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One thing nobody mentioned yet - check if you actually did receive prior notices. The IRS is required to send multiple notices before sending debt to collections. Pull your IRS account transcripts (can be done online) and it will show all notices sent to you. If they sent notices to an old address or there's no record of prior notices, that strengthens your case for abatement. Also, 1065 penalties are especially harsh because they're designed to enforce timely filing for information returns. The $195/month/partner can add up quickly, which explains your $4950 penalty for what seems like a simple mistake.
That's a great point about checking the transcript for prior notices! I'll definitely do that. Our business did move offices in early 2023, and I'm now wondering if notices were sent to our old address even though we filed a change of address form. Is there a specific way to mention this when requesting abatement?
If your transcript shows notices were sent but you never received them because of an address issue, definitely mention that when requesting abatement. This falls under "reasonable cause" arguments. Specifically say: "We filed Form 8822-B to change our business address, but it appears notices were sent to our previous location. We never had the opportunity to respond to the original notices before this went to collections." The IRS is generally understanding about address issues, especially if you can show you tried to update your information properly. This would be in addition to requesting First-Time Abatement, giving you multiple angles for relief.
I hate to be the pessimist, but be prepared for this to take multiple attempts. I had almost identical partnership penalties last year and the first abatement request was denied despite having a clean record. Had to call back, escalate to a supervisor, and be very persistent. Eventually got it abated, but it wasn't the easy one-call fix some people are suggesting. The IRS is incredibly backlogged right now.
I second this. My first request was denied too, but second time worked. The key was getting actual IRS transcripts that proved we had good filing history. Just saying "we've always filed on time before" isn't enough - they want to see proof in their system.
Has anyone used the IRS Tax Withholding Estimator on the official IRS website? I found it helpful for a similar situation.
Just to be clear, you're DEFINITELY not paying your employer's portion of payroll taxes. That's a completely separate thing that never shows up on your tax return. What you're experiencing is just the result of our progressive tax system when you have multiple incomes in a household. Each dollar of your income is essentially taxed at your highest marginal rate when added to your husband's income. So if his income put you in the 22% bracket, your additional income gets taxed at 22% (minus deductions). That's completely normal and how the system is designed to work, even though it can feel unfair.
Another perspective: I have three dry cleaning locations and used a tax preparer for years. Switched to a CPA two years ago and my tax bill dropped by nearly $7500 the first year. The difference? My CPA understood how to properly categorize equipment depreciation across multiple locations, helped restructure my business entity, and identified legitimate meal and vehicle deductions I was missing. For food businesses, there are TONS of industry-specific deductions a specialist might know. One tip: don't just get any CPA. Find one with restaurant/food service experience. They know the specific deductions and challenges in your industry.
Did your CPA also help you throughout the year or just at tax time? And how much more did you end up paying compared to your tax preparer?
My CPA definitely helps year-round. He reviews my books quarterly and advises on timing major purchases for maximum tax advantage. He's also helped me set up proper accounting for each location to track profitability separately. I pay about $2,200 per year compared to $650 for my former tax preparer, but with the tax savings and business insights, it's been one of my best investments. The first consultation was free, and he clearly explained how his strategies would save more than his fee.
One thing nobody has mentioned - ask your current tax preparer if they're an Enrolled Agent (EA). Some tax preparers have this credential, which means they're federally licensed and can represent you before the IRS just like a CPA. If your current preparer is an EA with small business experience, they might be perfectly qualified and cheaper than a CPA.
Another important consideration: if your mom might need nursing home care in the next 5 years, transferring assets from her account to yours could create a huge problem with Medicaid eligibility. They look back 5 years at transfers, and this could be seen as trying to hide assets.
I hadn't even thought about the Medicaid implications. That's a really important point since she might need that level of care eventually. Is there a way to use the proceeds for her benefit that wouldn't trigger Medicaid issues while still meeting her needs?
You should use the proceeds only for your mom's benefit and keep meticulous records of every expenditure. Maintaining a separate account specifically for her funds managed under the POA is essential. This money can be used for her care, living expenses, medical costs not covered by insurance, and quality of life improvements. For Medicaid planning, some families work with elder law attorneys to establish properly structured trusts, but you need professional guidance specific to your state as the rules vary. The key is demonstrating that funds were used for her benefit rather than gifted away to avoid Medicaid spend-down requirements.
Don't forget to keep really good records of all home improvements your mom made over the years! This increases the basis of the home and reduces potential capital gains. Things like a new roof, kitchen remodel, finished basement, etc. Get as many receipts as you can find.
This is so important! My parents sold their house last year and we forgot to account for the $30k kitchen renovation they did in 2010. Would have lost out on that adjustment to the basis if the closing agent hadn't mentioned it. Old credit card statements can help prove these expenses if you don't have the receipts anymore.
NeonNova
Be really careful with writing off your flip materials from your landscaping business! I did this exact thing and got audited. The IRS reclassified everything, disallowed my deductions, and hit me with penalties and interest. My $12k tax savings turned into a $20k+ nightmare. The IRS is pretty strict about keeping these activities separate. For flips, you should be tracking all costs (materials, labor, permits, etc.) and adding them to the property's basis. You'll recoup these when you sell. If you've already been writing these off as landscaping business expenses, consider filing amended returns before they catch it.
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Yuki Tanaka
ā¢Did you have any warning signs before the audit happened? Like did they send letters first or just launch straight into a full audit?
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Carmen Diaz
I'm a rental property owner and wanted to add: while you can't immediately deduct the materials for building your rentals, consider exploring the BRRRP strategy (Buy, Rehab, Rent, Refinance, Repeat). This lets you pull cash out after establishing equity, which is untaxed since it's debt, not income. Also, look into Qualified Business Income deductions for your rental activity if you can qualify as a "real estate professional" for tax purposes. With your construction background, you might meet the hours requirement. For your specific question about the flip materials you already deducted - that's problematic. Those should have been capitalized to the property's basis. Consider talking to a tax attorney about amendment options before an audit happens.
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