Did your cousin also file amended returns for other years? I'm wondering if doing that proactively helps show good faith or if it just opens you up to more scrutiny for years that weren't being audited.

Yes, she did file amended returns for the two previous years after discussing it with her new CPA. Her accountant said it was much better to proactively fix the issues rather than wait for the IRS to find them. It definitely helped show good faith effort in her case. The IRS agent specifically mentioned that her voluntary correction of prior years was viewed favorably when determining penalties. There were still some penalties applied, but they were reduced because of her cooperation and initiative. The agent told her that if they had discovered those other years' problems themselves through expanded audits, the penalties would have been substantially higher.

That's a really good point about the state taxes that I hadn't even thought about. We're in California, which I'm guessing will definitely follow up once the federal audit is complete. I'm going to start gathering our state returns too. I did save all the emails where he suggested we lie to the IRS, and I have the records showing he tried to divert our refund to his account. Hopefully that helps show we were victims rather than accomplices in this.

California will absolutely follow up - they're actually more aggressive than the IRS in many cases. Having those emails ready for both federal and state authorities will be incredibly helpful. One more thing I forgot to mention - if your preparer was licensed (CPA, EA, etc.), report them to their professional board as well, not just the IRS. My preparer had his license suspended after I reported him to the state board of accountancy, which helped prevent him from doing this to others.

Thanks for the suggestion about Form 8822. Do you know if they'll stop the current direct deposit if I file this form? I'm worried my refund will be sent to the wrong account before the form is processed.

Form 8822 won't stop a direct deposit that's already in process. It only updates your information for future interactions with the IRS. If your return is already being processed with the incorrect banking info, you really need to call them to intercept it before the deposit is attempted. When you call, specifically mention that you need to "cancel a direct deposit for a refund in process" - this sometimes helps get you routed to the right department faster. If they can't update the direct deposit info in time, they'll usually stop the electronic deposit and mail you a paper check instead.

The Where's My Refund tool is practically useless for these situations. It just shows "processing" forever and doesn't tell you if there's an actual problem. I had a direct deposit issue last year and the tool never updated until weeks after I had already resolved it by phone.

That's a good point! I went back through the whole interview process again and did find something weird. Last year I had checked that I had health insurance for the full year (which I did through my job), but somehow that setting didn't carry over correctly. After I fixed that, my amount owed went down by about $250! Unfortunately I still owe around $550, which seems to be because of the withholding issue others mentioned. But at least it's better than $800. No 1099s or anything like that - just my regular W-2.

Glad you found at least part of the issue! That health insurance question can definitely impact your taxes in some states. The withholding change is likely the main culprit for the remaining amount you owe. For the future, I recommend checking your pay stubs quarterly to make sure enough tax is being withheld. You can also use the IRS Tax Withholding Estimator midway through the year to see if you're on track. That way you won't get any unpleasant surprises at tax time!

I switched from TurboTax to FreeTaxUSA two years ago and would never go back. It's just as accurate but WAY cheaper. Federal filing is free and state is only $15. TurboTax was charging me $120+ for basically the same service. The interface isn't quite as pretty but it gets the job done and asks all the same questions.

Can you elaborate on how you handle this in your books? Do you track these special allocations through the capital accounts or do you have separate tracking outside the partnership accounting?

We track these allocations through our partnership capital accounts initially, showing equal distributions to maintain equal ownership percentages. Then we have a separate ledger for tracking reimbursements between partners outside the partnership. Our operating agreement specifically states that these reimbursements don't affect partnership interests or profit/loss allocations. It's essentially treated as a separate business arrangement between the partner entities that's documented but kept distinct from the partnership accounting.

That might work for some businesses but could be terrible tax-wise for others. The S-Corp structure allows for payroll tax savings on distributions that exceed reasonable compensation. Dissolving them could significantly increase self-employment taxes.

That's really helpful advice about just doing a temporary adjustment for the rest of the year. Do you think I should do that additional withholding for both our W-4s or just mine? And do I need to change anything else on the form besides putting the extra amount on line 4c?

You could do it all on just one W-4 or split it between both - the IRS doesn't care as long as the total withholding is correct. If you're paid at similar frequencies, I'd just divide it evenly for simplicity. The easiest approach is to keep everything else the same on your current W-4s and just add the additional amount on line 4c. No need to change your filing status or check any additional boxes if the only issue is making up that $1k difference. Then in January, submit new W-4s removing that extra withholding amount.

I second the TurboTax W-4 calculator recommendation. The IRS calculator is too basic for complex situations. The TurboTax one asks more detailed questions and gives more precise recommendations.