Do you know if either CPAs or tax attorneys offer any kind of guarantee that they'll resolve the issue? I'm worried about paying someone a ton of money and still ending up with problems.

Neither CPAs nor attorneys can typically guarantee specific outcomes with the IRS - anyone who promises this should be viewed with suspicion. What they can guarantee is proper representation and application of their professional expertise. Most reputable tax professionals will clearly explain what they believe they can accomplish based on your specific situation and their experience with similar cases. They should be upfront about potential outcomes, both favorable and unfavorable. This transparency is actually a good sign of professionalism rather than a limitation of their services.

So does that mean the home office, travel and equipment deductions the OP mentioned are likely to be rejected? I claim similar things for my business and now I'm worried.

Thanks for pointing that out - I should have mentioned it. From what I understand from the audit letter, she failed the support test. The IRS determined she didn't provide more than 50% of their support over the year. In reality, I was the one paying most of the housing costs and expenses, but we filed separately and she claimed them.

That's exactly what I was getting at! If the support test was the issue, and YOU were actually the one providing most of the support, then you have a legitimate case for amending and claiming them. Make sure you gather documentation showing YOUR financial support: rent/mortgage payments, utility bills, grocery receipts, clothing purchases, medical expenses, school supplies, etc. Calculate the total cost of support for each dependent and show that your contribution exceeded 50% of that total. Bank statements and canceled checks can help establish the timeline and amounts. When you file the 1040X, include a clear statement explaining that you were the actual support provider, not your wife, and that's why her claim was rightfully rejected while yours should be accepted. The more organized and detailed your documentation, the better your chances of avoiding another audit or having your amendment approved if you are audited.

I did this last year. Don't use the normal amend process in TurboTax. Start a brand new return for that tax year, enter everything correctly including the dependents, then select the option that this is an amended return. It'll generate a 1040X showing the differences automatically.

TaxAct didn't work well for me for back taxes. The navigation was confusing and it kept deleting info between sessions. Which version did you use?

What exactly qualifies as a PFIC? My grandmother's cafe is definitely an active business where she works daily, not some passive investment vehicle. Would that still fall under those rules? And are the Form 8938 thresholds different for different countries?

A PFIC is generally a foreign corporation where either 75% or more of the income is passive (like interest or dividends) or 50% or more of assets produce passive income. An actively run cafe would typically not qualify as a PFIC, so you're probably safe there. Form 8938 thresholds don't vary by country, but they do differ based on filing status and whether you live in the US or abroad. For a single person living in the US, you'd file if your foreign financial assets exceed $50,000 on the last day of the tax year or $75,000 at any time during the year. The thresholds are higher for married couples and US persons living abroad.

This is such an important point! My dad sent money to his brother in Mexico for a similar arrangement and when they had a falling out, he couldn't prove he was entitled to anything. Lost everything because there was no paper trail showing it was an investment rather than a gift.

Couldn't you potentially save on taxes by using accrual method though? I've heard you can deduct expenses before you actually pay them. Would that be beneficial for someone who buys a lot of supplies in December but doesn't pay until January?

Cash method actually tends to be more beneficial for most small custom goods businesses. While accrual lets you deduct some expenses before paying, it also forces you to report income when you invoice clients - even if they haven't paid you yet. For most of us, that's a big disadvantage. The December/January scenario you mentioned is a real consideration, but for most custom makers, the simplicity of cash method far outweighs any potential timing benefits. Plus, with cash method, if you have a client who hasn't paid yet, you don't have to pay taxes on that income until you actually receive payment. This is huge for small businesses with cash flow challenges or clients who pay late.

I used TurboSelf-Employed last year and it handled my accounting method change pretty well. The software walked me through the Form 3115 with guided questions. It wasn't perfect - I still had to do some research on my own, but it was way cheaper than paying an accountant $600. They also have some decent articles about cash vs. accrual in their help section.