I was in a similar situation with my S corp and almost got nailed in an audit. Even though the instructions for 1125-E say to file it if gross receipts are over $500K, the bigger issue is definitely the lack of reasonable compensation. My accountant now has me document WHY I'm paying myself the amount I do each year with comparable salary data for my industry. This has been super helpful in justifying my compensation decisions.

Based on this discussion, I'm really concerned about my situation too. I've been running my S corp for 3 years with similar revenue levels but zero officer compensation. Reading about the Watson case and the potential for retroactive reclassification has me pretty worried. I think I need to take action immediately - both filing Form 1125-E correctly (showing $0 compensation) and establishing reasonable compensation going forward. The documentation approach that Andre mentioned sounds like exactly what I need to implement. Has anyone here actually gone through the process of fixing this retroactively? I'm wondering if I should reach out to a tax professional who specializes in S corp compliance or if there are specific steps I should take first. The potential penalties and back taxes are keeping me up at night!

Has anyone used an online service like Zillow or local property tax records to figure out the historical value? I inherited a house from my grandmother in 2012 and the lawyer handling the estate didn't get an appraisal at the time. Now I'm selling and have no idea how to document what it was worth back then.

One thing I haven't seen mentioned yet is that you might want to consider the timing of your sale carefully. If this puts you into a higher income bracket for the year, you could end up paying the 20% long-term capital gains rate instead of 15%. Also, since you mentioned this is for your kid's college, look into whether your state offers any tax advantages for education expenses that might offset some of the capital gains. Some states allow you to contribute to 529 plans and get state tax deductions, which could help reduce your overall tax burden. Make sure you keep detailed records of all the property taxes you've paid over the 20 years too - while these don't add to your basis, they can sometimes be deducted in the year of sale depending on how the closing is structured.

22 Just an FYI - I called the EFTPS customer service line (not the IRS) at 1-800-555-4477 and they were able to tell me exactly which form to select for my CP128. Only took about 10 minutes on hold. Sometimes the EFTPS folks are more helpful than the IRS for these specific payment questions.

I've been through this exact situation with a CP128 notice last year. The key thing that finally worked for me was calling the EFTPS helpline directly at 1-800-555-4477 rather than trying to reach the IRS. They walked me through the correct form selection based on what type of tax the penalty was related to. For my situation (employment tax penalty), I had to select Form 941, but the EFTPS rep emphasized that it really depends on the underlying tax type shown on your CP128 notice. They also told me to include three things in the comments: the CP128 notice number, the tax period, and my EIN. The payment posted correctly within a few business days, and I received confirmation that it was applied to the right penalty. Much easier than the hours I spent on hold with the IRS!

Has anyone used CCH Axcess for SPVs? My CPA recommended it to me for our angel fund, but the pricing seemed outrageous for what's essentially a passive investment vehicle with 25 investors.

For your situation with multiple investment LLCs and 40-50 K-1s, I'd recommend starting with TaxAct Professional as Isabella mentioned. I've been using it for my real estate investment partnerships for 3 years now, and it handles the member data carryover beautifully. The key advantage for investment vehicles is that once you set up the allocation percentages and member information, subsequent years are mostly just updating income/loss amounts and any membership changes. TaxAct's batch K-1 printing and e-filing capabilities will save you hours compared to manual preparation. One tip: when you first set it up, take the time to carefully enter all the member information including addresses and SSNs. The software will catch common errors like mismatched names/SSNs that could cause IRS notices later. For the price point (around $200-300 per return), it's a solid middle ground between DIY manual work and expensive professional software. The learning curve is pretty gentle if you're already familiar with 1065 forms, and their support is responsive when you run into questions about specific partnership allocations.

One warning about cost segregation - the IRS has been increasing scrutiny of these studies in recent years. Make sure whoever does yours is legit and has engineering credentials. I've seen people try to DIY this and get absolutely hammered in audits.

Great discussion here! As someone who's been through a similar conversion, I wanted to add a few practical points. First, don't forget about the "material participation" tests beyond just Real Estate Professional status - there are 7 different tests you can meet, and some are easier than others depending on your situation. For the Airbnb conversion specifically, document EVERYTHING. Keep logs of time spent on guest communication, cleaning coordination, maintenance, marketing, etc. The IRS loves detailed records, especially for short-term rental activities since they're often more hands-on than traditional rentals. One thing that caught me off guard: if you're doing cost segregation on a duplex where only one unit becomes an Airbnb, you'll need to track the depreciation schedules separately for each unit since they have different business purposes. It's not complicated, but it's something to plan for. Also consider the state tax implications - some states treat short-term rentals differently than long-term rentals for tax purposes, which could affect your overall strategy. Worth checking with a local CPA who understands your state's rules.