That's a really good point I hadn't considered. Do you know how we can find out what kind of audit they'd likely do for something like this? And did you find that having representation made the field audit less stressful? My cousin is already pretty anxious about the whole situation.

It's hard to predict exactly, but generally, the larger the deduction and more complex the situation, the more likely it is to be a field audit. For a significant theft loss, I'd plan for at least an office audit if not a field audit. Having representation absolutely made the process less stressful. My tax attorney handled most of the direct interaction with the auditor, prepared me for questions I needed to answer, and made sure I didn't volunteer unnecessary information that could expand the scope of the audit. Worth every penny for the reduced stress alone. Before hiring anyone, ask specifically about their experience with the type of audit they think you might face. Some preparers are great with correspondence audits but have never handled a field audit.

I second this! My enrolled agent charges about half what CPAs in my area charge, and she used to work for the IRS so she knows exactly how they think. She's saved me so much money and stress over the years. Definitely worth considering as an option.

What's the difference between a CPA and an EA? Are EAs actually qualified to handle complex situations? No offense but I always thought they were like a step down from "real" tax professionals.

Thanks for that strategy idea! How do you determine what the right split is between using 529 funds versus other money? Do you need to keep really detailed records to show which expenses were paid from which source?

The ideal split depends on maximizing your education credits. For the American Opportunity Credit, you need $4,000 in qualified expenses to get the full $2,500 credit. So I typically recommend paying at least $4,000 of tuition/fees from non-529 sources, then using 529 funds for remaining tuition and all room/board expenses. Yes, good record-keeping is essential! Keep copies of all tuition statements, receipts for books/supplies, and documentation showing which payment method was used for each expense. I create a simple spreadsheet each semester showing expense type, amount, date paid, and payment source. This has been extremely helpful during tax season and would be crucial documentation if ever audited.

Is there a specific form you need to file to elect to treat the 529 distribution as taxable? Or do you just report it differently on your regular tax forms?

Thanks for sharing your experience! So with your holding LLC structure, do you just file one partnership return for the holding LLC, or do you still need to file for each property LLC as well? I'm trying to understand the administrative burden.

With my structure, I only file one partnership return (Form 1065) for the holding LLC. The individual property LLCs are treated as "disregarded entities" for federal tax purposes since they're single-member LLCs owned by the holding LLC. This significantly reduces tax preparation costs and paperwork. You'll still need to maintain separate books for each property for good management practices, but the tax filing burden is much lighter. Note that state requirements vary - some states may require separate filings or have annual fees for each LLC regardless of tax status. In my case, the administrative simplification at the federal level has been a big advantage.

That's a really important consideration. For real estate investors, the QBI deduction can offer up to a 20% deduction on qualified business income. With pass-through entities (LLCs taxed as partnerships, S Corps, or disregarded entities), you generally preserve your ability to claim this deduction. C Corps aren't eligible for the QBI deduction, which is another reason they're often not ideal for real estate holdings. Also, if your income is above certain thresholds, having your properties in the right structure becomes even more important to maximize QBI benefits.

I've heard about CNC status but wasn't sure if it would apply in this case. Would the IRS consider CNC even if my client has consistent income? Their issue is more that the total amount is overwhelming rather than having no income at all.

CNC status is based on ability to pay after necessary living expenses, not just on having income. If your client's income is being consumed by reasonable living expenses with nothing left over, they could still qualify. The IRS uses their Collection Financial Standards to determine what counts as necessary expenses. Have your client document all their actual expenses - housing, utilities, food, healthcare, transportation, etc. If these legitimate expenses leave little to nothing for tax payments, they have a case for CNC status even with steady income. The IRS would rather put someone in CNC temporarily than force them into a payment plan they can't maintain.

Be careful with this advice! The 10-year clock doesn't start until the tax is assessed, which can't happen until the return is filed. For unfiled returns, the clock hasn't even started ticking yet. Plus, certain actions can extend that 10-year period, like requesting an installment agreement or filing bankruptcy.

This is super helpful, especially the Google Scholar tip! I hadn't thought of using that for tax research. Do you find the search results are accurate or do you get a lot of unrelated cases to sort through?

Google Scholar works surprisingly well if you use specific terms. For instance, instead of searching "business expenses tax court," try "ordinary and necessary 162(a) tax court" to get more relevant results. You'll still get some unrelated cases, but far fewer than a general search. I usually add the specific code section in my search along with any technical tax terms. If you're looking for cases on a particular issue, adding terms like "held that" or "we conclude" can help find cases where the court actually made a ruling on your issue rather than just mentioning it in passing.

Westlaw and LexisNexis are industry standards for a reason - they have excellent search capabilities and organizing features. But they're prohibitively expensive for most individuals unless you have access through work or school.

Thanks for the input. I'll check if any local law libraries offer public access terminals. Might be worth the drive to use those resources occasionally for complex research.