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This watchdog report highlights exactly why I record EVERY interaction I have with IRS personnel. You never know who you're really dealing with or what their incentives might be. I use a call recording app (legal in my state) and keep detailed notes with agent ID numbers. Also, always request written confirmation of any guidance they give you. If an agent tells you something that later turns out to be wrong, having documentation can help you avoid penalties for relying on incorrect advice.
Is recording IRS calls legal everywhere? I'm worried about getting in trouble for that. Also, do agents actually give you their ID numbers if you ask?
Recording laws vary by state - some require two-party consent (both you and the agent) while others only require one-party consent (just you). Always check your local laws or inform the agent you're recording. IRS agents absolutely should provide their ID numbers when asked. It's typically a badge number or employee ID. I always politely say something like, "For my records, could I please have your name and ID number?" and note the date and time of the call. I've never had an agent refuse this information. If they do, that would be a red flag and worth asking to speak to a supervisor.
What's shocking to me is that this isn't the first time something like this has happened. My cousin worked at the IRS in the early 2000s and said there were multiple investigations then about employees moonlighting for tax firms. The system is broken at a fundamental level.
I've heard similar stories. The real issue is that IRS pay isn't competitive with private sector accounting jobs, so there's always temptation. Maybe if we properly funded the agency and paid people what they're worth, we wouldn't have these ethical problems.
In my experience as an accountant, this is almost always a mistake in how the settlement was coded in the payroll/accounting system. Class action settlements are particularly problematic because they can have multiple components (back wages, interest, penalties, etc.) that are treated differently for tax purposes. You should definitely not report both forms as that would double your income. Contact the settlement administrator first (not just your former employer) as they're the ones who typically provide the payment instructions to employers in these cases.
What's the difference in how these are taxed? Would it be better for OP if it's reported as 1099-MISC vs. W2 income?
The tax implications differ significantly between W-2 wages and 1099-MISC income. With W-2 income, the employer already withheld income tax, Social Security, and Medicare taxes. With 1099-MISC income, you'd be responsible for paying self-employment tax (which is both the employer and employee portions of Social Security and Medicare, totaling about 15.3%) on top of regular income tax. For class action settlements specifically, the correct tax treatment depends on what the settlement is compensating you for. If it's for back wages or lost income, it should typically be on a W-2. If it's for punitive damages or interest, it often belongs on a 1099. Some settlements have portions that belong on each form, but the total should never be duplicated across both forms.
I had the exact same problem last tax season! My former employer sent both a W2 and 1099-NEC for the same consulting work. I called their accounting department and apparently they switched payroll systems mid-year and accidentally processed me in both systems. They issued a corrected form eventually but it took weeks of calling. In the meantime, I filed an extension to avoid the April deadline pressure.
Did filing the extension cause any problems? I'm in a similar situation but worried about delaying my refund.
Just FYI, the enhanced child tax credit for 2021 was part of the American Rescue Plan. The amount was $3,600 for kids under 6 and $3,000 for kids 6-17. Half of it was supposed to be sent as monthly payments from July-December 2021, and the other half claimed when filing taxes. If you didn't receive the monthly payments (many people opted out or had issues with the system), you should have claimed the full amount on your 2021 return. If you didn't, then filing a 1040-X amended return is definitely the way to go!
Do you know if there's any way to check if you already received the payments? It's been so long I honestly can't remember if we got those monthly deposits or not.
Yes, you can check if you received the advance payments by creating or logging into your online account at IRS.gov. Look for the "Child Tax Credit Update Portal" or check your account for 2021 payments. You can also request a 2021 account transcript from the IRS which will show all transactions, including any advance Child Tax Credit payments that were sent to you. If you can't access the online system, you can call the IRS or file Form 4506-T to request the transcript by mail.
I was in the exact same situation!!! The letter you got was probably a CP-08 notice. Don't ignore it like I did at first! I ended up filing an amended return through TurboTax and it was actually pretty easy. Just log into your TurboTax account, find your 2021 return, and look for the option to amend. Make sure you have your kids' SSNs and birth dates handy. Also any documents showing they lived with you in 2021 (school records, medical records, etc) in case the IRS asks for verification later.
How long did your amendment take to process? I heard the IRS is super backed up with processing amended returns.
Just want to add one important point nobody mentioned yet - if you withdraw from your Roth IRA to pay these taxes, you'll be creating even MORE tax problems for yourself! You can withdraw contributions without penalty, but if you touch any earnings before retirement age (with some exceptions), you'll pay a 10% penalty PLUS regular income tax on those earnings. Your best bet is to leave the Roth alone and set up a payment plan with the IRS. The interest rate is usually better than what you'd effectively lose by raiding your retirement funds early.
Omg thank you for mentioning this! I didn't realize there was a difference between withdrawing contributions vs earnings from my Roth. Is there an easy way to tell which is which when I go to make a withdrawal? And yeah I'll definitely try for the payment plan route first!
Your Roth IRA provider should be able to tell you exactly how much of your account balance is from contributions versus earnings. Generally, withdrawals come from contributions first, so if you've contributed more than you're planning to withdraw, you should be able to take that amount out without tax consequences. For example, if you've put in $12,000 over the years and your account is now worth $14,000, you can withdraw up to $12,000 penalty-free. Just contact your provider before making any withdrawals to confirm the exact amount of your contributions. And definitely pursue that payment plan with the IRS - they offer reasonable terms, especially for first-time issues.
Has anyone here actually amended returns for scholarship income from past years? I'm wondering what the process was like. Did you get hit with huge penalties or was the IRS understanding about it?
I amended returns for 2 years of unreported scholarship income about 3 years ago. The process wasn't as bad as I expected. I used Form 1040-X for federal and had to fill out amended state returns too. The IRS charged interest on the unpaid taxes (inevitable), but I qualified for First Time Penalty Abatement which saved me hundreds in failure-to-file penalties. I wrote a letter explaining that I genuinely didn't understand scholarships were taxable, and they were pretty reasonable. Set up a payment plan for $150/month and it's almost paid off now.
Savannah Weiner
What nobody has mentioned yet is that you might qualify for an "abatement of penalties" even if you have to pay the full tax amount. The IRS has something called First Time Penalty Abatement for people with generally good filing history who made a one-time mistake. When I forgot to report some 1099 income a few years back, I called the IRS and specifically asked for this, and they removed about $3,800 in penalties! You still pay the tax and interest, but removing the penalties can save thousands. Also, if the unreported income was from royalties, make sure they calculated your tax correctly. You might be eligible for certain deductions that would lower the overall bill, like the Qualified Business Income deduction if your music counts as a business.
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Levi Parker
β’How do you apply for this First Time Penalty Abatement? Is there a specific form or do you just call and ask? And does it actually work for amounts this large?
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Savannah Weiner
β’You don't need any special form - just call the IRS directly and specifically request "First Time Penalty Abatement" or "FTA." Make sure to call the number on your notice. The size of the penalty doesn't matter for FTA eligibility - it's based on your compliance history. To qualify, you generally need to have filed all required returns and paid (or arranged to pay) any tax due for the past 3 years, and you can't have had penalties in those years either. The IRS agent will check your history right on the call. In my case, they approved it immediately, but sometimes they might need to review further or ask you to submit a written request. Even for large penalties, the approval process is the same. Just be polite but direct about requesting it.
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Libby Hassan
Just one quick warning - if you're thinking about the 10-year statute of limitations as a strategy, be aware that certain actions can extend that period. Filing an installment agreement, submitting an offer in compromise, filing bankruptcy, or leaving the country for an extended period can all add time to that 10-year clock. Also, the IRS interest rate is currently 7% which compounds daily (ouch!) plus failure-to-pay penalties that can add another 0.5% per month up to 25%. So you're looking at something like 13-14% annually, which is definitely higher than average stock market returns. At $25k, I'd strongly consider paying it off ASAP if you have the funds. The peace of mind alone is worth it, plus the guaranteed 13-14% "return" by avoiding those charges beats most investments.
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Hunter Hampton
β’What about trying to negotiate the amount down? I've heard about "offers in compromise" where the IRS accepts less than the full amount.
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