This is so important! My brother thought he could just reclaim his property when a buyer defaulted on owner financing, but it turned into a legal nightmare because he didn't follow the proper foreclosure procedures in his state. The tax implications were also way more complicated because of it.

Exactly right. Each state has different laws regarding owner financing and foreclosure requirements. Some states treat these transactions like mortgages requiring judicial foreclosure, while others allow for simpler processes if you used a land contract or contract for deed. The tax implications directly tie to the legal process. If you don't properly document the default and reclamation according to your state's laws, you could have trouble justifying your tax treatment to the IRS. It's worth consulting with a real estate attorney who specializes in your state's foreclosure laws before finalizing your tax approach.

You should be able to add those legal fees to your basis in the property since they're directly related to defending/clearing title. They're not immediately deductible expenses but get factored into your basis, which will reduce any gain when you eventually sell the property again.

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.

Have any of your clients using the pro-rata approach been audited yet? I'm worried that might be seen as too simplified if the actual spending pattern wasn't evenly distributed throughout the year.

None of our clients using this approach have been audited yet. You raise a valid concern though. If a client's business is seasonal or their meal expenses fluctuate significantly throughout the year, a pro-rata allocation wouldn't be appropriate. In those cases, we recommend either analyzing the actual receipts or using a reasonable allocation based on their business patterns (like quarterly sales figures or similar metrics that would correlate with business meal activity).

I haven't seen any serious legislation proposed to extend it. There was some industry lobbying from restaurant associations, but it doesn't seem to have gained traction. I'd proceed with the split approach rather than counting on a retroactive extension.

Thanks for mentioning this. How did you determine what portion was earnings versus contributions? Did the financial institution provide that breakdown or did you have to calculate it somehow?

The financial institution should provide statements showing the breakdown between contributions and earnings. Ask specifically for a "basis and earnings statement" as of the date of death. Most major brokerages and banks can generate this report. If they can't provide it for some reason, you'll need to track down old contribution records. The original Roth contributions are your basis, and everything above that amount is considered earnings. The 1099-R you receive when the distribution happens should also code whether it's a qualified or non-qualified distribution, which helps determine taxability.

I tried the "Roth IRA rescue" approach last year and it worked! Had to file some additional paperwork with the financial institution showing I was the sole heir, but saved about $8,200 in taxes that would have been paid by the estate if it had gone through probate normally.

That's a great point. I've been ignoring my credit card statements because they stress me out, but that's obviously making things worse. Have you had any personal experience with these hardship programs? I'm wondering how understanding they actually are.

I went through this myself during 2020. I called all three of my credit card companies - two offered to reduce my interest rate by about half for 6 months, and one actually gave me a 3-month payment pause without additional interest accumulating. The key is to call before you miss payments. They're much more willing to work with you if your account is still in good standing. Be prepared to explain your situation briefly and have a specific request in mind. Sometimes they'll offer options right away, but other times you need to directly ask "Do you have any hardship programs available?" or "Can you reduce my interest rate while I get back on track?

Adding to this - if you do find a medical collection, call the collection agency and ask for "debt validation" before you pay anything. They're required by law to prove the debt is yours. I've had medical bills dropped completely because they couldn't provide proper documentation.