I did charge a small interest rate (like 2%) but I never actually reported it on my taxes since he never made any payments. Should I go back and amend those previous returns to show the interest I SHOULD have received, even though I didn't get it? Would that help my case or just complicate things?

You don't need to amend previous returns to report interest you never received. In fact, doing so might raise red flags. What matters is that you had a legitimate expectation of being repaid with interest, which your loan agreement should show. The IRS follows the concept of "constructive receipt" - you only need to report income when you actually receive it or have unrestricted access to it. Since you never received any interest payments, there was nothing to report. Just focus on documenting that this was a genuine loan with the expectation of repayment, and that the debt has now become worthless.

Yes, that's right. Non-business bad debts are treated as short-term capital losses, which means they're subject to the capital loss limitation ($3,000 per year against ordinary income). However, if OP has any capital gains in the same year, the loss would first offset those gains. Any remaining loss can be carried forward indefinitely to future tax years. So if OP has no capital gains, it would take about 16 years to fully utilize the $47,000 loss. But if they have capital gains in future years, they could use more of the loss carryforward each year to offset those gains without the $3,000 limitation.

I completely forgot about those monthly payments from before! That makes so much sense now. Do you think I should adjust my withholding for this year to get more back next time?

If you want a larger refund next time, you can certainly adjust your withholding. Submit a new W-4 to your employer requesting additional withholding on line 4(c). Even an extra $50 per paycheck would give you about $1,200 more in your refund next year. Just remember that a refund is essentially an interest-free loan you're giving to the government throughout the year. Some financial advisors might suggest instead putting that extra withholding into a savings account yourself each month. But I completely understand the psychological benefit of getting a larger refund - many of my clients prefer it as a form of "forced savings.

She might not qualify for the full EIC with her income level. For 2024 filing season, EIC starts phasing out around $42,000 for a single parent with 2 kids. Her $42,800 main job plus $5,300 freelance puts her at $48,100 total income, which could reduce the EIC significantly.

Thanks for this tip! Did you end up getting any kind of confirmation that they received your reconsideration request? I'm worried about sending it and then it just disappearing into the void.

I did eventually get an acknowledgment letter about 3 weeks after sending my reconsideration request. It basically just said they received it and would respond within 90 days (which turned into 5 months, typical IRS). Make sure you send your request via certified mail with return receipt so you have proof they received it. I also included a cover letter specifically requesting an acknowledgment. If you don't hear anything after about 30 days, start calling to confirm they have your case in the system. This is where having that certified mail receipt becomes crucial - you can reference the delivery confirmation number.

Any chance you could share what kind of documentation worked for establishing "reasonable cause"? I'm in a similar situation but can't afford an attorney right now.

Question about the real estate professional requirements - I've heard you need 750 hours annually in real estate activities to qualify. If my spouse does property management full-time while I keep my W2 job, does that work for us filing jointly? Or do I personally need to qualify?

Your spouse can absolutely qualify as the real estate professional while you maintain your W2 job. This is actually the most common arrangement I see with my high-income clients. As long as your spouse spends 750+ hours annually in real estate activities (and more time on real estate than any other employment), their status allows the rental losses to offset your joint income on a married filing jointly return. Just be aware that your spouse needs to be actively involved in day-to-day operations, not just nominally listed as the manager. The IRS looks closely at these arrangements, so documentation of your spouse's time and activities is crucial. Keep calendars, logs, emails, and all evidence of their involvement.

I wouldn't recommend TurboTax for this. My brother tried doing this himself with TurboTax and missed several key forms and elections that would have maximized his deductions. He ended up hiring a real estate tax specialist who amended his return and found an additional $23k in tax savings he'd missed.

Can you request that transcript online or do you have to call again? This whole process gives me so much anxiety.

You can request a record of account transcript online through the IRS website if you have an online account set up. Go to irs.gov, log in to your account, and request the transcript. They usually process it within 5-10 business days. If you don't have an online account, you can also use Form 4506-T to request it by mail, but that takes longer (usually 2-3 weeks). The online method is definitely faster and easier if you're already set up with an online account.

The audit concluded about 6 months ago, and I just got the CP22 yesterday. But even with penalties and interest, it shouldn't double the amount in just 6 months. The notice does break down some penalties and interest but the base amount itself is showing as around $6,800 instead of the $3,800 we agreed on during the audit. So something is definitely wrong with their calculations.

The IRS penalty rate is nowhere near 100% for 6 months. Even with the failure to pay penalty (0.5% per month) and interest (federal short-term rate plus 3%, currently around 7% annually), the most the penalties and interest should add is maybe 10-15% to the original amount over 6 months. Doubling the amount definitely indicates an error.