What about state taxes? Aren't those separate from the IRS payment plans? With multiple states involved this seems like a nightmare to sort out.

You're absolutely right about state taxes being separate. Each state has its own tax authority and payment arrangements. You'll need to contact each state where you owed taxes to work out separate payment plans. For multi-state situations, I usually recommend tackling the federal issues first, then addressing each state in order of highest debt to lowest. Many states offer voluntary disclosure programs that can reduce penalties if you come forward before they contact you. It feels overwhelming at first, but breaking it down step by step makes it manageable.

That's only if the taxes were assessed though. For unfiled returns, the clock hasn't even started ticking since there's been no assessment. If anything, unfiled returns have no statute of limitations because the IRS can basically pursue those forever.

Thanks for the extra info! The tax software did have me fill out those schedules, but I wasn't totally clear on what they were for. How do the quarterly estimated payments work? Is there a minimum amount I need to earn before I'm required to make them? And how do I calculate how much to pay?

Generally, you should make estimated tax payments if you expect to owe $1,000 or more when you file your return. The IRS wants you to pay as you earn throughout the year, not just at tax time. To calculate your payments, you have two options: You can pay 100% of last year's tax liability (110% if your income is over $150,000), divided into four equal payments. This is the safest method to avoid underpayment penalties. Or you can estimate your current year's tax and pay it in quarterly installments, which might be more accurate if your income changes significantly. The IRS Form 1040-ES has worksheets to help you calculate this. Payments are due April 15, June 15, September 15, and January 15 of the following year. You can pay online through the IRS Direct Pay system.

Yeah, it's confusing! The threshold was supposed to drop to $600 for 2023, but the IRS delayed it. For 2023 tax returns (what we're filing now in 2024), the threshold is still $20,000 AND 200 transactions. In 2024 (for next year's taxes), it'll be $5,000 with no transaction minimum. Then in 2025, it'll finally go down to $600. But some states have their own lower thresholds, and some platforms might be issuing 1099-Ks at lower amounts anyway just to be safe. Super confusing!

I didn't have any unemployment this year, but I did cash out about $2000 from an old 401k from a job I had years ago. Could that affect things? I completely forgot about that until just now.

That would absolutely affect your taxes! 401k withdrawals are typically taxed as ordinary income, and there's usually an additional 10% early withdrawal penalty if you're under 59½. So on a $2000 withdrawal, you could be looking at your regular tax rate plus potentially a $200 penalty. This is definitely what caused your situation. The withdrawal added $2000 to your taxable income, and if they only withheld the standard 20% (which is common), that might not have covered your full tax obligation including the penalty. Mystery solved!

This is a good point. I had a similar experience a few years back. Made almost the same income but lost the American Opportunity Credit when I graduated. My refund dropped by like $1000 even though nothing else changed!

Thank you so much for mentioning this! I actually did pay my neighbor to watch my daughter during my online class sessions and study groups. I have Venmo records of all the payments. Would those work as documentation? And do I need to give her a form to fill out or anything to get her tax ID?

Venmo records are a good start for documentation! You'll need to complete Form 2441 (Child and Dependent Care Expenses) when you file your taxes. You'll need your care provider's name, address, and either their Social Security Number or Employer Identification Number. You should ask your neighbor to fill out Form W-10 (Dependent Care Provider's Identification and Certification). This form doesn't get filed with your return, but it gives you the information you need and shows you did your due diligence in getting their tax information. Keep this form with your tax records. Some providers might be hesitant to share their SSN, but explain that it's required for you to claim this valuable tax credit.

This is super important advice! Head of Household filing status makes a HUGE difference. The standard deduction for Head of Household in 2024 is $21,900 compared to just $14,600 for Single status. That's over $7,000 more of your income that won't be taxed! Definitely claim this if you qualify.

You might want to request a Wage and Income Transcript from the IRS for the year they think you claimed the credit. It should show all forms filed under your SSN that year, including a Form 5405 if one was actually filed. If no 5405 appears on your transcript, that's your proof one wasn't filed. Also request your Account Transcript which shows any credits applied. If the credit appears there but no corresponding 5405 on your Wage and Income Transcript, that helps demonstrate the error. Lastly, if you still have your tax return from that year (or can get a Return Transcript), that would show you didn't claim the credit on your actual filed return.

Thanks for these suggestions. I hadn't thought about using the absence of forms as proof! I just checked and I can get my transcripts online through the IRS website. I'll request both the Wage and Income and the Account transcripts to see what they show. I definitely don't have my actual tax return from 2008 anymore, but hopefully the transcripts will be enough to show there's a mismatch between what was filed and what credits were applied.

I did try going to the local IRS office - that's where they gave me the 5405 form and told me to fill it out! Maybe I just got someone who didn't know what they were doing? I think I'll try going back and hopefully get a different representative who might be more helpful like in your case.