That's an excellent point I hadn't considered! I received the notice in January 2023, so well past the 3-year mark. I definitely didn't underreport by 25% (my income was all W-2 and reported correctly), and there's certainly no fraud involved. Is there a specific way I need to raise the statute of limitations issue in my appeal? And do I need to provide any specific evidence to support this argument?

If you received the notice in January 2023 for tax year 2016, and you filed on time in 2017, then you absolutely should raise the statute of limitations issue in your appeal. This could potentially resolve the entire 2016 dispute in your favor. In your appeal, you should specifically state: "I am disputing this assessment on the grounds that it violates the statute of limitations under IRC Section 6501(a), which provides a three-year limitation period for assessment of additional tax." Include a copy of your 2016 tax return or transcript showing when it was filed, and request that the assessment be abated in full due to the expiration of the assessment statute. If for some reason the IRS claims one of the exceptions applies, they have the burden of proof to demonstrate that. But based on what you've described (W-2 income, standard deduction), it's unlikely they can justify a six-year statute of limitations.

This is such important advice! I learned this the hard way. I had an issue similar to OP's and the IRS claimed they never received my response to their initial notice, even though I mailed it. I didn't have proof of mailing, so I was stuck starting the whole process over again and lost my first-level appeal opportunity. Now I use certified mail for everything and scan copies of all documents before sending them. I also take screenshots of any online submissions or confirmations.

We do have an operating agreement, but it's pretty basic and just says we split everything equally. Is that sufficient? Also, what exactly is "substantial economic effect" and how do we know if our allocations meet that requirement?

Your basic agreement splitting everything equally is actually the simplest approach for IRS purposes, so that's fine. "Substantial economic effect" is the IRS's way of ensuring that tax allocations reflect economic reality. Basically, tax benefits should go to the partner who actually bears the economic burden or receives the economic benefit. For example, if your agreement said Partner A gets 90% of the tax losses but only 10% of the actual profits when you sell or liquidate the business, the IRS would likely reject that as lacking substantial economic effect. The partner getting the tax benefits must also bear the economic consequences. When you allocate everything equally, this usually isn't an issue unless you have complex arrangements like guaranteed payments or preferred returns.

Yes, partnership income can qualify for the QBI deduction (Section 199A). The partnership doesn't take the deduction itself - it's calculated and claimed on each partner's individual return based on their share of qualified business income. The partnership will provide information on each partner's K-1 about qualified business income, W-2 wages paid by the business, and qualified property. Partners then use this information on Form 8995 or 8995-A on their personal returns to calculate their deduction. The deduction can be up to 20% of QBI, subject to limitations based on taxable income, business type, and W-2 wages/qualified property.

Thanks for this! Where exactly is that option? I searched around but couldn't find the specific "return of excess contributions" checkbox.

When you enter the 1099-R information, there should be a question about the type of distribution. One of the options is "return of excess contributions." It's in the section where you're entering the distribution code from Box 7. If you've already entered it differently, you can go back and edit the 1099-R entry. Look for "Your Income" in the left sidebar, then find the 1099-R entry and click on it to edit. The option should appear during the workflow.

Call the IRS directly? Lol good luck with that. I tried calling 8 times this season and either got disconnected or told the wait time was 2+ hours. Never actually spoke to anyone.

Thank you all so much for the helpful responses! This definitely helps calm my nerves. Just to double check - even though I sold in December, I'm still okay waiting until I file my taxes to pay? My gains were about $28,000 and I'm worried that's a large enough amount to trigger some special requirement.

Yes, you're still fine waiting until you file your taxes to pay, even with $28,000 in gains. Since these sales happened in December 2023, they're part of your 2023 tax return due April 15, 2024. The $28,000 amount doesn't trigger any special immediate payment requirement. If you continue to have large capital gains in 2024, you might want to consider making estimated quarterly payments this year to avoid potential underpayment penalties next tax season. But for your 2023 gains, just handle it with your regular tax filing.

You can make a rough estimate. For long-term capital gains (held over 1 year), the tax rates are: 0% if your income is under $44,625 (single) or $89,250 (married) 15% if your income is under $492,300 (single) or $553,850 (married) 20% for incomes above that Just take your approximate gain amount and multiply by the appropriate percentage based on your income. It won't be exact but gives you a ballpark.

Is there any way to tell from the W2 if they actually DID deduct something from your paycheck though? Like could they hide deductions this way?

You can definitely verify if anything was deducted from your paycheck by looking at your pay stubs. Any healthcare premium deductions would appear as separate line items there, usually labeled something like "Health Insurance" or "Medical Premium." The W2 itself would show lower wages in Box 1 if money had been deducted pre-tax for health insurance. Also, if you had money taken out for insurance, there would typically be a code for that contribution elsewhere on the W2, not just the Code DD amount.

Great question! Employer health plan costs are typically not based on a percentage of salary - that's more common with retirement plans. For health insurance, employers often pay a fixed dollar amount per employee or per plan type (like individual vs. family coverage). Many companies also use what's called a "composite rate" for W2 reporting, where they take the total cost of their health plan and divide it equally among all employees, regardless of individual enrollment status or wages. That's why the OP and their cousin could have the same amount listed despite different incomes. The employer is essentially reporting the "per employee" cost of offering the health plan, not what was actually spent on each specific person.