Is it too late to do anything about it for this year's taxes? Or am I just stuck with the lower refund?

For this year's taxes, you're unfortunately stuck with the current situation. The withholding already happened in 2024, and you can't retroactively change it. However, you can absolutely prevent this from happening again. Fill out a new W-4 for both jobs right away, making sure to check the multiple jobs box or complete the multiple jobs worksheet. This will ensure the proper amount is withheld going forward and you won't have another surprise next tax season.

FreeTaxUSA is way better at explaining these things. It has a detailed summary page that breaks down exactly how each form affects your overall tax situation. And it's way cheaper than TurboTax for basically the same service.

Whoa I had no idea about the "recapture" thing! What exactly does that mean? Would we have to pay back all the tax savings from the depreciation when we sell the house?

You don't exactly "pay back" the tax savings, but the amount you depreciated gets taxed when you sell. For example, if you depreciated $20,000 of your home office over the years, that $20,000 would be subject to depreciation recapture tax (typically at 25%) when you sell, even if the rest of your home sale qualifies for the capital gains exclusion. So you'd pay around $5,000 in recapture tax on that $20,000 of depreciation. The benefit is that you got tax deductions spread over many years, which usually outweighs this future tax. This is why proper record-keeping is crucial - you need to track all the depreciation you claim to calculate this correctly when you eventually sell.

In TurboTax, you enter it through the business income section under Schedule C. When you get to the expenses part, there's a specific section for "Business use of home." It'll ask for the total square footage of your home and the square footage used exclusively for business. Then it will walk you through either the simplified method (standard $5 per sq ft up to 300 sq ft) or the regular method where you enter actual expenses including depreciation.

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.

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.