Definitely learning this lesson the hard way! Would a wire transfer or direct bank deposit have avoided this issue entirely? Or would any large deposit potentially trigger scrutiny?

A direct bank transfer, wire transfer, or even a personal check would have completely avoided this issue. Those methods don't generate 1099-Ks because they're not payment processors - they're just moving money between accounts. Bank deposits over $10,000 do trigger a Currency Transaction Report (CTR), but that's just an anti-money laundering measure and doesn't affect your taxes. It's not reported as income. The only real concern with bank transfers is if you have mysterious large deposits with no explanation, which might raise questions during an audit - but a documented loan with repayment terms wouldn't be a problem.

The optimism is nice but maybe not helpful for someone facing potential tax issues lol. Interest-free family loans are great until the IRS questions them and potentially recharacterizes them as gifts with gift tax implications.

You make a fair point! I just think sometimes we get so caught up in the tax complications that we forget to appreciate the underlying financial benefit. Interest-free capital is incredibly valuable to a small business. But you're right that proper documentation is essential. Even with family loans, it's worth taking the time to create a simple promissory note with reasonable interest (even if minimal) to avoid any gift tax complications. The small amount of interest is still way cheaper than commercial financing.

Thanks for the advice about documentation. I've kept all the IRS letters so far, but haven't been great about noting down phone call details. Going to start doing that immediately. Do you think I should deposit the refund checks or hold off until this gets sorted out?

You should definitely deposit the refund checks - they'll expire if you wait too long. Just make sure you keep copies of them first. The IRS has already determined those refunds are rightfully yours based on the returns you filed. If it turns out later that someone was legitimately trying to pay your taxes (like a family member trying to help), you can always work out repayment with them directly. But more likely, it's someone using your information incorrectly, and holding onto the checks won't help resolve that situation.

This is actually a really good point. Most identity theft involves taking money FROM you, not paying your taxes, but it could be part of a more complex scam. Maybe they're building credibility with the IRS using your identity before doing something more sinister?

Thanks for all this advice everyone. My total income including my W-2 job is definitely over that threshold, probably around $28k total. Sounds like I definitely need to report everything. Do you know if I can still claim business deductions even if I don't have receipts for things like gas and tools? And should I be worried about getting audited if this is my first time reporting self-employment income?

For business deductions without receipts, you can still claim reasonable expenses based on your best recollection, but start keeping better records immediately for the future. Many small business owners keep a dedicated credit card or checking account for business expenses which creates a record even without physical receipts. Regarding audit concerns, filing self-employment income for the first time doesn't automatically trigger an audit. The IRS is more concerned with patterns that don't make sense, like claiming excessive deductions relative to income. Report your income honestly, claim legitimate deductions you can reasonably support if questioned, and you'll significantly reduce audit risk. Going forward, even a simple spreadsheet tracking income and expenses will put you in a much better position.

This is terrible advice. The IRS has sophisticated methods to detect unreported income, including lifestyle analysis, bank deposit analysis, and information from third parties. They also run statistical comparisons against similar taxpayers in your area and profession. Plus the penalties for intentional non-reporting are severe - we're talking 75% penalty on the tax you should have paid PLUS interest PLUS potential criminal charges for willful evasion. They can look back many years if they suspect fraud. Not worth the risk for a few thousand dollars.

You're probably right. I didn't consider all that. I've always reported my side income but know plenty of people who don't. Guess they're taking a bigger risk than I realized.

How far back should we keep them? I've been doing backdoor Roth conversions for about 8 years now but honestly not sure if I still have all the forms.

You should keep them forever, honestly. The IRS doesn't have a central system tracking your nondeductible basis, so those forms are your only proof that you already paid tax on those contributions. If you're missing some forms from previous years, you might want to request transcripts from the IRS for those tax years to see if you can reconstruct your basis history. The problem is that if you can't prove your basis and you take distributions later, the IRS might treat the entire distribution as taxable, even though you already paid tax on those contributions.

Which tax software did you use? I'm doing my taxes this weekend and need to report a similar situation with nondeductible contributions and conversion.

That's a great tip about the test question! What kinds of questions would you recommend asking to really test their knowledge? I do have some investment income but nothing international.

For investment income, ask them something specific about how different types of investments are taxed. For example: "I've been trading stocks regularly and also have some dividend income. Can you explain how these would be taxed differently and what forms I should expect?" A good CPA will explain the difference between short-term and long-term capital gains, ordinary vs qualified dividends, and mention forms like Schedule D and 1099-DIV. Another good test is asking about home office deductions if you work from home. The rules changed significantly after the Tax Cuts and Jobs Act, and a knowledgeable CPA should be able to explain the current rules and alternatives like the simplified deduction method.

I've used an Enrolled Agent (EA) for years and been very happy. EAs are federally licensed by the IRS specifically for tax preparation and representation. They often charge less than CPAs but are just as qualified for most personal tax situations. In fact, they sometimes have more specialized tax knowledge since CPAs also focus on accounting, auditing, etc.