Can a real estate agent really provide documentation that would satisfy the IRS though? I'm worried about getting audited and having to justify my numbers.

What you want is documentation showing how you arrived at a reasonable allocation, not necessarily an official appraisal. The IRS recognizes that determining exact land values isn't an exact science. A realtor can provide comparative market analyses (CMAs) of similar properties showing their land-to-building ratios, which demonstrates you used a reasonable method based on actual market data. If you're particularly concerned about audit risk, you could have the realtor write a brief letter explaining the methodology used to determine the typical ratio in your area, and keep this with your tax records. The key is being able to show you made a good faith effort to determine an accurate and reasonable allocation, rather than just making up numbers.

Is this still true with the 2025 tax year changes? I thought there was something about this rule being modified.

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 Sometimes preparers are using outdated knowledge or software templates.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).

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.

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 still get the 1099-R if you do a hardship withdrawal? My husband needed emergency surgery last year and we took $25,000 from his 401k to cover costs insurance didn't pay. Will we get hit with penalties?

Yes, you'll still receive a 1099-R for hardship withdrawals. For medical expenses, there's a potential exception to the 10% early withdrawal penalty (though not to the regular income tax) if the medical expenses exceed 7.5% of your adjusted gross income. So let's say your combined AGI is $100,000 - medical expenses would need to exceed $7,500 to potentially qualify for the exception, and only the portion above that threshold would be exempt from the penalty. You'll need to file Form 5329 with your tax return to claim this exception. The $25,000 will still be counted as taxable income regardless, but you might be able to avoid at least some of the early withdrawal penalty.

This! I made this mistake a few years ago and overpaid my state taxes by almost $800. Double check ALL the boxes on your 1099-R, not just the main ones!