So you think this is actually a helpful service from my brokerage rather than a mistake? I had no idea they would monitor my income and make adjustments like this. Is there any way I should have known this was coming? I never saw any notifications and was completely surprised by the 1099-R.

Yes, it's definitely a helpful service - they're protecting you from potential penalties. Most brokerages include this information in their account agreements, but it's often buried in the fine print that nobody reads. They typically send notifications via your communication preferences (email, account message center, mail), but these can easily be missed. For future reference, you can usually see pending recharacterizations in your transaction history or on statements. They might be labeled as "recharacterization," "correction," or "adjustment." It's always a good idea to check if you're near the Roth IRA income limits. For 2024, the limits start phasing out at $146,000 for single filers and $230,000 for married filing jointly, so if you're in that range, keep an eye out for potential adjustments next year.

The 6% penalty isn't just a one-time thing though. It applies EVERY YEAR that the excess contribution remains in your account. So it's $168 this year, then another $168 next year, and so on until you remove the excess. Plus, you'd still need to file Form 5329 to report the excess contribution, which is another form to deal with. The recharacterization is definitely better long-term because it's a one-time fix with no penalties. Your money stays in a tax-advantaged account (just a traditional IRA instead of Roth) rather than paying penalties year after year.

I didn't realize the penalty was annual! That definitely changes things. $168 every year would add up pretty fast. Thanks for explaining - guess my brokerage did me a favor with the recharacterization after all.

I haven't heard of OnPay before. How user-friendly is it for someone who understands accounting basics but isn't a payroll expert? And does it integrate with any accounting software?

It's super user-friendly! I'd say it's actually easier to navigate than QuickBooks Payroll, with a cleaner interface. The setup wizard walks you through everything including tax registrations. They have good help articles that explain things in plain English. It does integrate with QuickBooks Online, Xero, and a few other accounting systems. The integration with QuickBooks works well in my experience - it automatically records payroll expenses in the right categories. If you understand basic accounting concepts as a CPA candidate, you'll have no trouble with it.

ADP is way overpriced for small businesses! I used them for my repair shop and switched to Gusto which does the same thing for half the price. Plus ADP's interface feels like it was designed in the 90s.

That's an angle I hadn't considered. The grant money is from my advisor's research funding, and I'm definitely working on their project rather than just my own educational pursuits. The money is paid biweekly like a salary, but it's never been called a salary explicitly - it's always referred to as a "research stipend." Does that distinction actually change how I should report it on my taxes?

Yes, the distinction can definitely change how you report it! If the money is compensation for services rendered (which sounds possible in your case since you're working on your advisor's project and being paid regularly like a salary), it would be treated as employment income rather than a scholarship/fellowship. In that case, the university should have issued you a W-2 for that portion of income. But universities are notoriously inconsistent with how they classify these payments. Some will issue 1099-MISCs for research stipends, while others report them as scholarships on the 1098-T, and some don't report them at all (expecting you to self-report).

This is excellent advice. I work in a university accounting office, and I can tell you that how the university reports these payments matters a lot. If they issued a W-2 for any portion, that's definitely reported as wages. If they included the research stipend on the 1098-T as a scholarship, that's how the IRS will expect to see it reported.

Do you ever get pushback from clients when suggesting extensions? I have a few who seem to think an extension increases audit risk (though I've told them repeatedly this isn't true). Any tips for convincing stubborn clients?

I definitely get that pushback all the time! The audit risk myth is surprisingly persistent. What works best for me is showing clients the actual IRS data - extensions don't increase audit risk, but amendments definitely can. I explain that filing an extension is a standard, accepted practice that millions of businesses use every year. However, filing an amended return can sometimes trigger additional review. I frame the extension as the more conservative, safer approach that gives us time to maximize their legitimate deductions while ensuring compliance.

Always go with option 2 and file the extension. Part of our job as professionals is educating clients about proper procedure, even when it's not what they want to hear. I explain to clients that while they might be eager for their K-1, receiving an incorrect one that later needs amendment could cause them much bigger headaches - potentially requiring them to amend their personal returns as well. Most clients understand when you frame it as protecting them from future complications.

Thanks for the advice! I ended up filing the extension yesterday and explained to the client that this was the proper approach. They were initially upset but calmed down when I explained how amendments could potentially affect their personal return and possibly increase scrutiny. Will definitely continue taking this approach in the future - better to have a momentarily unhappy client than create a bigger tax mess down the road!

Thanks for bringing this up. Do the streamlined procedures actually cover Form 5472 though? I thought those were mainly for individual tax returns and FBARs, not for business entities and their reporting requirements?

You're right that the streamlined procedures primarily focus on individual returns and FBARs. Form 5472 penalties technically aren't included in the standard streamlined relief program. However, once your friend enters the streamlined program for their personal returns, they can often make a separate reasonable cause argument for the business filings that has a higher chance of success. The IRS tends to view compliance efforts more favorably when taxpayers are comprehensively addressing all their filing obligations. So while the Form 5472 penalties aren't directly covered, being in the streamlined program can create a more favorable environment for negotiating those specific penalties through separate reasonable cause requests.

The Taxpayer Advocate Service has been completely overwhelmed since COVID. They're now only taking the most extreme hardship cases. Unless your friend can prove they're facing immediate eviction or something similar, TAS probably won't take the case.