That's an interesting approach. Which specific home expenses did you stop allocating to your office space? I'm wondering if I could take a similar middle ground where I still claim some home office expenses but not all of them.

I stopped allocating a percentage of my mortgage interest and property taxes to the home office, since I already claim those on Schedule A itemized deductions. I also reduced the percentage of utilities I allocate to business use to better reflect actual usage. I still deduct direct expenses related to my music business - instruments, equipment maintenance, software subscriptions, recording supplies, and a reasonable percentage of my internet costs since that's essential for sharing files with clients. This approach has kept my Schedule C showing a small profit most years while still giving me legitimate deductions for actual business expenses.

This is what I do too! The simplified method is so much easier. I make about $7k from my side business and the simplified deduction of $750 (I use a 150 sq ft bedroom as my office) keeps my business profitable on paper while still giving me a decent deduction. Way less hassle and much lower audit risk.

Thank you so much for sharing your experience. Do I need to do anything special with the letter? Like attach it in a certain way or reference anything specific? I've never had to write to the IRS before and I want to make sure I do it right.

Just write a simple one-page letter titled "Statement of Reasonable Cause" explaining that you inadvertently missed filing the return due to life circumstances (be specific but brief about the job change and move). Include your names, Social Security numbers, tax year, and sign it. Attach it to the front of your return if filing by mail. If filing electronically, mail the letter separately to the same IRS processing center where you would have mailed your return, and reference your names, SSNs, and tax year 2022 in the letter.

I second FreeTaxUSA for prior year returns. TurboTax wanted $140 for my 2021 return when I filed it late, but FreeTaxUSA was like $15. Same forms, way less money.

This seems extreme. Wouldn't it be better to just have an honest conversation first before going all spy mode on your business partner? Maybe there are legitimate explanations for the expenses OP is questioning.

An honest conversation is absolutely worth trying, but documentation isn't being a spy - it's being prudent. If there are legitimate explanations, great! No harm done. But if there's actual fraud happening, a conversation won't protect you legally when the IRS comes knocking. You don't need to be secretive about it. You can directly say, "I've noticed these specific issues that concern me, and I'd like to understand them before signing our tax documents." Then document the explanation. Partnerships require trust, but they also require verification, especially when it comes to tax compliance where both parties share liability.

I definitely considered that possibility, which is why I've been hesitant to make accusations. I do have a basic understanding of business accounting - I handle about half of our bookkeeping normally. What concerns me isn't creative accounting or aggressive deductions - it's things like expenses with altered receipts (literally different ink and handwriting changing amounts) and several cash payments to "contractors" that I've never heard of with no corresponding work I can identify. I'm planning to talk to an independent CPA this week before confronting my partner again. I genuinely hope there are explanations I'm missing, but some of this stuff seems really blatant.

@OP altered receipts is a HUGE red flag. That's not aggressive tax strategy, that's straight-up fraud. Document everything before approaching your partner - you might need it later. If I were you I'd be looking for a lawyer not just a CPA.

Thanks for this specific info! I'm pretty sure we claimed the American Opportunity Credit last year. Do you know if TurboTax has a specific section for Form 8863 recapture, or do I need to look for Schedule 2?

TurboTax definitely has a section for the Form 8863 recapture. When you enter your education information, there should be a question asking if you received any refunds of expenses you claimed in previous years. Answer yes to that, and it will walk you through the recapture calculation. If for some reason you can't find it in the education section, you can also search "recapture" or "education refund" in the TurboTax search bar, and it should take you right to it. The software will automatically fill out the necessary forms once you enter the information.

Yes, it does apply to Pell Grants too! The key thing is that if you allocated the original Pell Grant to living expenses (which makes it taxable but allows you to claim tuition credits), and then later got tuition refunded, you may need to recalculate. Basically, any refund of qualified education expenses that you previously claimed for a credit needs to be accounted for.

That's a great idea I hadn't thought of! Have you actually gotten detailed help from them before on how to report specific transactions? I'll definitely give them a call tomorrow if that's the case.

I've gotten basic guidance from them before, but it can be hit or miss depending on who you talk to. Their customer service can usually help clarify what specific codes or entries on your form mean. What they typically won't do is give specific tax advice about how to report things on your return - they'll explain their form but stop short of telling you exactly what to enter on your tax forms. Still worth calling though, as they can often clear up confusion about what certain transactions or adjustments on their statements represent.

I've had mixed results with Reddit. Sometimes you get amazing detailed answers from actual tax pros, and other times you get conflicting advice that leaves you more confused. The challenge is knowing which advice to trust when you get multiple different answers.