Has anyone else noticed how tax identity theft has gotten so much worse in the last couple years? My neighbor had someone file a fake return with her info last year and it took her like 8 months to get her actual refund. The IRS is completely overwhelmed with this stuff.

This is definitely a red flag. I've been preparing taxes for over a decade and there's absolutely no legitimate reason a tax preparer needs physical copies of social security cards. The SSN itself is sufficient for all tax preparation purposes, including e-filing and identity verification with the IRS. The explanation about "security purposes in case someone tries to fraudulently use your SSNs" doesn't make sense either - having copies of your cards wouldn't prevent or help with identity theft, and actually creates MORE risk by having those documents stored in their files. I'd strongly recommend finding a new preparer. A legitimate tax professional should be able to clearly explain why they need any document, and getting defensive when questioned is another warning sign. Trust your instincts on this one.

11 This might be a response to increased IRS scrutiny of tax preparers. My sister works at a tax firm and they recently implemented stricter documentation policies because they got audited. But they told clients about the policy change well in advance and explained exactly which regulation they were complying with. Your preparer's approach sounds suspicious - why wait until months after tax season? And why not explain the specific requirement?

5 I've been a client at my tax firm for over 20 years and they did something similar last year, but it was because they were implementing new security protocols after a data breach at another office in their network. They clearly explained this was for enhanced security and gave us multiple secure options for providing the information (secure portal, in-person verification, etc). The vague explanation you received is what concerns me most.

WATCH OUT with these repayments! I did something similar and didn't realize there were SPECIFIC CODES that needed to be used when repaying. My repayment got coded as a regular contribution instead of a rollover/CARES repayment, and it caused a huge headache with both the IRS and my tax filing. Make sure whatever financial institution you use for the repayment understands it's specifically a CARES Act repayment. Get written confirmation of how they coded it. Also, keep ALL your documentation showing the original distribution and the repayment for at least 7 years - I got audited on mine and was glad I had everything.

This is exactly why I love this community - so many helpful real-world experiences! I'm dealing with a similar situation but with a twist. My wife took her CARES Act distribution in late 2020, and we're now in 2023 getting close to that 3-year deadline. One thing I haven't seen mentioned yet is the timing aspect. Since you spread the income over 3 years (2020-2022), make sure you understand which tax years you'll need to amend. If you repay before the end of 2023, you can still file amended returns for all the years you reported the income. Also, I called my local IRS Taxpayer Assistance Center and they mentioned that some people are running into issues where their original 401k providers are claiming they can't locate the distribution records from 2020. Might be worth getting copies of all your original distribution paperwork from Fidelity before you start the repayment process, just in case you need to prove the connection between the original distribution and your repayment. The clock is ticking for all of us 2020 CARES Act folks, so definitely don't wait much longer!

Did your letter mention anything about interest being included with the refund? When the IRS sends refunds for prior tax years, they actually have to pay you interest too, which is kinda cool. Downside is that the interest is taxable income you'll need to report on your taxes for this year.

This exact thing happened to me with my 2020 return! Got a CP12 notice out of nowhere saying they made adjustments that resulted in a refund. Turns out they caught that I had miscalculated my Earned Income Tax Credit - I was actually eligible for more than I claimed. The whole process was surprisingly smooth once I verified it was legitimate. Like others mentioned, check for the official notice number and your correct tax info. If everything looks right, you really don't need to do anything except wait for the refund. One thing to keep in mind - if you used a tax preparer for that return, you might want to let them know about the adjustment so they can avoid the same mistake on future returns. The IRS is pretty good at catching these computational errors, but it's better to get it right the first time!

Does anyone have experience with how this affects state returns? I'm in California and dealing with a similar situation. Would reclassifying from ordinary income to rental income on the federal flow through correctly to CA Form 565?

This is a great discussion on rental income classification. I want to add a practical tip that might help with documentation when you amend these returns. When I've dealt with similar partnership rental misclassifications, I always prepare a detailed memo explaining the correction that gets attached to the amended return. I include citations to IRC Section 1402(a)(1) which specifically excludes rental income from self-employment tax, and Reg. 1.1402(a)-4 which clarifies that real estate rentals are not considered carrying on a trade or business for SE tax purposes. For the self-rental aspect, I also cite Reg. 1.469-2(f)(6) to show that while the income may be recharacterized as non-passive under the self-rental rules, it's still rental real estate income exempt from SE tax. This documentation has been helpful when dealing with IRS inquiries on amended returns. One more thing to consider - if your clients have been overpaying SE tax for multiple years, make sure you calculate the interest the IRS will owe them on the refunds. For substantial amounts, that interest can add up to a meaningful sum that clients appreciate knowing about upfront.