Thank you for this detailed breakdown! For the Schedule C Part V explanation, how specific should I be? Is something like "Adjustment for deposits received but not earned under accrual method of accounting" sufficient?

That explanation is a good start, but I recommend being even more specific. Something like: "Adjustment of $34,000 for client deposits received in 2024 for design services to be completed in 2025 - accrual method of accounting." The more precise you are about the exact nature of the adjustment, the clearer it will be to anyone reviewing your return. Also, make sure your record-keeping is impeccable - for each deposit, have the client contract showing when services will be delivered, and your invoice clearly marking the payment as a deposit for future work.

I had a "correspondence audit" (by mail) about this exact issue last year. They just asked me to provide documentation explaining the difference. I sent them my client contracts showing future service dates, my bookkeeping records showing when payments were received vs when work was completed, and a reconciliation worksheet. The case was closed with no issues or additional taxes. The key was having good documentation - if you can clearly show why the difference exists and that you're following proper accrual accounting methods, there's nothing to worry about.

Do you think the size of the bank matters? I was leaning toward a local credit union, but wondering if a national bank might be better for a tax business specifically.

Size definitely matters, but there are pros and cons to both approaches. National banks typically offer more sophisticated online tools and wider ATM networks, which is helpful if you travel to meet clients. Credit unions often provide more personalized service and better rates, plus they're more likely to work with you if you have special circumstances. For a tax business where trust is paramount, having a relationship with a local banker who knows you can actually help build credibility with clients.

I switched from BoA to a local credit union last year. Best decision ever. The switch took about 2 weeks to fully transition recurring payments, but the savings and better service were totally worth it. Do it now before tax season hits and you get too busy!

This is really helpful! When I respond, should I send copies of all my documentation or just the specific records related to the discrepancies they found?

Only send copies of the specific documentation that directly addresses the discrepancies mentioned in your CP2000. Sending too many unrelated documents can actually confuse the review process and potentially delay resolution. Make sure each document you send clearly relates to a specific item they're questioning. I like to use a cover letter that lists each discrepancy and exactly which supporting documents address each one. This makes it easier for the IRS agent reviewing your case to connect your evidence to their questions.

I've never heard of an extension request being denied if you ask before the deadline. The IRS is generally reasonable about giving people time to gather documentation. The problem comes when people ignore the notice entirely or wait until after the deadline to ask for more time.

Is there any software that does this tracking automatically? Seems like a lot of manual work if you have monthly or quarterly vestings.

There are several options for automatic tracking. Most of the major brokerages (Schwab, Fidelity, E*Trade) have reporting features that attempt to track this, but honestly they're often inaccurate for RSUs specifically. I've found that dedicated equity compensation tools like Carta, StockOpter, or even some features in tools like Personal Capital can help with tracking. There are also some newer fintech apps specifically for equity compensation, but I still recommend maintaining your own spreadsheet as a backup. Once you set it up initially, it only takes a few minutes to update each vesting period.

This is such an important point! My company does withholding at vesting but only at 22%, and I got hit with a huge tax bill my first year with RSUs because I didn't realize I needed to make estimated tax payments on the difference. The whole RSU taxation system is unnecessarily complicated.

Would it be bad to change it to 1 halfway through the year? I've been at 0 since January.

Not bad at all! You can change your withholding at any time during the year. If you switch from 0 to 1 allowance now, you'll just start having less tax withheld from your remaining paychecks this year. The withholding system is designed to adjust throughout the year. Your employer calculates the withholding for each individual paycheck based on your current W-4 information, not based on what you submitted in January. So making the change now just affects your future paychecks - it doesn't retroactively change anything.

This is the most likely answer. I remember the shock when I went from my $12/hr campus job to my first salaried position. Suddenly I was seeing hundreds in taxes instead of like $30-40 per check. Welcome to adult life lol