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Whatever you do, don't ignore the IRS notices or miss deadlines for responding. That's the fastest way to make the situation worse. Even if you can't pay right away, always respond to notices and requests for information. Something else to consider - you may want to file separately going forward if you have any current year income. This prevents any new tax issues from getting mixed in with resolving the past problems.
So sorry about your situation. I'd recommend getting a free consultation with a tax resolution attorney before making any financial decisions. Many offer free initial consultations, and they can give you a realistic assessment of your options. With your health situation and age, you likely qualify for special consideration. If your husband truly handled all the finances without your knowledge, innocent spouse relief might significantly reduce your liability. Don't drain your retirement accounts before exploring this option fully. The IRS has specific provisions to protect retirement funds for seniors, especially those with health issues. Whatever you do, don't ignore the notices. Responding shows good faith even if you can't pay immediately.
Former tax preparer here - one thing nobody's mentioned yet is that if you're operating short-term rentals, you need to be really careful about material participation requirements. This affects whether your rental activities are considered passive or active, which impacts how losses can be deducted. Short-term rentals (average stay less than 7 days) are generally considered a business rather than a passive rental activity, which changes the tax treatment significantly. You'll want to track your hours spent managing the properties, advertising, communicating with guests, etc. Also, regarding travel expenses - a mistake I saw clients make all the time was trying to deduct trips that were 90% vacation and 10% "looking at properties." The IRS isn't stupid. The primary purpose needs to be business, or you need to clearly allocate which days/expenses were business vs. personal.
This is really helpful info, thank you! How many hours would I need to spend on my rental business for it to be considered "material participation"? And does managing my existing rooms count toward that total if I'm also using those hours to justify business travel to look at other properties?
For material participation in a short-term rental business, you generally need to meet one of several tests, but the most common is spending more than 500 hours per year on the activity. For smaller rental operations, there's also a 100-hour test if you have the most participation of any individual in the activity. Yes, all the time you spend managing your existing rental rooms absolutely counts toward your material participation hours. This includes time communicating with guests, cleaning, maintenance, bookkeeping, researching prices, updating listings, processing payments, etc. All of this builds your case for being actively engaged in the rental business, which supports both the material participation standard and justifies business travel to expand your existing operation.
Is anyone using TurboTax for their rental properties? I'm trying to figure out if I need to upgrade to their premium version or if the deluxe is enough to handle my two rental rooms situation similar to OP.
You definitely need at least TurboTax Premier for rental properties. The Deluxe version won't have the Schedule E forms you need. I tried doing it with Deluxe last year and had to upgrade halfway through. Save yourself the headache.
One thing nobody's mentioned yet - if you win big on certain games (slot machines, bingo, poker tournaments, etc.) and the winnings are above certain thresholds, the casino might withhold federal income tax immediately (usually 24%). This is separate from whether they issue a W-2G. Check if any of your bigger wins had taxes already withheld because you'll want to claim that on your return.
Is there a simple way to calculate how much I should set aside for taxes on my gambling winnings throughout the year? I'm worried about getting hit with a big tax bill next April.
For most people, setting aside about 30% of your net gambling profits should cover the federal taxes, but you should also account for state taxes if your state has income tax. Remember that gambling winnings are added to your other income, so they're effectively taxed at your highest marginal tax rate. If you're already in a higher tax bracket from your regular job, your gambling winnings could be taxed at 32% or higher federally. It's always better to set aside too much than too little - you can always keep the extra if you overestimated.
Just a heads up, I'm a regular poker player and one big mistake I see new players make is not tracking sessions properly. The IRS allows poker players to track by session (meaning you can combine wins and losses from the same day at the same casino/site) which is usually better than reporting each hand separately. But sports betting is different - you have to report each winning bet separately, not as a session. This tripped me up my first year.
13 One thing to consider is whether you can free up some cash by adjusting other financial obligations. When I was hit with an unexpected tax bill last year, I: 1) Called my mortgage company and asked to skip a payment (many allow this once per year) 2) Temporarily reduced my 401k contributions to the minimum needed for company match 3) Sold some non-retirement investments (even at a small loss) 4) Used a 0% intro APR credit card for other expenses while directing cash to the tax bill The key is to pay as much as possible upfront to minimize the interest and penalties. The IRS interest rates are lower than credit card rates, but still significant over time.
1 These are all really good ideas! I hadn't thought about the mortgage skip-payment option. I'll definitely look into that. I'm also considering selling some stock I've been holding, even though the market is down a bit right now. I guess paying the IRS has to take priority over ideal investment timing. Did you find that the IRS was generally reasonable to work with? I've been anxious about dealing with them directly.
13 In my experience, the IRS representatives were surprisingly reasonable and helpful once I actually got through to them. They've dealt with this situation thousands of times and have standard procedures in place. The key is being proactive and honest. I explained my situation clearly, had all my numbers ready, and proposed a solution rather than just asking what to do. They responded well to that approach. Most importantly, never ignore IRS notices or deadlines - that's when they become much less flexible.
4 Have you checked if your state has similar tax issues? Often federal and state tax problems go hand in hand. It might be worth doing your state taxes right away to see the complete picture before finalizing your payment strategy.
1 That's a good point. I've done a preliminary calculation for state and we actually should be getting a small refund there (about $1,200). I guess that will help offset the federal bill a tiny bit. The majority of our issue was federal withholding that didn't account for some investment income and a side business I started last year.
7 Also, don't forget to check if you qualify for state-level payment plans too. Some states offer better terms than the IRS, with lower interest rates or longer payment periods. When I had a similar issue, I was able to set up a 24-month payment plan with my state that had a much lower interest rate than the federal one.
Andre Dubois
just wanna add that CP2000s often have a "respond by" date that's usually 30 days from when they sent it. make sure you don't miss this deadline!!! if u need more time u can call and ask for an extension but they're not required to give u one. speaking from experience, trust me u don't want the headache of dealing with an expired notice š©
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CyberSamurai
ā¢And make SURE you send it certified mail with return receipt if you're mailing your response! I learned this the hard way when the IRS claimed they never received my response to a similar notice.
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Zoe Alexopoulos
Don't overlook the possibility that this could be a scam. Real IRS notices have a notice number, info about your rights as a taxpayer, and never ask for gift cards or wire transfers. The IRS also doesn't initiate contact through email, text or social media. If you're unsure if it's legitimate, you can call the IRS directly at 800-829-1040 to verify.
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Zara Khan
ā¢It definitely came through regular mail with all the official letterhead and notice numbers. I'm pretty sure it's legit - just confusing! Thanks for looking out though. I've heard about those scams where they call and threaten to arrest you if you don't pay with gift cards right away.
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