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.

4 Has anyone used TurboSelf-Employed for this situation? Is it good at handling both W-2 and Schedule C income?

One thing that helped me tremendously when I started my side business was using Form 1040ES worksheets to calculate my quarterly payments more precisely. The IRS provides these worksheets specifically to help people in situations like yours estimate what they owe. The key insight is that you don't need to worry about being pushed into higher tax brackets - tax brackets are marginal, meaning only the income above each threshold gets taxed at the higher rate. Your 40% set-aside is likely more than sufficient for most income levels. Also consider the safe harbor rule: if you pay either 100% of last year's tax liability (110% if your prior year AGI exceeded $150,000) OR 90% of this year's liability through withholding and estimated payments, you won't face penalties even if you owe a bit more at filing time. This gives you some breathing room while you figure out the right withholding amount.

One thing nobody mentioned - you need to be careful about material participation rules with that K-1. If you're not spending enough time managing the property, the IRS might classify your activity as passive and limit your ability to deduct those losses against your W-2 income. I learned this the hard way!

Definitely report that K-1 loss! At your income level ($72k), you should qualify for the active participation exception that allows you to deduct rental losses against ordinary income. Even if you only save $800-900 in taxes, that's still much better than paying an accountant $250 for nothing. The key is making sure you meet the "active participation" test - this just means you're involved in management decisions like approving tenants, setting rental terms, or approving repairs (which it sounds like you are). You don't need to do the day-to-day work yourself. Also, even if you couldn't use the loss this year, you'd want to report it anyway to establish the loss carryforward for future years. Don't leave money on the table!