Thank you for mentioning this option. I had no idea tax debt could be discharged through bankruptcy. Is that something that applies to all types of tax debt or just income tax? And did it affect your credit score as badly as people say?

Bankruptcy can only discharge income tax debt, not payroll taxes, fraud penalties, or certain other types. The debt needs to be from a return that was due at least 3 years ago, filed at least 2 years ago, and assessed by the IRS at least 240 days ago. Yes, bankruptcy did impact my credit score - it dropped about 150 points initially. However, it's already started recovering, and the relief of not having that massive tax debt hanging over me was worth it. I've been able to start rebuilding my credit, and some lenders actually see me as a better risk now because my debt-to-income ratio is so much better without the tax debt. I recommend at least having a consultation with a bankruptcy attorney who specializes in tax issues. Many offer free initial consultations, and they can tell you exactly which portions of your tax debt might be dischargeable.

Were you able to get your penalties reduced too? I've heard the IRS sometimes gives "first time abatement" but wasn't sure if that applies when you've already been on payment plans.

That's a really good point. My CPA is someone I've never worked with before and was recommended by a friend mainly because they had availability to assist with the audit on short notice. They seemed pretty quick to just surrender on most points rather than advocate for me. Do you have any tips for finding a CPA who specializes in audit defense specifically?

To find a good audit defense specialist, look for CPAs or Enrolled Agents who specifically advertise audit representation or tax controversy as a core service. These professionals deal with audits regularly and know how to navigate the process much better than a general tax preparer. I'd recommend checking with your state's CPA society for referrals to tax controversy specialists. You can also search for professionals who have worked at the IRS previously - they often have insider knowledge about how audits are conducted and what documentation is most persuasive. The website of the National Association of Enrolled Agents (NAEA) has a directory where you can search by specialization. When interviewing potential representatives, ask specifically about their experience with Schedule C audits and their success rate in defending business expenses. A good specialist will be able to give you examples of similar cases they've handled without revealing client details. Don't be afraid to ask how many audits they handle annually - you want someone who does this routinely, not occasionally.

That's fascinating - I'd never heard about being able to request the auditor's workpapers. How exactly do you file this FOIA request? Is there a specific form or process to follow? And did you handle the appeal yourself or did you need professional representation?

You file the FOIA request using IRS Form 4506-A or submit a letter request to your local IRS FOIA office. Include your name, address, tax ID, the tax years involved, and specifically request the "examination workpapers" related to your audit. Be as specific as possible about what you want. There's a small fee involved, but it's very reasonable (under $100 typically). I handled the initial appeal myself using the IRS appeals process (Form 12203). However, after seeing the workpapers and realizing how fundamentally they had misunderstood my business, I did hire a tax attorney who specialized in appeals to help me craft the most compelling case. It was expensive (about $2,500), but since I was fighting over nearly $12,000 in tax, penalties and interest, it was worth it. The workpapers revealed they had classified my management consulting business as a retail operation, which explained why they thought my travel and professional development expenses were excessive. With the proper industry classification documented and explained, we got about 70% of the denied expenses reinstated.

Can you explain more about this QBI thing? I haven't heard about that and now I'm wondering if I should be factoring that into my decision as well.

The Qualified Business Income deduction allows you to deduct up to 20% of your "qualified business income" from your taxes. It was introduced with the Tax Cuts and Jobs Act. For your income level ($87k), you'd likely qualify for the full deduction. The important difference: with an LLC/sole prop, it's calculated on your net profit (income minus expenses). With an S-Corp, it's calculated only on the distribution portion, not your salary. So depending on your salary-to-distribution ratio, this could affect which structure is most beneficial. Some tax pros recommend modeling both scenarios with the QBI factored in before deciding.

Yeah, this is huge. I'm in Tennessee and we have no state income tax but we do have a "franchise tax" for LLCs that can add up. Always check local requirements!

Thanks for this tip! I just checked the IRS transcript and you're right - nothing from this company shows up at all. Looks like they haven't filed anything. Does this mean I'm definitely going to have issues with my return?

No, you won't necessarily have issues with your return. The fact that nothing shows up actually supports your case - it shows the company hasn't fulfilled their obligation. Just report the income accurately based on your bank records. If they file late and there's a discrepancy, the IRS will more likely question the company than you, especially if your reported amount is higher than what eventually gets reported. The key is documentation - keep those bank statements and records of your attempts to contact them.

This is interesting but also sounds risky. Couldn't this trigger an audit if you're claiming the company misclassified you?

I've tried on both my laptop and phone with the same result, so I don't think it's a browser issue. And yes, I'm just entering the numbers without any special characters - I double-checked that. I think I'm going to try the suggestion about ordering a transcript by mail to see what AGI the IRS actually has on file for me. Seems like that might be the most straightforward solution at this point.

That's a good plan. The transcript will show exactly what the IRS has in their system. Another thing to consider - if you amended your 2023 return at any point, you need to use the AGI from your original return, not the amended one. That trips up a lot of people. Also, if you filed jointly last year but are filing separately this year (or vice versa), that can sometimes cause confusion with which AGI to use. Just something else to consider while waiting for the transcript.

I used it successfully last week to get my AGI. The online version requires pretty intense verification (credit card account numbers, loan numbers, etc.) but if you can get through that, it shows your AGI immediately. The number it showed matched what I needed exactly, and my return was accepted after that.

Thanks for the info! I'll try it out. I was worried the transcript might not show the right information or might be too complicated to find the AGI number. Glad to hear it worked for you.