from owing $3k this year because I caught the underwithholding in October and adjusted my W-4 for the last few months.

One thing that hasn't been mentioned yet is to check if your employer is calculating withholding correctly based on your pay frequency. I discovered my biweekly paycheck withholding was being calculated as if I got paid weekly, which significantly under-withheld throughout the year. Also, if you get annual raises or bonuses, your withholding might not adjust proportionally. I learned to update my W-4 every January and again mid-year if I get a significant raise. The IRS withholding calculator is definitely your friend here - run it quarterly to stay on track. Another quick fix while you sort out the W-4: you can make estimated quarterly tax payments directly to the IRS to cover any shortfall. Form 1040ES has vouchers you can mail with a check, or you can pay online. This prevents that massive April surprise and potential underpayment penalties.

I'm dealing with a very similar situation right now! My business partner and I have been filing our 2-member LLC income on Schedule C for the past three years, and I just found out we should have been doing partnership returns. One thing I learned from my research is that the IRS has a "de minimis" approach for small partnerships - they're less likely to pursue penalties aggressively when the income is low and all taxes were actually paid (just reported on the wrong forms). Since your first LLC only had $15K total income and the other had zero, you're probably in a lower risk category. I'm also curious about the dissolution aspect you mentioned. If you're shutting down one of the LLCs in 2022, you might want to file a final partnership return for that entity showing the dissolution. That could actually help close the books cleanly rather than leaving things hanging. Have you considered reaching out to the IRS directly through their business line? I know it's hard to get through, but they sometimes give more practical guidance than accountants who tend to be overly cautious about every technical requirement.

I'm a tax preparer and see this exact situation frequently with small LLCs. Here's my practical take based on what actually happens versus what the regulations technically require: The IRS Publication 3402 (Tax Issues for Limited Liability Companies) clearly states that multi-member LLCs are partnerships by default, but enforcement for small operations is typically focused on whether taxes were actually paid, not the specific forms used. In your case, since you reported all income and paid appropriate taxes (just on Schedule C instead of via K-1s), the main issue is really about compliance, not tax avoidance. The IRS tends to be more understanding when they can see good faith effort to pay what was owed. My recommendation would be to file the partnership return only for 2020 (the year with actual income) along with amended 1040s for all three members. For 2021 with zero income, you could file a short-form 1065 showing no activity, or potentially skip it entirely since there's no tax impact. Include a reasonable cause statement explaining that tax software allowed the Schedule C filing method and you relied on that guidance. The key is being proactive rather than waiting. The IRS appreciates taxpayers who discover and correct their own mistakes. You'll likely face minimal penalties, and first-time penalty abatement might eliminate them entirely. For the LLC you're dissolving, definitely file a final partnership return showing the dissolution date - this officially closes that entity's tax obligations.