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Your friend needs to file an amended return immediately. I'm a bookkeeper (not tax professional) but I've seen this before. The tax preparer is likely claiming the Self-Employment Tax Credit or Schedule C business deductions that don't exist. Here's the real danger: when the IRS does catch this (and they will eventually), they can assess penalties up to 75% of the unpaid tax for fraud, plus interest that compounds daily. If they determine it was intentional fraud, criminal charges are possible.
Thanks for the advice. Do you think if he files an amended return now before any investigation happens, would that help minimize the damage? Also, should he report the tax preparer?
Filing an amended return quickly will definitely help minimize the damage. The IRS is generally more lenient when taxpayers voluntarily correct errors before being contacted about an examination. He'll still have to pay back the incorrect refund amount, but may avoid or reduce the fraud penalties. And yes, he should absolutely report the tax preparer. He can file Form 14157 (Complaint: Tax Return Preparer) with the IRS. Tax preparers who knowingly file false returns can face significant penalties themselves, including potential criminal charges and being barred from preparing returns.
Has your friend received a 1099-K for any online sales or side work? Sometimes people forget about occasional income that technically qualifies as self-employment. Though quadrupling a refund still sounds super suspicious.
This is a good point. I sold some stuff on eBay last year and got a 1099-K even though it wasn't a business. Maybe his preparer is counting something like that?
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Just a heads up - if you're responding to a CP2000 for missing crypto, you might not need to file a full 1040-X amended return. Sometimes you can just send in the corrected Schedule D and Form 8949 along with the CP2000 response form. When I had this situation last year, I called the IRS (which was a nightmare until I finally got through) and they told me I could just complete the response form, check the "I agree with some changes" box, attach the proper Schedule D and 8949 with the missing transactions, and mail it back. Saved me from having to do a full amendment.
Really? That would be so much easier! How did you calculate the difference in what you owed? Did you still use tax software to figure out the corrected amount or just calculate it manually?
I used TurboTax to calculate the correct amounts but didn't actually file an amended return through them. I basically entered all my original tax info plus the missing crypto transactions, saw what the new tax liability was, then compared it to my original return to get the difference. On the CP2000 response form, I entered my recalculated amount which was actually less than what the IRS estimated (they always seem to assume worst-case scenario on crypto gains). I included a brief explanation letter along with my completed Schedule D and 8949 showing all the transactions with correct basis amounts.
Whatever you do, respond to that CP2000 notice ASAP even if you need more time! I ignored mine thinking I had time to figure it out and ended up with additional penalties. If you need more time, you can call and request an extension, but don't just let the deadline pass. Also, keep copies of EVERYTHING and send your response via certified mail so you have proof of when you sent it.
This is super important advice. The IRS is really backed up right now, but they don't extend the same courtesy to taxpayers. I learned this the hard way last year.
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I filed the 1023-EZ for my community arts nonprofit 2 years ago and kinda regret it now. We're trying to get some bigger grants and one foundation specifically asked why we used the EZ form and wanted to see all the documentation that would've been in the full 1023. Feels like they dont trust us as much, tbh.
That's surprising! I work with a foundation and we never ask about which 501(c)(3) application was used. Maybe that foundation has had bad experiences in the past?
Something else to consider - if you're planning to grow beyond $50k annual revenue in the next few years, it might actually be better to just bite the bullet and do the full 1023 now. I did the EZ form for my youth mentorship program, but then we grew faster than expected and started getting questions from some donors about our status. Technically there's nothing wrong with starting with the EZ form when you qualify, but some larger funders seem to view the full 1023 process as more "serious." Just my experience in the education nonprofit world, might be different in urban agriculture.
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You might also want to check your state's tax laws. Some states have lower reporting thresholds than the federal government. In my state, the threshold is only $600 for reporting marketplace sales, even though the federal threshold is much higher.
I hadn't even thought about state taxes! Do you know if states typically use the same forms (Schedule D and 8949) for reporting this kind of income?
Most states use forms that correspond to the federal forms, but they may have different names. Usually your state tax return will ask for information from your federal return, including your Schedule D amounts, and then make adjustments based on state-specific rules. For example, in my state (California), we use Schedule D for capital gains just like the federal return, but some states have their own forms with different names. The good news is that most tax software will automatically handle this for you once you input the information on the federal forms.
I'm curious - did you sell the tickets at significantly higher prices than what you paid? Might be worth checking if your city or state has any anti-scalping laws. Some places have restrictions on how much above face value you can sell tickets for.
Anti-scalping laws vary widely by location and are rarely enforced for individual resellers. Most target large-scale operations. The tax obligation remains regardless of any potential scalping issues.
Avery Saint
For anyone who already paid TurboTax and wants a refund - call their customer service and specifically mention "bait and switch pricing" and that you're going to file a complaint with the FTC. I did this last year and got a full refund after being charged $89 when I was expecting the free version. You have to be firm but polite. The key is to call within 30 days of paying.
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Taylor Chen
•What number did you call? I tried their main support line last week and was on hold for over an hour before giving up.
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Keith Davidson
Pro tip: If you have a simple tax return, you can file directly through the IRS Free File Fillable Forms system. It's not as user-friendly as TurboTax but it's 100% free and cuts out the middleman entirely. https://www.irs.gov/e-file-providers/free-file-fillable-forms I've been using it for years. It's basically just electronic versions of the paper forms. You do need to be comfortable figuring things out yourself, but for basic W-2 income and standard deduction, it's pretty straightforward.
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