Thank you so much for the exact citations! This is exactly what I was looking for. One follow-up question: when calculating the 25% employer contribution limit, do I need to reduce my Schedule C net profit by the amount of any employee contributions I make first? Or is it 25% of the total net profit?

Great question. You calculate the 25% employer contribution limit based on your net self-employment income AFTER deducting your employee deferral contributions. So the calculation order is: 1) Start with Schedule C net profit, 2) Subtract half of self-employment tax, 3) Subtract your employee deferral contribution, 4) Calculate 25% of this resulting amount for your maximum employer contribution. This ensures you're not "double-dipping" on the employee contribution portion. This is outlined in IRS Publication 560, but it's definitely one of the more confusing aspects of solo 401k planning. The employer contribution is effectively limited to around 20% of your original Schedule C net profit when you factor in all these adjustments.

That's interesting advice about having one 401k plan for multiple businesses. Do you need to file anything special with the IRS to indicate that the plan covers multiple sole proprietorships? Or do you just need to make sure the plan documents are set up that way with the provider?

Thanks for this! Where exactly is that option? I searched around but couldn't find the specific "return of excess contributions" checkbox.

When you enter the 1099-R information, there should be a question about the type of distribution. One of the options is "return of excess contributions." It's in the section where you're entering the distribution code from Box 7. If you've already entered it differently, you can go back and edit the 1099-R entry. Look for "Your Income" in the left sidebar, then find the 1099-R entry and click on it to edit. The option should appear during the workflow.

Call the IRS directly? Lol good luck with that. I tried calling 8 times this season and either got disconnected or told the wait time was 2+ hours. Never actually spoke to anyone.

We do have an operating agreement, but it's pretty basic and just says we split everything equally. Is that sufficient? Also, what exactly is "substantial economic effect" and how do we know if our allocations meet that requirement?

Your basic agreement splitting everything equally is actually the simplest approach for IRS purposes, so that's fine. "Substantial economic effect" is the IRS's way of ensuring that tax allocations reflect economic reality. Basically, tax benefits should go to the partner who actually bears the economic burden or receives the economic benefit. For example, if your agreement said Partner A gets 90% of the tax losses but only 10% of the actual profits when you sell or liquidate the business, the IRS would likely reject that as lacking substantial economic effect. The partner getting the tax benefits must also bear the economic consequences. When you allocate everything equally, this usually isn't an issue unless you have complex arrangements like guaranteed payments or preferred returns.

Yes, partnership income can qualify for the QBI deduction (Section 199A). The partnership doesn't take the deduction itself - it's calculated and claimed on each partner's individual return based on their share of qualified business income. The partnership will provide information on each partner's K-1 about qualified business income, W-2 wages paid by the business, and qualified property. Partners then use this information on Form 8995 or 8995-A on their personal returns to calculate their deduction. The deduction can be up to 20% of QBI, subject to limitations based on taxable income, business type, and W-2 wages/qualified property.

That's an excellent point I hadn't considered! I received the notice in January 2023, so well past the 3-year mark. I definitely didn't underreport by 25% (my income was all W-2 and reported correctly), and there's certainly no fraud involved. Is there a specific way I need to raise the statute of limitations issue in my appeal? And do I need to provide any specific evidence to support this argument?

If you received the notice in January 2023 for tax year 2016, and you filed on time in 2017, then you absolutely should raise the statute of limitations issue in your appeal. This could potentially resolve the entire 2016 dispute in your favor. In your appeal, you should specifically state: "I am disputing this assessment on the grounds that it violates the statute of limitations under IRC Section 6501(a), which provides a three-year limitation period for assessment of additional tax." Include a copy of your 2016 tax return or transcript showing when it was filed, and request that the assessment be abated in full due to the expiration of the assessment statute. If for some reason the IRS claims one of the exceptions applies, they have the burden of proof to demonstrate that. But based on what you've described (W-2 income, standard deduction), it's unlikely they can justify a six-year statute of limitations.

This is such important advice! I learned this the hard way. I had an issue similar to OP's and the IRS claimed they never received my response to their initial notice, even though I mailed it. I didn't have proof of mailing, so I was stuck starting the whole process over again and lost my first-level appeal opportunity. Now I use certified mail for everything and scan copies of all documents before sending them. I also take screenshots of any online submissions or confirmations.

19 I second this. I found a great tax attorney through my accountant. One thing I'd add is to make sure they have experience specifically with the type of issue you're dealing with. My first attorney was good with business tax but not so much with innocent spouse relief, which is what I needed.

3 Absolutely true. Tax attorneys often develop niche specialties within tax law. Some focus primarily on offshore reporting issues, others on employment tax, and some specifically on innocent spouse relief or offer in compromise cases. When interviewing potential attorneys, ask them what percentage of their practice involves innocent spouse cases specifically. If it's less than 15-20%, keep looking. Also, ask if they've handled cases with the specific IRS service center that will be processing your case, as procedures can vary slightly between locations.

4 Most of those national tax resolution firms that advertise heavily make unrealistic promises. The "pennies on the dollar" settlements (called Offers in Compromise) are quite rare and have very specific qualifying criteria - most people don't qualify. These companies often charge large upfront fees ($5,000+) and then do very little actual work. Many employ salespeople rather than tax professionals for initial consultations, and they're incentivized to tell you what you want to hear. I've had many clients come to me after wasting thousands with these services.