Thanks for this specific advice! Would I need to include any particular forms with that letter or just the explanation and check? Also, should I be worried about penalties since I've had the refund money for about 2 weeks now?

You don't need any specific forms to return an erroneous refund - just the letter explaining what happened and the check. Make sure to write "Returned Refund" and the tax year (2025) in the memo line of the check. As for penalties, you shouldn't worry about that at this point. The IRS generally doesn't charge penalties for erroneous refunds if you return them promptly. Two weeks is still considered prompt action. The key is addressing it before they send you an official notice about it, which shows you're acting in good faith to correct the mistake.

That makes a lot of sense. I work in payroll and we occasionally have to generate W-2s early for special situations. The IRS systems need to accommodate these edge cases, which is probably why they don't have hard blocks against future-year filings.

This is so important! My brother thought he could just reclaim his property when a buyer defaulted on owner financing, but it turned into a legal nightmare because he didn't follow the proper foreclosure procedures in his state. The tax implications were also way more complicated because of it.

Exactly right. Each state has different laws regarding owner financing and foreclosure requirements. Some states treat these transactions like mortgages requiring judicial foreclosure, while others allow for simpler processes if you used a land contract or contract for deed. The tax implications directly tie to the legal process. If you don't properly document the default and reclamation according to your state's laws, you could have trouble justifying your tax treatment to the IRS. It's worth consulting with a real estate attorney who specializes in your state's foreclosure laws before finalizing your tax approach.

You should be able to add those legal fees to your basis in the property since they're directly related to defending/clearing title. They're not immediately deductible expenses but get factored into your basis, which will reduce any gain when you eventually sell the property again.

Thanks for this! How exactly would I be able to prove she was insolvent from 12 years ago? Would we need bank statements from that time? I'm not sure we'd even have access to those anymore.

You'd need to make your best good-faith effort to document her financial situation at that time. Old bank statements, credit reports, loan documents, property records, etc. would be helpful. If you don't have everything, create a reasonable estimate based on what you do know, and document your methodology. The IRS understands that records from many years ago may not be complete. Just be prepared to explain and defend your calculations if questioned. The key is showing that her debts exceeded her assets at the time the debt was cancelled.

This happened to me too. No notice whatsoever until the 1099-C showed up. Apparently they're only required to send the 1099-C, not a separate cancellation notice. Super annoying.

I had no idea this was even a thing! Do you know if there's a specific form I need to fill out to request this? And does it matter if I've already set up a payment plan?

You don't need a specific form - you can request it by phone when you call the IRS. Just specifically ask for "first-time penalty abatement" and explain that you've had a good compliance history. They'll check if you qualify right on the call. It doesn't matter if you've already set up a payment plan - you can still request the abatement. The payment plan is for the total amount, but if they approve your abatement request, they'll reduce the total and adjust your payments accordingly. Be aware this only removes penalties, not interest or the actual tax owed, but it can still save you a decent amount.

Do you just use the calculator on the IRS website? I've tried that before and found it super confusing with all the questions about dependents and deductions.

Thanks for bringing this up! I double-checked everything and my overall tax situation is pretty much identical to last year. Same filing status (single), same standard deduction, no dependents, no additional income sources, and my 401k contribution percentage is the same. The only significant change was switching employers, which is why the withholding issue makes the most sense. After reading everyone's comments, I'm going to submit a new W-4 with additional withholding in line 4c. Hopefully that'll fix things for next year's return!

Good thinking to check all those factors! Since everything else remained consistent, it definitely sounds like the withholding change from your new employer is the culprit. Using line 4c for additional withholding is exactly the right approach. Just be careful not to overwithhold too much - remember that a smaller refund means you had more money in your paychecks throughout the year. Some financial advisors actually recommend aiming for a small refund since it means you're not giving the government an interest-free loan. But I understand many people prefer the forced savings of a larger refund!

If both you and your spouse work, the Step 2 checkbox is actually designed specifically for your situation. It adjusts your withholding to account for the higher tax bracket you might be in when combining both incomes. The downside is that it might overwithhold a bit. If you want more precise control, you could use the IRS withholding calculator online to get an exact dollar amount for Step 4c instead. That's what I did, and it worked out perfectly - we got a small refund instead of owing like we did the previous year.