Does anyone know if this exception is continuing for the 2022 tax year? I finally understand the 2021 exception but wondering if I need to prepare for K2/K3 filing for current year.

The exception has been modified for 2022 and future years. Starting with tax year 2022, there's a "domestic filing exception" with slightly different requirements. Partners or S corp shareholders must be notified about the intention to not provide K-3s unless requested. You'll need to review the updated guidelines for 2022, as the automatic exception isn't identical to the 2021 version we're discussing here.

I had the same issue with Lacerte. You have to manually override it. There should be a checkbox somewhere in the software to indicate you qualify for an exception. In Lacerte it's buried in the K-2/K-3 input screens - there's a specific question about qualifying for the exception that you need to mark "Yes".

Thanks for the tip! I found the override option in ProSeries. It was in the K-2/K-3 input area under "Filing Exceptions" - there's a check box for "Qualifies for domestic filing exception" that I needed to select. The software still gives a warning but allows you to proceed without generating the schedules.

If you do file an extension, do you know if that increases your chances of being audited? I've heard mixed things about this.

Filing an extension doesn't increase your audit risk at all. That's actually a common tax myth. The IRS has officially stated that filing an extension doesn't affect your chances of being audited. In fact, extensions are incredibly common - millions of people file them every year for all sorts of reasons. It's a routine process that the IRS expects. What can increase audit risk is filing an inaccurate return or having to amend later, so in that sense, waiting for correct documentation is actually the safer approach.

This is good advice. Also worth noting that employers are required by law to provide corrected W-2s within a reasonable timeframe. If they're really dragging their feet, mentioning this requirement can sometimes light a fire under them.

That's a really good point I hadn't considered. I know she's also "managing" his student loans and I wonder if there's other financial stuff happening. I'll suggest he check his credit report right away. I think the hardest part of this situation is that his mom is definitely the one who provided these fake numbers, but she's maintaining complete innocence. Makes me wonder what else she's doing with his finances.

Yeah, unfortunately I've seen this pattern before with family members. Often there's a broader pattern of financial manipulation going on. Student loans are definitely another red flag - make sure he logs in directly to studentaid.gov to see exactly what loans are in his name. I'd also recommend he create an IRS online account at irs.gov to view his tax transcripts directly. This will show all returns filed in his name and any other tax activity. He might discover even more issues.

The Voluntary Disclosure Program is really for major tax fraud cases where criminal prosecution is likely - typically involving offshore accounts, unreported income in the six figures, etc. This case sounds bad but probably doesn't rise to that level.

That's really helpful! So in my case with my niece, would it be better to pay her student loans directly to the loan provider instead of giving her the cash? Would that still qualify for the medical/education exception?

Unfortunately, paying off someone's existing student loans doesn't qualify for the unlimited education exclusion. The education exception only applies to tuition paid directly to the educational institution while someone is attending. For existing student loans, you're better off staying within your annual gift exclusion of $18,000. If you want to pay more than that toward her loans in a single year, you'd need to file Form 709 to report the excess amount against your lifetime exemption (though you still wouldn't owe actual tax unless you've used up the lifetime amount).

Yes, you and your husband can each give your daughter $18,000 in 2025, for a total of $36,000, without having to file a gift tax return! This is called "gift splitting" and it's a common strategy for married couples.

This is really helpful, thanks! Looking at these brackets, I think that's exactly what happened. My first job had me in the 22% bracket by itself, and then the second job pushed our household income into the 24% bracket. Both were withholding at their respective individual rates rather than our true combined rate. Is there any way to tell your employer to withhold at a higher rate to prevent this problem next year?

Yes, you can absolutely fix this for next year! Fill out a new W4 form with your current employer and use the "Multiple Jobs" worksheet (Step 2) or the "Deductions Worksheet" (Step 4) to increase your withholding. The easiest approach is to use Step 4(c) where you can specify an additional amount to withhold from each paycheck. Calculate your expected annual shortfall (like $3000) and divide by the number of remaining pay periods in the year. So if you're paid twice a month and realize this in February, you'd divide by 22 remaining pay periods = about $136 extra withholding per paycheck. The IRS also has a Tax Withholding Estimator tool on their website that's pretty accurate for calculating the right amount.

This explanation makes a lot of sense. I've been doing payroll for a small business and we see this all the time when people come from lower-paying jobs. The withholding tables just aren't designed to handle multiple employers or mid-year salary changes well.

That's exactly my situation! I went from a $60k job to a $95k job in September, so my new employer has been withholding at the higher rate, but only for part of the year. This really helps me understand why I'm suddenly looking at this tax bill. I think I'll adjust my W4 right away to avoid this happening again next year. Thanks everyone for the helpful explanations!