Thanks for this advice - I actually have a folder with all our home improvement receipts since we bought our house in 2017. Should I be keeping those separate from the regular tax stuff then? And how long should I keep investment statements?

Yes, absolutely keep home improvement receipts separate and basically forever, or at least until 3 years after you sell the house. These directly affect your tax basis and can save you thousands when you sell by reducing potential capital gains tax. For investment records, keep purchase confirmations, dividend reinvestment statements, and records of any stock splits indefinitely for any investments you still own. For investments you've sold, keep the purchase and sale confirmations for at least 7 years after filing the tax return reporting the sale.

I do this too but make sure you're encrypting sensitive docs before uploading them to cloud storage! Regular PDFs in Google Drive aren't that secure. I use encrypted archives or password-protected PDFs.

That sounds terrifying, but I'm skeptical they'd go straight to fraud allegations just based on an algorithm without other factors. Did your friend maybe ignore multiple notices or miss meetings with the examiner? The IRS generally starts with accuracy-related penalties (20%) before jumping to fraud penalties (75%) unless there's pretty clear evidence.

DIF scores are primarily used for audit selection, not fraud determination. A high DIF score might get your return selected for examination, but fraud penalties only come into play when the examination uncovers evidence of intentional wrongdoing. That said, what triggers a high DIF score (unusual patterns, statistical outliers, etc.) might also raise questions during an audit. The difference is that for fraud, the IRS needs to establish that discrepancies were intentional, not just unusual. They look for affirmative acts of concealment or misrepresentation beyond just claiming questionable deductions. But you're right about certain deductions increasing audit risk - particularly those that are frequently abused like home office, vehicle expenses claimed as 100% business use, or hobby losses disguised as business losses. The key is having proper documentation and a legitimate business purpose.

That's really interesting - I didn't realize education expenses could qualify for avoiding the penalty. About $6,000 of what I withdrew actually did go toward my final tuition payment. Would I need to file an amended return to claim this exception, or can I just dispute the CP49 notice directly?

You can address it directly in your response to the CP49 notice. You'll need to complete Form 5329 for the tax year in question, entering the distribution amount on line 1, then the amount used for qualified education expenses on line 2 of the "Exceptions" section. I'd also include proof of payment to your educational institution from that year. The IRS will recalculate your liability based on this information. Since it's been a few years, gather as much documentation as possible - receipts, account statements, anything showing you used those funds for education.

This is a really important point. When I cashed out part of my 401k years ago, they automatically withheld 20%. It should show on your 1099-R in Box 4. If withholding happened but wasn't accounted for in your original return, that could significantly reduce what you owe.

Thanks for this advice! I hadn't thought about the income phase-out limits. My parents definitely make well over the threshold you mentioned. They're in the higher tax brackets so they might not even get much benefit. I'll try showing her how much more I'd get from the credit compared to what she'd get. It's not about taking something from them - it's about maximizing what we get back as a family overall. I think presenting it that way might help!

This is important! My cousin and her mom both tried to claim the same education expenses last year (similar situation, not a dependent) and BOTH their returns got flagged. The IRS ended up auditing both of them, and her mom had to pay back the credit plus penalties. Definitely not worth the headache.

While technically adding more earned income could increase your Additional Child Tax Credit, I would strongly caution against "finding" income that wasn't actually earned just to increase a tax credit. That could potentially be considered tax fraud if audited. However, if you legitimately had self-employment income, gig work, or other earned income that you simply forgot to include on your original return, then yes - filing an amendment to accurately report all your income could increase your Child Tax Credit. Just remember that you'd also need to pay self-employment tax on that additional income, which is about 15.3%.