Thanks for that explanation! Quick question - does this same circular calculation issue apply to both SEP IRAs and Solo 401ks? I'm trying to decide which one to open this year.

Yes, the circular calculation applies to both SEP IRAs and Solo 401k employer contributions. For both plans, the employer contribution limit is 25% of your net self-employment earnings, but the actual calculation works out to roughly 20% of your net profit. The big difference is that with a Solo 401k, you can also make employee contributions up to $22,500 for 2023 ($23,000 for 2024) that aren't affected by this calculation. That's why Solo 401ks often allow for higher total contributions, especially for people with moderate self-employment income.

I just checked and found the updated version. They didn't actually change the calculation, but they did add a clearer explanation of why line 17 uses that specific percentage. It's still the same formula, just better explained in the instructions section.

thx for checking! typical irs to keep the confusing calculation but just explain it better lol. at least now people might understand whats happening with that weird percentage. gonna look for the new version again.

Thank you for sharing this specific IRM reference! This is exactly the kind of information I was hoping for. Did you handle this over the phone or did you need to submit something in writing with documentation?

I started over the phone by speaking with an IRS representative and explaining my situation, citing the specific IRM section. The agent advised me to follow up with a written request using Form 843. I attached documentation showing they had my foreign address on file (copies of previous correspondence I'd sent them with my updated address) and a timeline showing when I discovered the payments. I also included a short, clear letter explaining exactly why this qualified as an administrative error under IRM 20.2.7.7 and referencing the Taxpayer Bill of Rights. The whole process took about 8 weeks from submission to receiving confirmation that the interest was abated. Keep your explanation factual and concise - the clearer you make it for them, the more likely you are to succeed.

That's a good point! The IRS does expect you to check your online account. But I think OP has a stronger case since they moved internationally and explicitly mention they weren't regularly checking US accounts. That's different from someone living in the US who just didn't log in.

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.

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.