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IRS Letter of Deficiency shows income $90K higher than my actual revenue?!
Got two certified letters today containing identical copies of a Letter of Deficiency for my 2021 tax return. I'm completely floored by what I'm reading. According to this notice, the IRS claims I failed to report over $140,000 in "income reported by others" with the line item specifically mentioning Venmo (which I use for my small business transactions). Here's the crazy part - my TOTAL Venmo revenue for 2021 was only about $74,000! Even if I owed taxes on every single penny that passed through my account (which I don't), there's no mathematical way I could have underreported by this much. The IRS is somehow saying I had $215,000 in taxable Venmo income! From what I've read online, a Letter of Deficiency is essentially a final notice and I should have received previous communications about this issue. But this is literally the first I'm hearing about any problem with my 2021 return. I'm completely lost on how they could be off by such an astronomical amount. Who should I contact? What's my next step? Is there a specific IRS department that handles these types of disputes? Any guidance would be extremely appreciated. I'm trying not to panic but seeing a tax bill for income I never earned has me seriously worried.
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Do I need to file Form 8840 with my 2024 tax return if I applied for green card lottery?
I'm on a J-1 visa and worked in the US for 138 days during 2024. Planning to file as nonresident alien with Form 1040NR. I've been searching for the best e-filing service that will let me get my refund directly deposited to my bank account. After taking the IRS Free File eligibility test, it looks like I can use OLT for free. When going through their system, they asked if I want to file Form 8840 (Closer Connection Exception Statement). Their help section mentions something about not being eligible if you [something - their explanation got cut off]. I'm confused because I applied for the green card lottery (DV lottery) in October 2024. Does this affect whether I need to file Form 8840 with my tax return? The form seems to be about proving closer connection to another country, but I'm not sure if my lottery application changes my filing requirements. Has anyone dealt with this situation before? I want to make sure I'm filing correctly.
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Just to add some clarity about Form 8840 specifically - it's ONLY needed if: 1) You meet the substantial presence test (which you don't with only 138 days) 2) You want to claim you have a closer connection to another country Since you don't meet the substantial presence test, you're already considered a nonresident alien for tax purposes. The green card lottery application doesn't change that status - it's just expressing interest, not actually changing your current status. File your 1040NR and don't worry about Form 8840. You do, however, need to file Form 8843 if you're on a J visa - that's different from 8840 and is required for all J visa holders regardless of day count.
Wait what's the difference between 8840 and 8843? I've been filing wrong for years maybe??
Form 8843 is for J visa holders, students, and certain other nonimmigrant statuses to explain your presence in the US. It's required for everyone on those visas regardless of how many days you were in the US. Form 8840 is only for people who would otherwise meet the substantial presence test (183+ days using the formula) but want to claim they have a closer connection to a foreign country and should still be treated as nonresidents. They're often confused because of the similar numbers, but they serve different purposes. If you're on a J visa, you definitely need to file 8843, but you only need 8840 if you meet that substantial presence test and want to claim the closer connection exception.
I went through exactly this last year - J1 visa, applied for green card lottery, and OLT confused me with that same question! Pro tip: OLT isn't great for nonresident returns. Their system kept trying to make me file resident forms. I ended up using Sprintax which is specifically designed for nonresident aliens. A bit more expensive but way less confusing and they file state returns too.
Thanks for sharing your experience! Did Sprintax handle direct deposit of refunds well? That's important to me since I'll be leaving the US soon and want to make sure I get my refund.
How to determine if I overpaid taxes - was it my W4 withholding or 1099 earnings?
Feeling pretty lost about my tax situation (I'm using freetaxusa)... I need to figure out if I overpaid my taxes last year and what caused it. So my income comes from a regular W-2 job and DoorDash (1099-NEC) for the past couple years. For last year's taxes, I was shocked when I ended up owing $650 instead of getting my usual $1,300 refund. And that was BEFORE adding my DoorDash 1099-NEC income! After adding that, I ended up owing close to $4,000 total which I paid. But here's the weird part - this year, when I only entered my W-2 information, it showed a HUGE refund of $3,800! I was super excited until I entered my DoorDash 1099-NEC, which brought me down to owing $2,500 (which makes sense since 1099 work doesn't have taxes withheld, and yes I did claim the standard mileage deduction). My question is - where did that massive $3,800 refund come from before I added the 1099-NEC? Does this mean I overpaid taxes last year? And if so, how do I figure out if the overpayment was from my W-2 job withholding too much or from me overpaying on my 1099 income?
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For what it's worth, I went through something similar and found out it's pretty common with gig work. Your W-2 withholding is probably correct, but the issue is that you need to be making quarterly estimated tax payments on your 1099 income. When you're seeing that big refund before entering your 1099, it means your W-2 job is withholding correctly for THAT income only. But once you add the 1099 income, you owe additional taxes that weren't withheld. I solved this by setting up automatic transfers of 25-30% of my DoorDash deposits into a separate savings account for taxes. Then I make quarterly payments using the IRS Direct Pay system.
How do you figure out what percentage to save for quarterly payments? I do Instacart and have been just guessing and usually end up owing at tax time anyway.
I started with 30% as a safe estimate (covers both income tax and self-employment tax for most people). Then after filing my first full year of taxes with gig work, I calculated my effective tax rate on just the 1099 income. For me personally, it worked out to about 27% when considering federal, state, and self-employment taxes. But this varies based on your total income, tax bracket, deductions, and which state you live in. If you're eligible for a lot of deductions (like mileage for Instacart), you might need to set aside less.
One thing no one mentioned - check if you changed your W4 in the past year or if your employer updated their payroll system. My company switched payroll providers last year and somehow my withholding got WAY messed up (too much taken out) even though I didn't change anything on my W4. If you do wanna adjust your W4 to have less taken out from your regular job, use the IRS Tax Withholding Estimator online. It lets you put in both W2 and 1099 income to give you the right withholding.
That's a good point - my company did actually change their payroll system around October last year! I just checked my final paystub from 2023 and compared it to my 2022 W-2, and it looks like they withheld about $2,800 more in 2023 than in 2022, even though my salary only went up by about $4,000. That explains a lot!
Child Tax Credit Issues with Delayed Birth Certificate for Adopted Child
I'm in a really frustrating situation with the IRS regarding the Child Tax Credit for my adopted son. I became his foster parent about 4 years ago after his biological parents had done a home birth with no documentation. The whole birth certificate process was a nightmare due to delays from the pandemic and endless bureaucracy. It literally took over 2 years to finally get his birth certificate, which came with a special addendum explaining it was a delayed issue. My caseworker had advised me to wait on filing taxes until I had this document, which I did. Well, the IRS just rejected my claims for the Child Tax Credit for those years! They're saying their rules don't allow for a delayed birth certificate. According to them, I can claim the credit going forward, but not for the 3 years when I was raising him as a single parent. This is thousands of dollars that would really help us. I have mountains of proof that I was his guardian - court documents, foster care paperwork, receipts for everything from doctor visits to clothes to childcare. I can literally prove I was responsible for him, but apparently the one document they absolutely require is the very one that took forever to get due to circumstances beyond my control. Has anyone dealt with something similar? Is it worth appealing this decision? The whole situation seems absurd - I was legally caring for this child, paying all his expenses, but can't get the tax credit because government bureaucracy moved at a snail's pace.
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My sister went through almost the exact same situation with her adopted son. What worked for her was submitting Form 8862 (Information To Claim Certain Credits) along with a detailed letter explaining the circumstances and documentation from the adoption agency confirming the dates of placement and finalization. She also included affidavits from her social worker and pediatrician confirming they had been seeing the child since placement. The IRS eventually approved her claim after initial rejection. The key was persistence and overwhelming documentation from multiple sources.
That's really helpful info! Did she have to go through multiple appeals or did they accept everything after the first detailed submission with the Form 8862?
It took two submissions. The first one was rejected with a form letter, but she called (after struggling to get through) and spoke with an agent who advised her to resubmit with even more documentation and a more detailed timeline of the birth certificate delays. The second submission included everything from the first plus school enrollment records, health insurance coverage documentation, and a more detailed letter citing specific sections of the tax code related to qualifying children. That one was finally approved, though it took about 4 months to process.
Have you tried contacting your state's taxpayer advocate? They can sometimes help navigate these situations, especially when there are extenuating circumstances like yours. They might be able to help identify exactly what documentation the IRS needs to approve your claim. Also, just a personal experience - we had a somewhat similar situation with our kinship placement and eventually got our credits after appealing, but it took almost 8 months and multiple submissions. Don't give up!
I second this! The Taxpayer Advocate Service helped me resolve a much simpler issue when regular IRS channels were going nowhere. They're specifically designed to help with situations where the standard process isn't working due to special circumstances.
Understanding tax differences: Starting a default MMLLC vs S-corp MMLLC for escape room business
I'm planning to open an escape room in upstate New York with 3 partners, and I'm trying to figure out the best business structure from a tax perspective. For context, all 4 of us make decent money at our day jobs (between $150-250k yearly). From what I've researched so far about multi-member LLCs (MMLLC): -A default MMLLC means we'd pay both personal income tax AND self-employment taxes on all profits the escape room makes. -An MMLLC with an S-corp tax election gives us different options: ---Option 1: If the escape room is profitable but we don't take salaries or distributions, the profits would pass through to our personal returns, but we'd avoid self-employment/payroll taxes ---Option 2: If we pay ourselves "reasonable compensation" salaries, any additional profits could be distributed without the 15.3% self-employment/payroll tax (though we'd still pay income tax on everything) Have I understood these tax strategies correctly? Also wondering if there are special tax considerations with an MMLLC vs S-corp if one of our partners lives in Connecticut while the escape room will operate in New York? Thanks for any guidance!
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One thing nobody has mentioned yet about MMLLC vs S-corp - operating agreements are SUPER important, especially with 4 partners. Make sure you have detailed provisions for: - How profits/losses are allocated (doesn't have to be equal to ownership %) - What happens if someone wants out - Management responsibilities and voting rights - Capital contribution requirements My brother-in-law's multi-member LLC imploded because they didn't have this stuff spelled out clearly. The tax structure matters, but the operating agreement will save you major headaches.
This is really helpful! We have a basic operating agreement drafted but haven't addressed the profit/loss allocation part in detail. Would you recommend getting a specialized business attorney to help with this, or are there good templates we could use as a starting point?
I would absolutely recommend getting a specialized business attorney for this. Templates are a starting point, but with four partners and potentially complex profit-sharing arrangements, you need customization. The attorney cost us about $1,500 for a solid operating agreement, but it was worth every penny. For your escape room business, you'll want specific provisions that address how to handle capital-intensive improvements, marketing expenses, and the sweat equity some partners might contribute versus purely financial investments. The attorney can also help structure things to maximize the tax benefits whether you go MMLLC or S-corp route. Think of it as insurance against future partner disputes.
A practical tip from someone who runs 2 escape rooms: regardless of whether you go MMLLC or S-corp, set up good bookkeeping from DAY ONE. Our first year was a nightmare at tax time because we mixed personal and business expenses and didn't track properly. QuickBooks Online worked well for us, but there are cheaper options like Wave that are good too. Just make sure you're categorizing everything correctly and keeping good records of all your startup costs (which can be substantial for escape rooms with all the props and tech).
Does QuickBooks handle the S-corp payroll stuff well? We're starting a similar business and I'm worried about getting the whole "reasonable compensation" thing right.
Everett Tutum
Something similar happened to me in 2022. In my case, the IRS was counting EVERY transaction in my payment processor as income - including refunds I issued, transfers between accounts, and even money I was holding for my business partner. Call the Taxpayer Advocate Service at 877-777-4778. They're an independent organization within the IRS that can help with these kinds of issues. They assigned me a case advocate who sorted everything out within a month.
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Peyton Clarke
AuthorThank you for this suggestion! I didn't even know the Taxpayer Advocate Service existed. Did you need to provide special documentation to them, or just explain your situation?
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Everett Tutum
I had to provide pretty much everything - bank statements, my complete Venmo transaction history, my tax return, and the deficiency notice. The more documentation you have ready, the faster they can help. Make sure to explain that this is causing you significant financial hardship (which I'm guessing it is, given the amount). That helps them prioritize your case. They're understaffed but they really do try to help if they can see clear evidence that the IRS made a mistake.
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Sunny Wang
Update us on what happens! I've been dealing with a similar issue for 8 months now and still haven't gotten it fully resolved. Make sure to keep detailed notes on every conversation, including the ID number of every IRS employee you talk to.
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Hugh Intensity
This 100%. Document EVERYTHING. I had to reference previous conversation IDs several times during my deficiency dispute. Also send everything via certified mail so they can't claim they never received your documentation.
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