Did they ask for proof of all your expenses? I've heard they make you send bank statements and bills to prove everything on the 433-F form.

They didn't ask for proof upfront, but they did call me to verify some information. After that call, they requested three months of bank statements and copies of my utility bills and rent agreement. I think they only dig deeper if something looks inconsistent or if the amount you owe is substantial. The key is being honest on the form. If you claim expenses that are significantly higher than what the IRS considers reasonable for your area (they have internal guidelines), that will trigger more scrutiny. I stuck to my actual basic expenses and they approved my CNC status without too much back and forth.

Offers in Compromise can definitely work for offset situations, but they take time to process (6-12 months typically). If you want to stop an imminent offset, you should first request a Collection Due Process hearing to get immediate protection while you prepare your OIC. The success of an OIC depends on your financial situation. The IRS uses a specific formula to determine your "reasonable collection potential." If you can prove you'll never be able to pay the full amount before the collection statute expires (typically 10 years), you have a good chance. Form 656 is used for the offer, along with Form 433-A detailing your financial situation.

That's really good advice! What kind of documentation would be acceptable for cash jobs? Most of his work is for neighbors who just pay cash, no invoices or anything formal.

For cash jobs, create your own simple invoice system - even a notebook where you write down the date, customer name, service provided, and amount paid is better than nothing. Some people use apps like Square or PayPal for small jobs which automatically creates a record. The key thing the IRS wants to see is consistency and reasonableness. If you can show a regular pattern of work and income that matches the lifestyle you report on your taxes, that goes a long way. For expenses, keep ALL receipts for anything related to the work. Home improvement stores, gas, work clothes, tool repairs - these can all potentially be deductible depending on how they're used. Just make a note on each receipt what job it was for.

Self-employment tax is currently 15.3% of net earnings (12.4% Social Security + 2.9% Medicare). On $4,000 of net income, that would be about $612 in self-employment tax. However, you can deduct half of that on your 1040, which slightly reduces your income tax. But remember, you'll likely have deductible expenses that reduce your net income. If your husband spent money on tools, supplies, transportation to jobs, etc., those costs can lower the taxable amount significantly. Sometimes with proper expense tracking, the taxable income might be much lower than the gross income.

Thanks! That's helpful to know. I didn't realize I could deduct expenses against that income. I was worried about owing a big chunk of that $4k, but if I can deduct the gas, tool repairs, and other expenses, it might not be so bad.

That's a really good point that I hadn't even considered! She's currently living in Australia and I have no idea what their rules are for small self-employment income like babysitting. Would we need to file tax returns in both countries then? And how does that work with the tax treaty stuff?

Australia definitely taxes residents on worldwide income, so yes, she likely needs to file there too. The good news is that the US and Australia have a comprehensive tax treaty. If she pays taxes in Australia, you can generally claim a Foreign Tax Credit on your US return using Form 1116 to offset US taxes on that same income. This helps prevent double taxation. Australia has a tax-free threshold of about 18,200 AUD, so if she's making less than that from babysitting, she might not owe Australian taxes anyway.

This FBAR stuff is terrifying! I've been doing my taxes myself for years and just found out about this requirement. Is there any kind of amnesty program if you've messed up in previous years? Also, does it matter if the account has barely any money in it?

Is that always true though? I thought there were exceptions based on how many days you rent it and personal use days? The whole 14-day rule and all that?

That approach could potentially create even bigger problems. The IRS looks at the substance of transactions, not just the form. If they determine the arrangement is actually a disguised below-market rental, they could disallow your rental expense deductions AND potentially treat the "gifts" as taxable rental income that you failed to report. Additionally, regular monthly gifts that coincide exactly with rent payments would look suspiciously like a tax avoidance scheme. It would be hard to argue these are genuine gifts rather than just a way to circumvent the Fair Market Rent rules. I'd strongly advise against this approach.

Ah, I see. I didn't realize the IRS would look at the whole picture like that. Makes sense though - it would be pretty obvious what was happening if the gifts lined up exactly with rent payments. Thanks for explaining!

That's a really good point I hadn't considered. I probably spent 15 hours last year just on my taxes, and that was before all these complications. Do you know if tax preparation fees are tax deductible?

Unfortunately, tax preparation fees aren't deductible for individuals anymore since the 2017 tax law changes. However, if you have a business (which you do with your craft sales), you can deduct the portion of tax prep fees related to your business on Schedule C. So if your tax preparer charges $400 and roughly 30% of your return complexity is from your business, you could deduct about $120 as a business expense. Make sure they break down their fee so you can document this properly!

This is terrible advice. I thought the same thing until I got audited last year. Turns out I'd been incorrectly handling my home office deduction for my side business for 3 years. Ended up owing $3,200 in back taxes plus penalties. A $400 tax pro would have saved me thousands.