Thanks for the heads-up about the lifetime exemption. We did get a professional appraisal for the property to document the $675,000 value. Does the appraisal need to be attached to both of our Form 709s, or just referenced?

You should attach a copy of the appraisal to both returns. The IRS wants to see the documentation for both spouses since you're each claiming half of the gift amount against your respective lifetime exemptions. Also make sure the appraisal is dated reasonably close to the date of the gift transfer. If there's more than a 6-month gap, the IRS might question whether the valuation is still accurate.

We looked into QPRTs but decided against it. They're more complex and you have to survive the trust term to get the tax benefits. For our situation, direct gifting with gift splitting worked better, but definitely talk to an estate attorney about your specific situation.

Does it matter how long the property was a rental vs a primary residence? I lived in mine for 2 years, then rented it out for 5 before selling.

That's a great question! If you lived in the property for at least 2 of the 5 years before selling, you may qualify for a partial exclusion of gain under the primary residence rules (up to $250k single/$500k married). For the period it was a rental, you'll still face depreciation recapture on the depreciation you claimed or should have claimed. The IRS has a specific calculation for properties that were both primary residences and rentals. You'll allocate the gain between the periods, and only the rental period portion is fully taxable (minus any qualified exclusion). IRS Publication 523 covers this in detail.

I used the installment method when I sold my duplex last year. Basically, you only pay taxes on the portion of the profit you receive each year. BUT - and this is a big but - you still have to pay all the depreciation recapture tax in the year of sale, regardless of how much money you actually received. Only the capital gains portion gets spread out.

Thanks for this advice! I just checked my bank account and the payment did go through about 10 days ago. That's a huge relief! I kept thinking there might be some official "approved" notification I was missing. Do you know roughly how long I should keep documentation for self-employment taxes?

You're welcome! Yes, that payment clearing is usually a good sign that everything is proceeding normally. Most people don't realize the IRS generally only contacts you if there's a problem. For self-employment tax documentation, you should keep all records for at least 7 years. This includes receipts, mileage logs, home office measurements, client invoices, and bank statements showing income and expenses. The IRS can typically audit returns up to 3 years back, but for some situations like substantial underreporting, they can go back 6 years or more.

So basically we just file and hope for the best? There's really no confirmation system at all? That seems messed up considering how serious they are about audits and penalties.

Thanks for these tips! My cycle code is 20230906 and I did claim the EITC this year for the first time. I also had a side gig that generated a 1099 which I haven't had before. Do either of those typically trigger these codes?

Yes, both of those would increase the chances of seeing these codes. First-time EITC claims are frequently verified by the IRS as part of their due diligence requirements. And adding 1099 income when you previously only had W-2 income can sometimes trigger a review, especially if the 1099 income is substantial. Based on your cycle code, your return was processed in week 9 of 2023. Typically, if it's a simple verification, you might see resolution within 4-6 weeks from that processing date. The notice will likely ask for documentation supporting your EITC claim or verification of your 1099 income.

Code 420 is more serious - it means your return has been selected for audit. You'll definitely get a notice explaining what they want to examine. Usually they focus on specific items rather than the whole return. In my experience, refund adjustments depend on whether they accept your documentation.

I'm worried about messing something up if I try to do it on paper. Is there a good tutorial somewhere for filling out 1040-X? Also, do I need to redo all the calculations from scratch or can I use what TurboTax already calculated?

The IRS has a decent tutorial on their website with instructions for Form 1040-X. Just search "how to file 1040-X IRS" and it should come up. You don't have to redo everything from scratch. Use the calculations from both your accepted 1099 return and the rejected W-2 return as starting points. The 1040-X has three columns: A (original figures), B (net change), and C (correct amount). Column A would be your accepted 1099 return amounts, column B shows the changes from adding your W-2 income, and column C is the final combined total. It sounds more complicated than it is when you're actually looking at the form.

Totally agree. And make sure you keep copies of EVERYTHING - both returns, all your documents, and any communication with the IRS. I had a similar issue resolved but then got a notice 6 months later questioning my amendment. Having all my paperwork saved me from a huge headache.