Omg you're so right about the state taxes! I didn't even think about that. And no, I don't recall seeing a PTIN anywhere on our returns but I'll double check. When we confronted him about the federal audit, he didn't mention anything about potential state issues either. Should I be contacting the state tax agency proactively or wait until after dealing with the federal audit?

I'd recommend dealing with the federal issue first since that's the immediate concern with the audit notice. However, you should at least pull copies of your state returns to review them. Most states have processes for amending returns similar to the IRS. Once you have your federal situation under control with proper representation, your tax professional can help address the state issues too. They often go hand in hand, and many of the same corrections will apply to both. Just make sure to keep documentation of everything - communications with the preparer, the audit notice, and any amendments you file. This will help show your good faith efforts to correct the situation.

This is key advice! When I went through my audit, I had all my communications with my sketchy preparer saved in a folder. The IRS agent specifically asked for evidence that I relied on professional advice, and those emails where my preparer assured me everything was "standard practice" made a huge difference in the outcome.

That's actually a really good idea I hadn't thought of. I believe the owner's sister is handling his affairs, but honestly we've all been keeping our distance out of respect while she's grieving. Maybe I could reach out carefully and just ask if she has any information about the business accounts or records. The restaurant was doing well financially, so there must be some kind of bookkeeping or records somewhere.

Approaching with sensitivity is definitely the right move. You might frame it as wanting to properly close out your employment relationship with the business rather than just tax documents. The executor likely has legal access to business records that could help everyone involved. If there was a business accountant or bookkeeper separate from Paycom, they might also have records that would be helpful. Many businesses keep separate financial records beyond what their payroll service maintains.

This is 100% the way to go. I worked payroll for years and the YTD on your final December paystub should match your W2 exactly for most regular employees. Only difference might be if you had taxable benefits added after the last payroll was processed.

Thanks for these suggestions! We don't have any partnership income or self-employment, but the capital loss harvesting is interesting. We do have some investments that haven't performed well. Would selling those at a loss help lower AGI this year?

Yes, capital loss harvesting would help lower your AGI. You can deduct up to $3,000 in net capital losses against ordinary income per year, which directly reduces your AGI. If you have investments that are currently at a loss, selling them would realize those losses that you can use on your tax return. Just be aware of wash sale rules - if you buy substantially identical investments within 30 days before or after selling at a loss, you can't claim the loss for tax purposes.

The student loan interest deduction phases out completely for married couples filing jointly when MAGI reaches $155,000, so that wouldn't help in their situation with $227k income unless they file separately. And if they file separately, neither spouse can claim the student loan interest deduction at all. It's one of those weird tax rules.

Do you have to wait until they assess the penalty before requesting abatement? Or can you be proactive and request it when you file?

You generally need to wait until they assess the penalty before requesting abatement. The IRS typically sends a separate notice about penalties after processing your return. When you get that notice, that's when you should call and request the First Time Penalty Abatement. You can't really request it proactively when filing because the IRS needs to calculate the penalty first. The good news is that if you qualify, they'll usually grant it without much hassle as long as you've had a clean compliance record for the previous 3 years.

This is such a good point. I'm in California and their underpayment penalties are actually worse than the federal ones. Had to pay almost 9% penalty on what I owed to the state.

Your accountant is partly right, but timing is crucial. Recharacterization was an option before the tax filing deadline (including extensions) for the year of the contribution. For 2019 contributions, that deadline would have been around July-October 2020 (extended due to COVID). Since we're in 2025 now, recharacterization is no longer an option for 2019 contributions. The OP will need to go with the Form 5329 and penalty approach. But your suggestion is definitely good advice for anyone who catches their over-contribution more quickly!

That's a really good point I hadn't considered. I haven't calculated the exact earnings on the excess portion, but given market performance since 2019, it's probably significant. If I'm using the "absorption" method by under-contributing in 2021, do I still need to worry about the earnings issue? Or does that only apply if I'm physically removing the excess contribution?

If you're using the "absorption" method by under-contributing in a later year, you don't need to worry about withdrawing the earnings. The earnings stay in your Roth IRA and continue growing tax-free, which is actually a nice benefit! The earnings only become an issue if you physically withdraw the excess contribution. In that case, you'd need to calculate and withdraw the proportional earnings as well. Since you've already effectively "fixed" the excess through your 2021 under-contribution, you just need to file Form 5329 for 2019 and 2020 to pay the penalty for those years. The earnings can stay put in your account.