But wouldn't the 401k plan administrator be responsible for coding this properly? If they put code E instead of something else, couldn't that be the actual problem rather than the IRS misinterpreting it?

You're absolutely right that the plan administrator has primary responsibility for coding 1099-R forms correctly. Sometimes administrators do use incorrect codes, and that could be part of the problem here. Code E isn't necessarily wrong, but there's some ambiguity in how it's applied. Ideally, the administrator should have used a distribution code that more clearly indicates a return of after-tax contributions. It might be worth contacting your plan administrator to verify they used the correct code for your specific situation. They can issue a corrected 1099-R if needed, which would save you the hassle of explaining things to the IRS.

I used H&R Block software for a similar situation and had to manually override it. There should be an option to specify that the distribution isn't taxable despite what the 1099-R coding suggests. You might need to include an explanation or use the tax software's "notes" feature to document why you're treating it differently than the standard interpretation of the form.

You know what, this might actually make sense! She did travel to three different trade shows for them and they reimbursed her separately from her regular paycheck. I didn't even think about that. She also bought some computer equipment they reimbursed her for when she started working remotely. But shouldn't reimbursed business expenses NOT be reported on a 1099-MISC at all? Now I'm even more confused.

You're absolutely right - properly documented business expense reimbursements should NOT be reported on a 1099-MISC or considered taxable income. If the employer reimbursed legitimate business expenses under an accountable plan (basically meaning your wife provided receipts and documentation), then this 1099-MISC is likely incorrect. This actually makes it more likely there's an error in their accounting system. Sometimes companies, especially smaller ones with less sophisticated payroll systems, accidentally code expense reimbursements as "other income" which triggers an automatic 1099-MISC. You definitely need to contact them to get this corrected.

This happened to me! Turned out I was getting paid by two technically different legal entities under the same corporate umbrella. Super confusing but actually legitimate in my case.

I just double-checked and yes, the EIN is exactly the same on both forms. And no, she didn't do any work outside her regular job duties. It was a standard 9-5 marketing position. I'm going to call her old boss tomorrow morning. After reading everyone's comments, I'm pretty sure this is either a mistake or related to those expense reimbursements. Will update when I find out!

How exactly do you adjust your withholdings? I've seen this advice before but I have no idea how to actually do it.

You need to fill out a new W-4 form and submit it to your employer's payroll department or HR. The form was redesigned in 2020, so it's different from the old withholding allowances system. The new form has a section where you can specify an additional amount to withhold from each paycheck. For example, if you owed $1255 and get paid bi-weekly (26 paychecks per year), you might want to have an extra $50 withheld per paycheck ($1300/year) to cover what you'd otherwise owe at tax time.

FreeTaxUSA has been my go-to for years! It handles everything TurboTax does but for a fraction of the cost. Only downside is the interface isn't as pretty, but who cares when you're saving hundreds?

So would selling stocks or crypto with capital gains trigger this? I did make about $3k in stock gains last year that I paid taxes on when I filed, but I didn't think that would trigger getting a 1040-ES for the next year.

Yes, capital gains from stocks or crypto could definitely trigger this if you ended up owing taxes when you filed. The $3k in stock gains without tax withholding would create a tax liability, and if your total tax due when filing was over $1,000, that would typically trigger the 1040-ES forms for the following year. The IRS essentially is saying "we noticed you had income without withholding last year, so we expect you might have similar income this year - please make estimated payments quarterly instead of waiting until tax time." It's their way of making sure you're paying taxes throughout the year on income that doesn't have automatic withholding like a W-2 job would.

If your tax situation is going to be significantly different this year (like you won't have the extra income that triggered it), you can technically ignore them. BUT - if you end up owing more than $1,000 when you file next year, you could face underpayment penalties. The safe approach is to either make the quarterly payments OR increase your withholding at your regular job to cover any expected tax. The IRS doesn't care how you pay throughout the year, just that you do.

Is there a difference between a regular CPA and an "Enrolled Agent"? How do you find someone who specializes in tax resolution specifically?

An Enrolled Agent (EA) is a tax professional who's been licensed by the IRS specifically to represent taxpayers. They've passed comprehensive exams on tax matters and often specialize in tax resolution. While many CPAs are excellent with taxes, EAs focus exclusively on tax issues and representation before the IRS. To find someone specializing in tax resolution, search for "Enrolled Agent tax resolution" in your area, or check the National Association of Enrolled Agents website. You can also search for CPAs who specifically mention tax resolution services. Always check reviews and ask about their experience with cases similar to yours. A good tax resolution specialist should offer a free initial consultation to discuss your situation before charging fees.

This is so true! I had a similar situation where I was trying to set up a payment plan for about $30k in back taxes but kept getting rejected because I had a missing return from 3 years prior. Once I filed that last return, everything went much smoother.