But what happens if the amount the company reports paying you (if they filed anything before going bankrupt) doesn't match what you report? Could that trigger an audit?

That's a good question. If there's a discrepancy, it potentially could raise a flag in the IRS system. However, if you're reporting based on your actual income records (bank deposits, etc.), you're still doing the right thing. If the company reported incorrectly before going bankrupt, that's their mistake, not yours. Just make sure you have documentation of all the income you received - bank statements, invoices, contracts, emails confirming payments. If you're ever questioned, you can show you reported based on your actual earnings. The IRS is generally understanding when you can show you made a good-faith effort to report accurately.

CA resident here too. The Franchise Tax Board definitely wants documentation, but I found they accepted my own records (invoices + bank statements) when I couldn't get a 1099 from a client who went out of business. I included a brief statement explaining the situation with my filing.

That's a great point I hadn't thought of! I just double checked my statements. There was a tiny bit of growth - looks like about $8.72 in earnings before the conversion went through. So I'll have a very small taxable amount for 2025, but nothing major. Thanks for pointing this out!

Exactly right! The $8.72 will be taxable income on your 2025 return. The key thing is you've got your non-deductible contribution of $6,500 properly documented on your 2024 Form 8606, establishing your basis. Then in 2025, your 1099-R will show the full conversion amount ($6,508.72), but you'll only pay tax on the $8.72 growth portion.

Do you use tax software to prepare your returns or did you fill out Form 8606 manually? I'm worried my tax software might get confused with this two-year situation.

Is there a dollar threshold for when something should be depreciated vs just expensed? Like if my desk was only $300, do I still need to depreciate it or can I just deduct it all at once under supplies/furniture?

There's actually a "de minimis safe harbor election" that lets you expense (rather than depreciate) items that cost less than $2,500 per item or invoice. So for your $300 desk, you could absolutely deduct it all at once instead of depreciating it over several years. Many small business owners don't know about this and end up creating unnecessary complexity by depreciating smaller items. For slightly larger purchases, Section 179 expensing is another great option that lets you deduct the full cost of qualifying equipment in the year you put it into service, rather than depreciating it. The limits are quite generous for small businesses (up to $1,160,000 for 2023).

Simplified method is WAY easier but usually results in a smaller deduction in my experience. I tracked both methods for two years and regular method gave me about $1,200 more in deductions. Depends on your situation though.

Did they say anything about whether they're going after everyone who didn't pay those penalties? I ignored mine too but haven't received any notices yet.

The agent didn't specifically say they're targeting everyone, but she did mention they're working through batches of unpaid penalties from the ACA mandate years. She said something about starting with larger amounts and more recent years, then working backward. If you haven't gotten a notice yet, you might still receive one in the coming months. She recommended checking your online account at IRS.gov to see if there's any balance showing there, even if you haven't received a physical notice yet.

I tried the Taxpayer Advocate Service for a different issue last year. They won't take your case unless you've already tried resolving it through normal IRS channels AND you're facing some kind of immediate financial hardship (like wage garnishment or bank levy). For a simple notice like CP71H, they'd probably just tell you to call the regular IRS number.

Thanks for that info! Sounds like they're more for serious collection situations rather than just getting a first notice. I'll try the regular channels first then.

What exactly do we need to check on the W-2? Like which specific boxes should I pay attention to the most?

The most critical things to verify are your personal information (name, SSN, address) since those are used to match your return to IRS records. An error there can cause your entire return to be rejected. As for the financial information, check Box 1 (Wages, tips, other compensation) against your final paystub of the year to make sure it matches. Also verify Box 2 (Federal income tax withheld) since that directly impacts your refund or amount due. If you contributed to a 401(k), check that Box 12 has the correct code and amount for your contributions.

It works but it's unreliable. Last year mine said "still processing" for 3 weeks AFTER I already received my refund. The IRS systems don't talk to each other very well. I'd just set up direct deposit and forget about it - the money will show up eventually.