Thank you for this info! I definitely don't fall into any of those categories. I'm just a regular employee at a marketing company. This confirms the form shouldn't be there. I'll call my tax preparer tomorrow to get this fixed.

You're welcome! When you call your preparer, just be very clear that you understand Form 2106 is only for those specific categories of workers after the TCJA changes in 2017. Sometimes preparers are using outdated knowledge or software templates. Also, make sure they know they need to file a Form 1040-X (Amended Return) to correct this issue - not just "remove it from their system" since the return has already been submitted. Good luck!

This is actually really good advice. Superseding returns are less well-known but can be much simpler than amendments in many cases. You just need to file before the due date (including extensions).

Should I do this before or after talking to the IRS? I'm worried about making any changes that might look suspicious.

You can do both simultaneously. Changing the account ownership now doesn't affect the documentation for the previous year's issue. The IRS is concerned with who actually received the money during the tax year in question. By updating the Square account now, you're just preventing future problems. Make sure to document the process of changing ownership though. Get emails or letters from Square confirming when your name was on the account and when it was removed. This actually helps your case by showing you're taking active steps to correct the situation.

I strongly advise against ignoring IRS notices. They don't just go away. The IRS has a multi-step collection process that escalates over time: 1. Initial notice (what you received) 2. Follow-up notices with increasing urgency 3. Assessment of penalties and interest (growing daily) 4. Potential tax liens on property 5. Potential levy of assets or wages Sometimes there's a delay between steps due to IRS backlog, which might explain your 5 months of silence, but the issue is still active in their system. It's much better to address it proactively than to wait until they escalate to more severe collection activities.

Do you pay your kid weekly or monthly? And do you need to do any quarterly filings with this approach?

I pay my kids bi-weekly to establish a regular pattern (looks more legitimate to the IRS). You will need to do quarterly 941 filings even though you're exempt from some taxes, but the form is pretty simple when you're just reporting one employee with FICA exemptions. You'll also need to do annual FUTA (form 940) filing, though you're exempt from paying federal unemployment tax when it's your child under 21. The first year takes a bit of learning, but after that it becomes pretty routine. The tax savings make it worthwhile - you're essentially shifting income from your tax bracket to your child's (likely 0%) bracket.

I did the math when I hired my daughter. For a sole proprietor in the 22% federal bracket plus self-employment taxes, paying your child $2000 can save around $600-700 in taxes. Plus there are non-tax benefits - teaching your kid about work, responsibility, and money management. My daughter loves having her own money and learning about saving/investing.

Did your brother handle this himself or use a tax professional? I'm in a similar situation but wondering if I need to hire someone.

He started the process himself but ended up hiring a tax professional halfway through because the IRS started asking for additional documentation he wasn't sure how to provide. It cost him about $800 for the tax pro, but considering it saved him several thousand in penalties, it was worth it. If your case is relatively straightforward and you're comfortable with tax forms, you might be able to handle it yourself. But in my brother's experience, having a professional who knew exactly what supporting documents to include and how to present the case to the IRS made a significant difference in the outcome. The tax pro also knew which specific medical expenses would qualify and how to properly document them to meet IRS requirements.

Thanks for this insight. Do you think there's any chance the IRS would consider a full abatement of the penalty? I'm really struggling financially and this penalty is going to put me in an even worse situation.

Full abatement is rare but not impossible. The IRS does have authority to provide relief in cases of exceptional circumstances. Your best approach would be to: 1) Request abatement based on reasonable cause, clearly documenting why you believed the withdrawal qualified for exception (any advice you received, confusion between 401(k) and IRA rules, etc.) 2) Request abatement based on financial hardship by completing Form 433-F (Collection Information Statement) to demonstrate your current financial situation and inability to pay. If you're already in a difficult financial position, also look into the IRS payment plan options or Offer in Compromise program. Even if they don't waive the penalty entirely, you might be able to settle for a reduced amount or spread payments over time. Document everything thoroughly - the more evidence you provide of both your reasonable belief that the withdrawal was exempt and your current financial hardship, the better your chances.

That's a great point about specialization. Do you think it's better to find someone who focuses on small businesses since I have the side gig income? Or would a general personal tax CPA be sufficient?

For your situation with both personal tax events (home purchase, 401k distribution) and a side business, I'd look for a CPA who specializes in individual taxes but has experience with small business owners or self-employed individuals. A good way to gauge this is to ask them specific questions about home office deductions and qualified business income deductions. If they give you detailed, clear answers rather than generalities, that's usually a good sign they have the right expertise for your situation.

This is really smart advice! I never thought about using a CPA as a one-time learning opportunity. Did you literally just ask them to walk you through what they were doing?